The FED, Its Balance Sheet, the CPI, and Inflation

We have been looking at possible canaries in the mine shaft in light of our concern regarding inflation. As we have stated before we believe that based upon the recent FED actions that there is a portent for massive inflation. Somewhere in the back of Bernake's mind is the set of controls to fly thru this, akin to a Luke Skywalker feat, and one may dread, something that Summers could never do.

So here is another try. Consider the following. We have analyzed the FED BS and the CPI data and have looked at annualized percent changes average over a six month interval using monthly data.

We present three curves:

1. The Long Term Data: This is a telling chart since it clearly shows the spike in the FED BS as we have discussed at length. The spike is a clear anomaly so we really want to see if there is a cause and effect here that can be determined,



















2. The Recent Data: The chart below shows the data above but ends in July 2008 so we do not see the explosion. Again we ask is there some relationship. Namely if the inflation is IN(k) for some interval then do we have some relationship as:

IN(k+m)=a BS(k), where IN is inflation annualized change m units from time k and BS is the FED BS annualized change at time k. a is some constant. So does this make some sense?



















Frankly we do not see a great correlation but there may very well be something there.

3. A Look for a Correlation: We now take the above and plot the two data points in a scatter plot. This we have shown below.



















Again we may see something here but it is akin to hoping we can see something. Interesting but not definitive.