Friday, May 13, 2011

Inflation Fears Are Still Largely Unfounded

Core inflation and service-sector inflation are still far below long-run averages.
The BLS reported today that annual headline inflation increased to 3.2% in April, the highest rate since October 2008.  Core inflation increased at a 1.3% annual rate, and the CPI inflation for services is 1.5% (see chart above). Most of the increase in headline inflation was from a 19% annual increase in the overall energy index, and a 33.1% increase in the gasoline index.  Based on the relatively modest inflation rates for the core CPI (1.3%) and the services CPI (1.5%), which are still running well below their respective historical averages of 3.9% and 4.8%, I am still not convinced that inflation is a major concern yet.  

Neither is Chicago Tribune columnist Steve Chapman, who wrote a column yesterday titled "Unfounded Fears: Inflation Nightmare or Runaway Prices Just a Dream," with the following five key points:

1. "Take the price of gold. It has more than doubled since Obama was elected in November 2008, allegedly because investors want a hedge against an increasingly worthless currency. But gold prices were also on a rocket during the previous eight years. And they were not a portent of raging inflation. During the administration of President George W. Bush, the consumer price index rose at an average rate of less than 3 percent per year — while gold was tripling in value.

2. Though some U.S. prices have jumped recently, most have not. The "core" inflation rate, which includes everything except food and energy, was 1.2 percent over the past year. That may seem painfully irrelevant, given the supreme importance of groceries and gas. But you can't have general inflation without core inflation. Comparisons with the last serious bout of inflation, the 1970s, suggest that today's worries are misplaced. Back then, it wasn't just fuel and food that soared: The cost of everything soared.

3. The depreciation of the dollar, likewise, is not really the unspeakable horror often portrayed. No one seems to recall that the greenback fell against the euro for most of the past decade.

4. Investors wouldn't be snapping up three-year Treasury notes at 1 percent if they were expecting their purchasing power to be ravaged by wolves any moment now. It's true that if the Fed pumps too many dollars into the financial system, it will eventually mean too much money chasing too few goods, pushing prices through the roof. But in the aftermath of the near-death experience of 2008, banks have been happy to hang on to cash rather than lend it out. By a broad measure known as M2, the money supply has been growing very slowly.

5. You can't have a wage-price spiral when unemployment is high, workers have little bargaining power and pay is stagnant. Wages and salaries, according to the Bureau of Labor Statistics, are up only 0.4 percent in the past year. Raise your hand if your pay is spiraling — upward, I mean."

MP: I've blogged recently about most of these same points - that you can't have overall high inflation without: a) high core inflation, b) high service sector inflation, c) rising wages, d) rising interest rates and e) much higher M2 growth.   

For the opposing view, see Scott Grannis and Brian Wesbury/Bob Stein and Mark Calabria.


At 5/13/2011 1:33 PM, Blogger juandos said...

"The "core" inflation rate, which includes everything except food and energy, was 1.2 percent over the past year"...

So long as one doesn't eat, drive, use electricity or natural gas then inflation isn't a problem?!?!

Is this Chapman clown looking for a job in the Obama administration?

Maybe core inflation should include reality...

Real reality...

At 5/13/2011 2:06 PM, Blogger Benjamin Cole said...

I can't understand the fetish some people have for injurious low inflation rates.

Japan has had no inflation in 20 years, and they are in perma-recession. Equities and property have lost 80 percent of value in Japan.

In the USA are climbing out of the worst recession since WWII. We have unused productive capacity, unemployed people, and tons of lost production. Now is not the time to fret about low, single-digit inflation.

Wake me when we get to 5 percent inflation and 5 percent growth in GDP. Let that ride for a years years, and then call me.

Dudes, we had moderate inflation all through the 1980s and 1990s, and we boomed the whole time.

The Nipponistas are the most dire threat to American prosperity today. Al Queda looks like a bunch of fairies next to the Chicken Inflation Little crowd.

At 5/13/2011 2:47 PM, Blogger Eric H said...

3mo. annualized CPI inflation approaching double-digits.

At 5/13/2011 2:51 PM, Blogger morganovich said...

cpi was .4 for april after being .5 for march.

that annualizes to a 5.5% rate, even using the vastly understated CPI.

that is NOT moderate.

nor were the double digit increases in import and export prices year over year.

it's amazing how much inflation shows up once you stop using the mathematical tricks the BLS does.

At 5/13/2011 3:23 PM, Blogger morganovich said...



you still do not understand japan and what caused what.

try reading this:

this is mathematical proof that growing money supply to try to drive inflation and growth DID NOT WORK.

you cannot inflate out of a demographic collapse.

here in the US we are just getting faux growth.

notice that the entire increase in nominal imports was driven by price?

how can that possibly be a good thing? you pay more for the same stuff.

At 5/13/2011 4:37 PM, Blogger James E. Miller said...

I refer everyone to this post by Robert Wenzel:

as for "idle resources" Robert P. Murphy handles that myth quite well:

At 5/13/2011 7:55 PM, Blogger Rufus II said...

It's oil; that's our problem.

At 5/15/2011 8:58 PM, Blogger Michael E. Marotta said...

Kondratieff would predict another spike ... soon ...

At 5/18/2011 8:44 PM, Blogger VangelV said...

You can't have a wage-price spiral when unemployment is high, workers have little bargaining power and pay is stagnant.

What a dumb argument. The experiences of the 1970s and Zimbabwe show that you don't have to have high employment or a booming economy to get high inflation. In fact, if you look at history you will find that it is weak economies that are producing well below potential that are most likely to suffer from high inflation.


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