Steve Forbes responds to improving indicators on inflation—but warns that despite growing hopes about the economy, more turbulence is probably about to hit.
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00:00 The consumer price index for October was flat and the producer price index was down.
00:05 But don't break out the champagne yet.
00:11 Hello I'm Steve Forbes and this is What's Ahead where you get the insights you need
00:15 to better navigate these turbulent times.
00:18 The consumer price index, the CPI, which came out Tuesday was surprisingly flat for October.
00:25 Certain other inflation measures have been improving, including the just released producer
00:30 price index.
00:31 A happy consensus has enveloped financial markets.
00:35 No more Federal Reserve engineered interest rate rises.
00:38 Hopes grow that our central bank will start lowering them during the first half of 2024.
00:44 Stocks and bonds are booming in anticipation.
00:47 But don't get too giddy too quickly.
00:50 One note of caution is that the CPI was helped mightily by the significant drop in gasoline
00:56 prices.
00:57 A deeper dive into the latest CPI shows that a subset, beloved at the moment by the Fed,
01:03 is up more than 3% and more worryingly is going up, not down.
01:09 This is an exception to what other gauges are showing.
01:12 But the Fed probably won't ease up until the economy is visibly slumping.
01:17 More ominously long term is this dark cloud.
01:21 The Fed Reserve and almost all but a handful of economists don't understand a profound
01:26 truth.
01:28 Rising prices are a symptom, a result of inflation, not the cause.
01:33 Misunderstanding inflation means big trouble down the road.
01:37 The definition of inflation is straightforward, reducing the value of a currency, usually
01:43 by creating too much of it.
01:45 When you devalue the dollar, nominal costs go up.
01:49 People get less for their money.
01:51 The Fed Reserve and other central banks believe in the Phillips curve.
01:55 The curve posits that low unemployment breeds more inflation.
01:59 If you want less inflation, you must have higher unemployment.
02:03 Depressing the economy will bring down prices as people and businesses buy less.
02:08 But if the dollar is not stable, trouble will return when the Fed takes its boot off the
02:13 neck of the economy.
02:15 Real world experience shows the Phillips curve is nonsense.
02:19 Nonetheless it is wholly red at the Fed.
02:22 Instead of clutching the curve, the Fed Reserve should announce that its goal is a sound stable
02:28 dollar rather than trying to control the economy's direction by manipulating interest rates.
02:35 The U.S. achieved dollar stability by linking its value to gold until the 1970s at $35 an
02:41 ounce.
02:42 For a variety of reasons, gold keeps its intrinsic value better than anything else.
02:47 From the early 1980s to the late 1990s, Fed actions were guided by commodity prices, which
02:54 can be very sensitive to changes in currency values, as well as gold.
02:59 We're not going back to a gold standard any time soon because today's authorities wouldn't
03:04 know how to run one.
03:06 But our central bank could achieve a good deal of dollar stability by repeating what
03:11 it did from the early 1980s to the late 1990s.
03:15 Let's hope it does so.
03:17 I'm Steve Forbes.
03:18 Thanks for listening.
03:19 Do send in your comments and suggestions.
03:21 I look forward to being with you soon again.
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