Why Today is Different From the Inflationary 1970s
WASHINGTON (Reuters) - Soaring gasoline prices helped drive up overall U.S. consumer prices during May by the fastest rate in six months, but core prices remained tame, a government report today showed. But 12-month core prices advanced 2.3% as expected (see chart above).
MP: Note that core CPI inflation (less food and energy, data here) has been below 3% now for 149 consecutive months, since January of 1996 (shaded area above). Also notice that there is a huge difference between the inflationary 1970s and today - in the inflationary 1970s (fueled by excessive money creation) ALL prices were rising simultaneously at double-digits rates, EVEN the non-energy and non-food items of the CPI. Today, except for energy and food prices, core inflation is contained, low and stable, as is growth in the monetary base, suggesting that the concern about inflation is well... inflated.
Also, compared to a recent peak close to 3% during 2006, the core inflation rate is lower today, and has been generally declining since late 2007.
Rising energy prices alone cannot cause inflationary increases in all goods and services, as the situation today suggests, with core inflation remaining low and stable despite rising energy prices. Keep in mind also that during the double-digit inflation in the U.S. during the 1970s, fueled by expansionary monetary policy, the German central bank demonstrated much greater monetary restraint, and inflation in Germany never exceeded 8% in any year during the 1970s and averaged only 5% during that decade (despite experiencing the same increase in world oil prices as the U.S.).
Also, compared to a recent peak close to 3% during 2006, the core inflation rate is lower today, and has been generally declining since late 2007.
Rising energy prices alone cannot cause inflationary increases in all goods and services, as the situation today suggests, with core inflation remaining low and stable despite rising energy prices. Keep in mind also that during the double-digit inflation in the U.S. during the 1970s, fueled by expansionary monetary policy, the German central bank demonstrated much greater monetary restraint, and inflation in Germany never exceeded 8% in any year during the 1970s and averaged only 5% during that decade (despite experiencing the same increase in world oil prices as the U.S.).
4 Comments:
Professor,
Since inflation is a monetary phenomenon, how can one get a feel for an aggregate international money supply. Many a chart has been presented to show that the US monetary base is not growing (much) and yet the US economy is being stimulated by low real rates and the dollar is priced below the mid 90's lows. Is it possible that a drop in oil prices would reveal that real rates are higher than they look?
It is clear that productivity (in China and elsewhere) is keeping the cost of manufactured goods down. It is also clear that the price of oil is operating like a tax (depressant) on the world economy. Brian Wesbury says that when the oil price comes down, the core rate of inflation will rise. This is a bit counter intuitive in that energy does feed in to the cost of goods.
It is also clear that the lower income people in the US and around the world are being hit the hardest by high food and high energy prices. I do not want to sound like my liberal friends but there does seem to be merit in their argument that the "poor man" has not done so well lately.
My key question is about the world money supply because only a few months ago it seemed likely that the strength of the international economy would keep the US out of recession. Now it is starting to appear that the US economy is going to have to be the engine of growth.
Many thanks. Your blog is my first daily read.
Jack
Jack
Of course it's different than the 1970s.
Today, some people would take home more money if they were on welfare than if they were paying gas costs to and from work.
Of course, this graph doesn't take into account the changes that have been made to the CPI calculation since the 70s. If the CPI was calculated using the old method, core inflation would be roughly 8%.
the changes that have been made to the CPI calculation since the 70s.
Good point. One should be careful using longitudinal CPI data to explain differences.
For instance and as an example, prior to 1983, the BLS used the asset approach to calculate shelter costs which amount to 30% of the CPI. Now the BLS uses the owner-equivalent rent (OER) approach.
The asset approach would have indicated higher core CPI during the housing boom period from 1996 to 2006 than the OER approach and the OER approach would have indicated lower core CPI during the 1970 to 1983 period.
See: Treatment of Owner-Occupied Housing in the CPI
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