November 25, 2020
There are many different measures of inflation, but the one that the Federal Reserve considers to be most important is the personal consumption expenditures deflator, in particular the PCE deflator excluding the volatile food and energy components.
The PCE deflator was unchanged in October after having risen 0.2% in September and 0.3% in August. The year-over-year increase now stands at 1.2%.
Excluding the volatile food and energy components the PCE deflator was also unchanged in October after having risen 0.2% in September and 0.3% in August. The year-over-year increase is now 1.4%. This is the inflation measure that the Fed would like to see rise by 2.0%.
The purchases of Treasury securities by the Fed has caused money supply growth to surge. We all learned back in our basic economic classes that money growth is the cause of inflation. However, the length of time between a pickup in money growth and an increase in inflation is both long and invariable. Thus, the recent increase in money growth should cause the inflation rate to climb above the Fed’s 2.0% target at some point, probably next year. For what it is worth, we expect the core PCE deflator to increase 1.5% in 2020 and 2.4% in 2021.
Given the quarantine GDP declined by 31.4% the second quarter. But the $1,200 tax refund checks boosted third quarter GDP growth by 33.1% with an additional 10.0% gain expected in Q4