Is It Different This Time?

by Brian Pretti, Financial Sense:

One of the apparent conundrums of US Fed money printing in the current cycle is lack of headline inflation, at least as measured by the CPI. Certainly the CPI calculation itself is open to debate in terms of whether it is accurately depicting the cost of living in the US. But in bigger picture context, alongside quiescent headline CPI, the US credit markets have likewise not priced in meaningfully accelerating inflationary pressures. Although the very act of currency debasement academically connotes rising inflationary pressures, the US Fed has received a free pass in the current cycle so far as prior period predictions of a hyperinflationary fireball have fallen well short of the mark.

Meaningful to global economic and financial market outcomes ahead will be the Bank of Japan monetary extravaganza of a generation that lies directly in front of us. Will Japan be so lucky as to have little to no headline inflationary impact while printing historic amounts of money? Or could it be different this time relative to the US monetary and inflationary experience of the last four to five years? Although not given much recognition amongst the high fiving over recent Japanese equity market levitation, there is one critical difference between the backdrop against which the Fed has operated compared to the landscape the BOJ faces.

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InvestmentWatch

Is It Different This Time?

President Obama looks to reduce Social Security cost of living increases with "chained CPI"

President Barack Obama is hunting big game. His budget proposal — which will be formally unveiled next week — is seeking a grand bargain of taxes on the rich and spending cuts. But perhaps the most controversial measure in his proposal is a move to slow payments to Social Security.

So, get ready to hear lots of talk about “chained CPI.” That’s wonk talk for altering how inflation is measured when the federal government cuts checks for Social Security, or veteran benefits. 

University of Pennsylvania Economist Olivia Mitchell says imagine you’re grocery shopping.

“If the price of a breakfast cereal went up, people might substitute the generic brand instead,” he says, “and so the chained CPI takes into account that people do do those substitutions.”

Bottom line: Moving to chained CPI would slow annual cost of living increases by a fraction. Over a decade, that would cut federal spending by $ 130 billion and generate roughly the same in tax increases.

Paul Van de Water, an economist with the Center on Budget and Policy Priorities, says most taxpayers lose less than 1 percent of their after tax income in year 10 of chained CPI — and the average person on social security would lose $ 350. 

“For a lot of people it’s not going to make a noticeable difference,” says Van de Water.

If that’s really the case, then chained CPI may become a political reality.

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President Obama looks to reduce Social Security cost of living increases with "chained CPI"