Economist Milton Friedman once wrote, “Inflation is always and everywhere a monetary phenomenon.” Maybe -- though I have my doubts based on how scarcity can work. Today, though, I want to talk about inflation worries during a time when the Fed is raising rates at a historically fast rate. Fed Chair Jerome Powell gave a press conference in which he fed-speak said: prices are going up too fast so we are going to raise rates until lots of people lose their jobs, lots of people’s retirement savings are erased, and lots of people will become unable to finance a house. That’s a lot of pain to inflict, so it better be worth the suffering. Right?

I worry that the Fed is using the wrong metrics and the wrong tools to combat inflation. If I’m right, this means that the Fed is likely to inflict too much pain and/or inflict pain in a way that won’t help the patient heal.

Wrong metrics. The Fed is watching the CPI numbers to determine whether inflation is out of control or not. Dig deep (really deep) into CPI and you’ll find out what it measures: mostly physical goods mostly sold in physical stores in the United States.

In fact, the Bureau of Labor Statistics even says it mostly sets CPI based on visits to brick-and-mortar stores. Since I’m an older cat (not like you always-online kittens), I actually go to brick-and-mortar stores to buy stuff. And, let me tell you, what it’s like if you go to WalMart, Target, or Home Depot: you are essentially standing in the United States buying stuff essentially exclusively made in China. I defy you to buy a normal list of stuff from WalMart that isn’t 90%+ made in China. Go on, I’ll wait.

The implication is that the Fed can’t solve inflation in the US until and unless goods coming out of China stop getting more expensive. WalMart’s profit margins are too thin to absorb, maybe, 1 or 2% of cost increases. Until you can explain to me how raising interest rates in the United States is going to solve the cost of production in China (with its draconian anti-Covid measures imposed by a totalitarian regime) and all of the logistical problems between the two countries, then don’t talk to me about interest rates in the US solving inflation.

You know what else drives up the cost of everything? Energy. Yep, fully 80% of our energy comes from fossil fuels. That cost has skyrocketed for a number of reasons, including the war in the Ukraine and production limits set by OPEC. Large factors affecting the price of energy in the US are controlled by forces far, far away.

Know what else is a component of CPI? The cost of housing. Here, I’ll acknowledge that raising rates does have an effect on housing. You can afford more house with a 3% mortgage than you can with a 6% mortgage. But here’s the thing: if you’re dreaming of owning your own home when mortgages are at 3%, that dream doesn’t go away at 6% or even 12%. You still dream of buying a place with a good school district for your kittens, short commute to your job, and safe place where you can sleep well at night. If you live in California, you know one inescapable fact about housing: fewer houses are being built than people starting families. I don’t care what you do with interest rates, you’re going to have many people who want homes regardless what the Fed does. However, raising interest rates arguably makes things worse by denying funding to the very companies that build more homes.

So, yeah, color me unconvinced that the Fed can make a dent in inflation factors that are completely beyond its control (or our shores).

Also color me unconvinced that inflation is as bad as it might seem based on CPI. CPI is based on the increasingly inaccurate assumption that what people want is composed exclusively of atoms. Indeed, I would argue that once your basic physical needs of food, shelter, clothing, and warmth are met, most of what you want is not composed of atoms.

Most of what we want, beyond the basics, are: status among our cohort, a feeling of security in our personal circumstances, meaning from accomplishment or activity, respect from peers, and entertainment. I call it the weekend test: what do you do on weekends? If you work to be able to eat something that day, your needs are entirely physical. But if you spend your weekends traveling, visiting with friends, surfing the web, posting on social media, going out to a lovely dinner -- then you are at the point where many of your aspirations are non-material. Let me clarify: it’s not that they don’t involve atoms (in burning fuel to get to your dinner and eating it or in the raw materials for your hobbies), it’s that atoms are a tiny portion of the cost of that activity/service/product.

What percentage of your time do you spend (in your non-working, non-sleeping hours) that’s electronic -- including social media, electronic communication, watching TV, etc. If you’re typical, I’m guessing that you look at glass a lot. A lot. Your phone, your computer, your Kindle, your TV. And, the content inside that glass is either cheap or free. In fact, this is the golden age of content. It’s so cheap that I have Netflix, HBO plus, Disney plus, Apple plus (what is it with the pluses?), and Amazon Prime. I can’t possibly watch even a fraction of one of those services. And yet, I don’t bother cancelling any one of them because none are particularly expensive.

In short, more and more of what we value is being dematerialized. There’s no limit to the films/video you can watch for free on YouTube, email that you can send, Twitter that you can consume, Facebook you can rage about. The Fed has nothing to worry about with the fastest growing component of things we value, because those things are not physical things.