Say what you want about the CPI as it relates to inflation, the actual calculation is set up to measure essentially what GDP measures. That is why economists take their calculations of “inflation” as almost literal substitutes for actual economic activity. There is little denying the close correlation between economic activity especially in recession and the dramatic slides in CPI figures.

In the history of the CPI going back to 1960 when economists Paul Samuelson and Robert Solow first proposed the “exploitable” Phillips Curve whereby monetary authorities could “buy” lower unemployment with higher inflation, there have been exactly nine negative months (out of 661). Eight of those came in 2009, starting at the very trough of the Great Recession in March of that year. The ninth was January 2015.

ABOOK Feb 2015 CPI

The only way that Janet Yellen can justify raising interest rates is by ignoring the current and conspicuous failure and calling it temporary or “transitory.” In the recent past, such declines in the CPI have immediately preceded QE episodes, meaning that though those were also called “transitory” they clearly had an effect on policymakers and their actual, as opposed to public, thoughts on the economy.

ABOOK Feb 2015 CPI Recent

There is also the problem of the FOMC’s reasoning, if it may be called that, about negative “inflation” to begin with. Such low inflation is supposed to be short-lived, as Yellen tells it, because the economy is getting much better, and therefore more robust economic activity will attract oil prices, and thus “inflation”, back up with it. That sounds consistent enough, except when looking at the same formulation in the converse. If rising oil prices are consistent with a rising economy pulling them up, what are quickly falling oil prices consistent with?

The charts above provide just such an answer which is what Yellen et al. are actually very much afraid of; and have been for some time despite constant and more forceful projections otherwise. Severe oil price declines only occur during periods of global economic dislocation, and there is nothing to suggest this time is any different (especially about the “dollar” and “dollar” liquidity). That is also why a negative CPI is exceptionally rare, as the central banks around the world do everything in their power to gain at least some “inflation” (to our collective detriment, as they are essentially against rapidly rising real wages). That inflation could be negative notwithstanding three trillions collectively of just US versions of QE is simply not spinnable as a robust economy.

The real danger is what this dramatic and sharp slide portends outside of orthodox interpretations and obfuscations. That is the real incongruity here, that despite all the QE, ZIRP and constant cajoling the CPI ends up negative anyway. That can only calculate out to real economic problems with only the FOMC’s hopes and dreams left to counter.