E Incoming Choppers: Inflation, Not Deflation, Will Surprise You

The CPI numbers that were released mid-July failed to make any meaningful headlines. The year over year Core CPI (excludes food & energy) came in at 2.3%. Now, this isn't the CPI gauge that the Federal Reserve looks at - they only watch the Headline CPI (includes food & energy). It makes this author wonder: if it weren't for the huge drop in oil prices since 2014 and the massive appreciation in USD Index (aka US dollar), what would Headline CPI be?

 "The energy index has declined 9.4 percent over the past year, with all of its major components falling over the period. The fuel oil index has declined 19.6 percent, and the index for gasoline has decreased 15.4 percent. The indexes for natural gas and electricity have posted smaller declines, falling 5.0 percent and 1.8 percent, respectively," says the BLS (Bureau Of Labor Statistics)

The Fed would have well over the 2% inflation target by now, but the steep fall in oil (energy) does a wonderful job offsetting the CPI as a whole.

It's interesting that empirically, the last two times that Core CPI was higher than Headline CPI, we were in recessions.

Many pundits, even the brains at the Fed, said that the lower oil prices would spur consumer demand (the marginal savings from filling up the gas tank would be used to go buy other stuff). Therefore, a lower oil price was a net benefit. But unfortunately this isn't the 199's where the USA imports almost all of its oil. If it were, then yes, a cheap oil price is much better because importing it is cheaper. But since 2012 the USA is a top 3 oil producer, thanks to the fracking bubble. 

Especially since fracking in the US is extremely expensive to produce and so much of the corporate debt and junk bonds are backed by these companies, a low oil price is a net liability. The junk bond defaults, the high paying oil jobs lost, the lost state tax revenue, and potential banking crisis outweigh the idea that consumers will have a few extra saved dollars from filling their tanks up. Again, hats off to the Fed.  It is safe to say that many of those bonds of fracking companies aren't going to be paid back. And they will be seen for what their name truly means: junk. 

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Gary Anderson 3 years ago Contributor's comment

Nice article, except that real #HelicopterMoney won't need treasury bonds, which are already in short supply as collateral for derivatives. Real helicopter money would just involve base money, even if Bernanke and others don't quite want to face that kind of real helicopter money.