Bernanke’s Predictions in March were Wrong in February.

In Money Supply on March 17, 2011 by CQCA

During his March 1 Semiannual Monetary Policy Report to the Congress before the Committee on Banking, Housing, and Urban Affairs, Chairman Bernanke testified that “FOMC participants see inflation remaining low; most project that overall inflation will be about 1-1/4 to 1-3/4 percent this year and in the range of 1 to 2 percent next year and in 2013.”[1]

He did not expect inflation to surpass 2% before 2013.  These statements were made in March, 2011.  The Consumer Price Index for February, 2011 was released today.  According to the Bureau of Labor Statistics, prices increased 2.1% year-over-year for February, 2011.[2] This means that Chairman Bernanke’s prediction in March forecasting inflation will remain below 2% until 2013 was incorrect before he even made it.

Holding Chairman Bernanke’s projections to the CPI standard is not very accurate, considering calculating the overall price increase of the billions of products and services in our economy, and accurately weighting them, is impossible.  It is also incorrect to focus on the price of goods, because it ignores the key influence of the value of the currency.

A more accurate figure for inflation is the money supply.  The Federal Reserve publishes multiple statistical releases related to the money supply on a weekly or monthly basis.  The broadest measure we have available is M2.  M2 includes “(1) currency outside the U.S. Treasury, Federal Reserve Banks, and the vaults of depository institutions; (2) traveler’s checks of nonbank issuers; (3) demand deposits at commercial banks (excluding those amounts held by depository institutions, the U.S. government, and foreign banks and official institutions) less cash items in the process of collection and Federal Reserve float; and (4) other checkable deposits (OCDs), consisting of negotiable order of withdrawal (NOW) and automatic transfer service (ATS) accounts at depository institutions, credit union share draft accounts, and demand deposits at thrift institutions, (5) savings deposits (including money market deposit accounts); (6) small-denomination time deposits (time deposits in amounts of less than $100,000), less individual retirement account (IRA) and Keogh balances at depository institutions; and (7) balances in retail money market mutual funds, less IRA and Keogh balances at money market mutual funds.”

The supply of M2 increased from $8.537 trillion in February, 2010 to $8.890 trillion in February, 2011, or 4.1%.[3]

Both the consumer price index, which is worshiped by policy makers, and the money supply, which is ignored by policy makers, show that Chairman Bernanke’s projection about inflation in the coming years was incorrect before he even made them.

[1] Chairman Ben S. Bernanke.  “Semiannual Monetary Policy Report to the Congress Before the Committee on Banking, Housing, and Urban Affairs, U.S. Senate.” Washington, D.C.  March 1, 2011

[2] Bureau of Labor Statistics Consumer Price Index for February, 2011.  Released March 17, 2011.

[3] Federal Reserve statistical release. “H.6 (508) Table 1 Money Stock Measures.” Released March 17, 2011.

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