Jeff Miller: Here is How You Should Think About Inflation

Every Sunday night I make it a point to include Jeff Miller’s A Dash of Insight blog as part of my weekly prep.

The blog is always good but I’ve come to appreciate his regular “Weighing the Week Ahead” series the most. In addition to giving us a cogent summary of what’s just happened along with his best guess for what the markets may be “talking about” during the coming week, Jeff usually throws in a final thought at the end. This weekend’s was excellent: a no bullsh*t heuristic for how investors should be thinking about inflation. I’ve excerpted it below, hope you learn something or this shifts your perception somewhat – Josh.


Writing about inflation is a thankless task. Readers begin by thinking they know all of the answers. We all shop, right? It is the most popular subject for bamboozling people, since it is easy to find examples of rapidly rising prices. It is by far the most deceptive trap for those who might confuse politics with investing.

You have a simple choice:

  1. You can reinforce your beliefs and take joy in how stupid our leaders are. You and your favorite blogger, pundit, Congressional candidate, etc. have all of the answers. You are all smarter than the isolated, ivory-tower academics at the Fed. Please note that this was the trap that ensnared leading experts and wise observers like John Hussman and the ECRI – just to mention two of the most prominent examples who have had disastrous results over the last few years.
  2. You can accept the fact that the Fed has the power to set policy. It is wiser and more profitable to understand what they are doing and just go with the flow. You can grumble with your friends at the bar, vote your conscience at elections, and still profit from your investments.

I have been extremely accurate in my Fed forecasts, but I am not claiming any prizes. It has not been difficult. I simply read information carefully and understand that it is a committee at work. Here are the key takeaways. You will disagree. You will hate them all. Keep reminding yourself that even if you are right and Yellen is wrong, you will lose on your investments. The Fed has the power. Figure out how to use the knowledge to your advantage.

  1. The Fed is attempting to increase inflation. They seek 2% on the PCE index. This runs about 0.5% cooler than the CPI.
  2. The Fed does not measure inflation through commodity prices.
  3. The Fed believes that 2% is price stability. They think that traditional measures overstate inflation. They do not subscribe to ShadowStats (and neither do any of the people they respect). They also see a touch of inflation as easier to fix than deflation. They bias is toward stimulus.
  4. The Fed will tolerate as much as 2.5% inflation (on the PCE index) for a time.
  5. The Fed has a dual mandate – inflation and employment. It does not protect savers or emerging markets. Learn to live with it and ignore pundits who think this is important.
  6. The Fed sees food and energy as noisy components of inflation – wild movements that do not relate to the dual mandate. If food prices are up because of a drought or disease in hog herds, how could this be controlled by raising interest rates? Middle East geopolitics and oil? Same question. These price changes are certainly real, but they are volatile and not relevant for policy.
  7. The Fed does not shift policy based upon small monthly changes in data. Longer trends are demanded.


The conclusion is that Fed policy is on a relatively stable course, but data dependent. The market does not like this, since the preference is for certainty.

If you think about it, even just a little, you can see an obvious edge for investors. You need only accept the reality of the obvious course of policy and ignore the pundits. The Fed has always succeeded in creating inflation – eventually. It will happen again, but given the overall economic weakness it is taking longer. My current guess is late in 2016 or so. Meanwhile, there are some profitable investments to enjoy.

Monitor data, not pundits.


Awesome, well done Jeff!


Weighing the Week Ahead: Is the Fed behind the Curve? (A Dash of Insight)

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