Inflation May Be Camouflaged from Central Bankers – An Open Letter to The Bernank

• Posted by Greg Harmon
• on March 30th, 2011

Why The Fed Is Wrong About Inflation But Thinks They Are Right

Dear Ben – It only takes one chart to explain why the Fed is so screwed up on whether there is inflation or not. Here it is.

This is a ratio chart over the last 9 years of the US Treasury Bond ETF, $TLT, against the CRB Index. There is a lot going on in this chart so lets explore it starting at the bottom. The bottom panel shows the 8 year rising trend in the TLT. The one above it shows the CRB Index. From 2002 until July 2008 both the CRB and the TLT were rising at a pretty good clip. Good job as your mandate was to make stocks rise, but did you know CRB is not a stock? You may recall everything you read saying that inflation was in check during this time period, trending below 2% annually. Even though the CRB was rising, bond prices were rising faster as shown in down trending wedge in the ratio. This actually means that real inflation was rising, not stable, but masked by falling real rates. A bit convoluted but if Treasury prices are rising then yields are falling and real rates are falling. If real rates are falling while the CRB is rising then real inflation is actually rising! I know it is confusing but I am sure you have a book on your shelf about this. Then in July 2008 all hell broke loose. The ratio tripled in 6 months mainly driven by a falling CRB Index, which was cut by more than half. Inflation as measured by the CRB had crashed. This must be when you measured. Either that or the lie was preserved.

Here is where the focus begins. Now shift to the zoomed in chart for the last 3 years below.

This chart shows a reversion back to that downward trending wedge has been happening over the last three years. Back on track for rising inflation. Only this time it is much more clear. As Treasury prices and yields have remained in a very tight range, the CRB Index has risen by over 34% annualized over the last 2 years. Bond yields are stable and prices are rising. The typical consumer cannot understand this analysis, but does not need to. They know they are paying more for everything except iPads. What more evidence do you need?

I am pretty sure that Ben does not read my blog so if anyone has Ben Bernanke’s twitter account or e-mail, (I tried ben@bernanke.com) please forward this along. Thanks in advance.

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