Government Stats Hide Inflation Truth

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Despite a dollar that is testing modern lows against the euro and pound, and a gold price that has reached all-time highs, the Federal Reserve expects inflation to moderate in the next few quarters. Government measures of inflation seem to confirm the Fed’s outlook, and with the latter expecting economic growth to subside over the next year, inflation should too if we accept the view suggesting slower economic growth is an inflation cure.

The problem for the Fed is that growth, or lack thereof, has never been a quality predictor of real inflationary pressures in our midst. Despite four U.S. recessions from 1965 to 1982, inflation was never quiescent during the time in question. Conversely, despite nearly uninterrupted economic growth from 1982 until 2000, inflation was largely non-existent. Inflation always results from cheap money, and if our own government statistics are failing to reveal this, we need only look around the world to see that pricing pressures are bubbling up in countries that either have dollar-linked currencies, or whose currencies have strongly outperformed the dollar in recent years.

In England, even though the pound has risen 37 percent against the dollar since 2001, the latest government inflation figures from January show that producer prices rose the most since 1995. The cost of raw materials rose 19 percent last year, the most since this number was first measured in 1986. The dirty little secret that explains U.K. inflation is that despite the pound’s strength relative to the dollar, it has been weakening steadily in real terms for several years; the gold price in pounds having registered a 151 percent rise since 2001.

Last month in Euroland, government measures of inflation reached their highest levels in 14 years. This might seem odd when we consider the euro has risen 71 percent against the dollar since 2001, but as is always the case, the interplay between two paper currencies rarely reveals the real story when it comes to currency strength. Though the euro has slaughtered the dollar over the last several years, its price in gold since 2001 has risen 101 percent.

The Aussie dollar beats both the pound and euro when it comes to performance relative to the U.S. dollar; it having risen 73 percent against the greenback since 2001. Still, inflation Down Under is hardly quiescent as evidenced by the 94 percent appreciation of the gold price over the same timeframe, not to mention that the January CPI reading of 3.8 percent was the highest for Australia in 16 years.

When we look at dollar-linked currencies, the inflation story logically gets no better. In yesterday’s Wall Street Journal, Mary O’Grady noted that with El Salvador’s dollarization having effectively outsourced monetary policy to Ben Bernanke and the U.S. Fed, “Salvadorans left themselves vulnerable to Mr. Bernanke's weaknesses as a central banker.” Sure enough, 2007 inflation in El Salvador came in at almost 5 percent, and according to O’Grady, shows “no signs of retreating.”

Middle Eastern country Qatar currently links its riyal to the dollar, and its most recent measure of CPI inflation came in at 13 percent. China has most famously tied the value of its yuan to the dollar, and despite a more than 12 percent rise against the dollar since July of 2005, China announced its highest inflation reading (7 percent) in eleven years last December.

Given the historical correlation between falling currencies and inflation, it seems folly to assume that the United States has largely skirted the latter in recent years despite the dollar’s broad weakness. Inflation’s classical definition hasn’t changed, and from the North’s counterfeiting of the Confederate dollar (causing one of the greatest inflationary periods in U.S. history) downward during the Civil War to post-World War I Germany’s hyperinflation resulting from the falling Mark to the stagflation stateside in the 1970s, pricing pressures have always been monetary in nature and have resulted from currency weakness. For the Fed to assume that today is somehow different, that inflation will somehow moderate in the coming quarters, is for Bernanke et al to rewrite basic economic law.

It is said that low nominal rates of interest from 2003 to 2004 explain the weak dollar today, but the dollar’s fall began well before Fed funds hit 1 percent, and it continued alongside 425 basis points of rate increases from 2004 to 2006. The dollar has surely weakened since the Fed reversed course last fall, but to assume the dollar is weak due to lower nominal rates of interest is a bit of a misnomer.

The reality is that credible, stable currencies are low interest rate currencies. The dollar suffers today from a U.S. Treasury that regularly flaunts its lack of a currency policy, not to mention a Federal Reserve that seemingly ignores that which causes inflation, all the while frequently shifting its rate targets around given the Keynesian view that price stability will result from its “managing” the economy in such a way that it won’t grow or contract too much.

Perhaps owing to their desire to make the citizenry believe they’re actually helping us, politicians regularly tell us “there are no easy solutions.” Maybe so, but when it comes to the dollar the solution is simple: the Treasury and Fed must communicate to the markets their unhappiness with the dollar’s value, announce a rough gold price target at which they’d like it to stabilize, and make plain that if markets don’t reverse its fall, they’ll intervene and arrest its slide as monopoly issuers of the currency.

History, however, says once a non-inflationary dollar-price target is communicated, markets will do their work for them. If so, the inflation in our midst will quickly become yesterday’s news.

John Tamny is editor of RealClearMarkets, Political Economy editor at Forbes, a Senior Fellow in Economics at Reason Foundation, and a senior economic adviser to Toreador Research and Trading ( He's the author of Who Needs the Fed?: What Taylor Swift, Uber and Robots Tell Us About Money, Credit, and Why We Should Abolish America's Central Bank (Encounter Books, 2016), along with Popular Economics: What the Rolling Stones, Downton Abbey, and LeBron James Can Teach You About Economics (Regnery, 2015). 

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