Sunday, June 21, 2015

2015-05 Relative Price Trends

Consumer prices increased 1.2% year-over-year in May, whereas purchasing prices fell 5.5% over the same period. This marks China’s 42nd month of economic contraction.

Last week, the Financial Times ran an article titled "China Central Bank Admits Defeat in War on Deflation."  The Chinese people no longer have to worry about their renminbi purchasing power.  The Chinese central bank has shut down its printing presses.  Could it be that the managers at the People's Bank of China read Murray Rothbard's work, and finally agreed that the price of everything should drop to five mao?

Unfortunately, no.  When the Financial Times says "admits defeat", they really mean "revised down its inflation estimate to half the level targeted by Beijing[.]"  When they say "deflation", they really mean "full-year CPI forecast [of] 1.4 per cent, down from the 2.2 per cent projection published in December. "  In our upside-down world of financial journalism, purchasing power is bad and deflation is low-digit inflation.

At some point, the world will realize that central banks cannot guide the economy more rationally than private actors can.  That point has not been reached.  In fact, most mainstream commentators are calling for more of the same.  According to the same Financial Times article:
Still, the gap between the inflation forecast and the government's official target suggests officials are well aware that monetary easing measures adopted so far are not enough to boost price growth to the government’s desired level.
There does not seem to be any discussion, either in the financial media or at monetary authorities, as to why the monetary easing measures adopted so far have been wildly successful at igniting one of the largest bull markets in history, but cannot lift consumer prices higher than 2.00%.  Could it be that central banks are not omniscient directors of the economy, nor is money neutral?