Still Think the Fed Isn’t Fueling Inflation? Check Out This Chart

Just as we can’t eat iPods, we can’t subsist on official reassurances that the Fed and inflation are both benign.

There is a great divergence between the conventional financial media and the public who goes to the supermarket: the financial media swallows whole the official artifice that inflation is near-zero while J.Q. Public sees his/her grocery costs, health insurance, etc. rising by leaps and bounds.

Many observers finger the Federal Reserve as the villain in the inflation story: it’s all well and good to conjure up a few trillion dollars to pass out to your banker buddies, but there are always costs, recognized or not, to every action, and the Fed’s credit creation and numerous quantitative easing operations have greatly expanded money supply.

All else being equal, a massive expansion of money typically causes inflation, as the flood of new money starts chasing goods and services that haven’t expanded at the same high rate as money supply.

One camp reckons the reason why inflation is muted is that the Fed largesse has flowed into asset bubbles rather than goods and services, and proponents of this view make a good point: since little of the Fed largesse has trickled down to the to bottom 99.5%, it can’t exerting much pressure on consumer prices. In effect, the price pressure is all in equities and rentier assets such as real estate rather than in goods and services.

But demand from consumers flush with cash is only one facet of inflation, as this chart of oil and Fed operations from Fine Charts (courtesy of Petr Fiala) reveals.Recall the charts I posted a few days ago showed a tight correlation between the price of oil and food: Why Are Food Prices so High? Because We’re Eating Oil.

In other words, if the price of oil goes up, so does the price of food, and everything else that must be transported or that consumes oil in its manufacture.

Now examine this chart of Fed operations and the price of oil: when the Fed is actively expanding credit/money, oil goes up in price.

If little of the Fed’s largesse is ending up in consumer’s wallets, why should oil go up as the Fed shovels money into financiers’ accounts? The answer is somewhat speculative, but there are two avenues of price pressure other than consumer demand:

1. Financial speculation in oil futures contracts, which fuels non-consumer demand

2. Fed credit/money creation weakens the U.S. dollar (USD), pushing the cost of oil priced in USD higher.

This is how the Fed fuels inflation, even when little of its largesse ends up in consumers’ wallets. Recall that the price of tradable commodities such as grains and oil are set on the global marketplace. That means that grain harvested in the U.S. and oil extracted in the U.S. is not priced solely by domestic demand: as the Fed has weakened our currency with its various manipulations to favor financiers and bankers, oil and everything that uses oil rises in price in the U.S.

Sellers of grain and oil have a fiduciary obligation to get the best price they can, and in a Fed-engineered weak-dollar environment, the best price is not in domestic markets but in overseas markets.

This chart shows the Fed is indeed fueling inflation by driving oil higher. Official denials are to be expected, as are ginned-up inflation statistics; but just as we can’t eat iPods, we also can’t subsist on official reassurances that the Fed and inflation are both benign. 

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  • Michael Deloatch

    You’d think the potentates and pontificators of the media would have at least heard anecdotally from their domestic staff the price of caviar and champagne are skyrocketting. I guess their butlers are all hiding the climbing expense by padding the books and hiding food costs as replacing the gold leaf in he mansion changing the oil in the Lear jet etc.

  • jadan

    We are in a deflationary environment. Classic definitions of inflation do not apply. There is not too much money chasing too few goods. Nonsense. Vast numbers of unsold new cars are parked around the world with no buyers. All the big retailers are closing stores and losing money, including Walmart. The US economy contracted by 1% in the first quarter of 2014. Bernanke understood in 2008 the problem was deflation, which is why he launched QE and gave low to no coast loans to corps to jump start the system. Didn’t work. The Fed fueled massive speculation. The Fed does not understand the simplest principle of economics espoused by Henry Ford: demand is created by the mass of little people, not the tiny elite group and its hangers-on. What you are looking at, Smith, is not inflation. It’s devaluation. It’s being created by people like Jim Rogers, Goldman Sachs and other financial parasites. The Fed pumped them up with cash and they are bidding up the prices of commodities and looting the dollar of its value. It looks like inflation. It’s not. It’s a shocking and disgraceful devaluation bubble caused by the Fed’s irresponsible and stupid policies.

    • Chris Sky

      excuse me.. but when you’re expanding the money supply at the tune of almost 1 TRILLION per year… regardless of whats going on with the economy… you are DEFINITELY in an INFLATION period. The only question is, when will it become “Hyper Inflation”?

  • Dee

    Here’s the thing I don’t . When the stock market crashes or the housing market crashed it wipes out Billion, even Trillions of dollars from the economy.. why would printing a lot of money to level things back up be such a total bad thing? Sure, when the economy starts growing again it starts to look like “extra” money and it can , I think, cause inflation, but then they can reverse the process , Fed has 4 Triilion in assets it is going to have to sell back into the economy , which will pull the cash back out of the system.
    I mean something is off here.. I know what money printing is supposed to do.. but it has really been the more the case that we have been tottering between inflation and deflation. In fact , as popular as it is to blame money printing.. but honestly the inflation in food prices look more like a weather related thing, and housing a liquidity thing, more about lack of credit access than the rich being able to buy for cash. I mean they could do that because the price was low because there was no market regular buyers in the market for housing and that created the renters market. Since there was a renters market that was being ill served because of lack of supply.. it made investing sense to buy up homes and renter them out, Not defending it.