Atlanta Fed President's Failed Attempt To Exonerate The Fed

Atlanta Fed president Dennis Lockhart argues that there is a distinction between "inflation" and "cost of living increases":

"Let's review what inflation is and is not. Inflation affects all prices. Inflation is not the rise of individual prices or the rise of categories of prices.

"I want to contrast inflation to the cost of living. In casual language, we often interpret a rise in the cost of living as inflation. They are not the same thing. Cost-of-living increases are a result of increases in individual prices relative to other prices and especially relative to income. These relative price movements reflect supply and demand conditions and idiosyncratic influences in the various markets for goods and services. If some component of a household's cost-of-living basket goes up in price, the higher cost of living is not ipso facto inflation."

So what he is saying is that only when all prices rise is there inflation. But even in the 1970s there were some prices that fell, so this means that ccording to Lockhart, there were no inflation in the 1970s.

Indeed, it is only in countries with hyperinflation like Germany in 1923 and Zimbabwe more recently that all prices rise, so what Lockhart is really in effect saying is that only when there is hyperinflation can you say that there is inflation!

There are more strange aspects of Lockhart's speech:

The Fed, like every other central bank, is powerless to prevent fluctuations in the cost of living and increases of individual prices. We do not produce oil. Nor do we grow food. Or provide healthcare. We cannot prevent the next oil shock, or drought, or a strike somewhere—events that cause prices of certain goods to rise and change your cost of living.

"So monetary policy is not about preventing relative price adjustments dictated by market forces. It is about controlling the broad direction and pace of change of all prices across the economy.

But except for hyperinflation there is never any "broad direction of all prices", there are always some prices that rise and some prices that fall. And taking supply factors that raise certain prices as an excuse for the price increases overlooks that there are supply factors that reduce prices, for example, technical progress in the computer industry that teduces computer prices or other forms of productivity increases or increases in labor supply.

You can't use negative supply shocks to rationalize some price increases while overlooking how positive supply shocks limits or prevents other price increases or lower prices-at least not if you want to be intellectually honest. And as long as there is positive growth, the positive supply factors are greater than the negative.

Lockhart does have a point though in the sense that when you judge central bank action by other factors beyond their control. But since non-monetary factors usually lowers prices, a focus on monetary inflation usually put the central bank in an even worse light.