Production Discounting Globally Suggest US Consumers In Deepening Recession

When addressing the inability of monetary policy to actually produce its “inflation” target, the FOMC has been left to hiding. They fully and openly admit the role of oil prices in the depression of calculated inflation starting late 2014 because they reason that it somehow doesn’t apply strictly within their mandate (as if it was specifically written for monetary policy to create 2% steady inflation, except if oil prices don’t want to cooperate). However, that is decidedly not the full extent of their own professed failure; and they know it, but refuse to specify.

In these past few FOMC meetings where no action has been taken, even the more “hawkish” like October, the policy statement has been updated with the addition of “partly.” The latest iteration was:

Inflation has continued to run below the Committee’s longer-run objective, partly reflecting declines in energy prices and in prices of non-energy imports. [emphasis added]

While economists and most of the media seems content to take that statement at face value, given that “inflation” has been undercutting, often severely, the 2% target not for a few months but rather a few years you would think there would be more open inquisition about what that unsaid “partly” might be. It isn’t hard to find, either. Just this week, updates for both import prices and the PPI domestically offer much further analysis in that direction. In fact, both of those factors and pieces of the consumer price process are highly complementary even if the FOMC refuses the obviousness.

For one, the general PPI follows recessions quite closely. You simply don’t see persistently negative producer prices, year-over-year, outside of them. History is quite clear upon that fact, which intuitively flows from the recessionary idea of overcapacity relative to the sales environment and the plug in between – inventory.