Abby Normal

We live in interesting times, but not as interesting a time as the one in which Young Frankenstein (pronounced Fronkensteen) lived.  His creation turned out to be quite abnormal.  Intellectuals probably think I should read the original book which Mel Brooks and Gene Wilder parodied, but even small clips like this one make me laugh enough to forget I haven’t read Mary Shelley’s 1818 novel.

Our central bank is dealing with a creation the likes of which the institution hasn’t seen since the early 1980s.  Inflation is quite high by historical standards.  Going back to the beginning of this century, inflation as calculated by the Bureau of Labor Statistics Consumer Price Index (CPI) has averaged 2.4 percent on a year-over-year basis.  Averages offer a glimpse at a statistic’s “central tendency” but do not tell the whole tale.  To better understand the bigger picture, something known as standard deviation is considered.  This is an additional calculation used to demonstrate the expected pattern within which individual measurements are likely to fall relative to the average (the Bell Curve is one example).  Basically, it creates bands around an average to help project limits for how far above or below future iterations are likely to fall.  Generally speaking, anything beyond two standard deviations higher or lower than average is abnormal.

Abnormally high is a way to describe America’s current inflation pattern.  We’ll give more detail in a subsequent note specifically on CPI, but for now it suffices to know that the latest reading fell to 8.5 percent in July from 9.0 percent.  Both of these tallies are well beyond the 2.4 percent average from January 2000 through last month.  With a standard deviation of 1.7 percent, the higher side of normal would be 5.8 percent (2.4 +(2*1.7) = 5.8 percent), so despite the slowdown in the statistic, it is still in abnormal territory.

This Putting on the Ritz scene comes to mind when thinking about the Federal Reserve and their current dilemma.  While the slower inflation trend is in their favor, they will likely continue tightening monetary policy until the figure normalizes.   Meanwhile, America’s economy is experiencing a slowdown, and forward-looking indicators are not yet showing signs that this slowdown is ending, suggesting an official recession could be in our future.  Let’s hope the economy doesn’t blow a stage light suddenly and cause chaos while the Federal Reserve is putting on their song and dance.