Over the weekend, economic luminaries (I use that term loosely) swarmed into Jackson Hole, Wyoming for the annual Kansas City Fed’s Economic “Let’s All Agree To Agree”Symposium. The message emanating from the meeting was exactly what was to be expected. Central Bankers from around the globe all concurred with the Fed’s assessment to increase rates despite a crashing Chinese economy, deflationary readings, a stronger dollar and elevated volatility and stress in the world’s financial markets.

Here is Fed Vice Chair Stanley Fischer:

“Given the apparent stability of inflation expectations, there is good reason to believe that inflation will move higher as the forces holding down inflation dissipate further. While some effects of the rise in the dollar may be spread over time, some of the effects on inflation are likely already starting to fade. The same is true for last year’s sharp fall in oil prices, though the further declines we have seen this summer have yet to fully show through to the consumer level. And slack in the labor market has continued to diminish, so the downward pressure on inflation from that channel should be diminishing as well.

With inflation low, we can probably remove accommodation at a gradual pace. Yet, because monetary policy influences real activity with a substantial lag, we should not wait until inflation is back to 2% to begin tightening.”

Here is the problem. While Mr. Fischer is correct that inflation is low, there is NO SIGN that inflationary pressures will substantially rise, and stabilize, at 2% in the future. The two charts below show the real problem.

The first chart is the long-term deflationary problem facing the Fed using their preferred measure of inflation.

Click on picture to enlarge

As shown the deflationary problem has existed since 1980 and continues today. While the fall in oil prices, and surging US Dollar, are certainly putting downward pressure on inflationary readings, that doesn’t really explain the long-term deflationary trend.