Wednesday, March 17, 2010
The Producer Price Index dropped -0.6% in February, mainly because oil prices fell. Core prices were up 0.1%. Year over year, both are in positive territory; we might say that inflation at the producer level is somewhere between 1% and 5%.
Nevertheless, it's hard to get a grasp on what is happening, with all the gyrations of late. So I put together the following chart which shows the Producer Price Index from 1960 through Feb. '10. (Note how prices have risen fully 640% over this period!! Just a little bit of inflation every year can really add up.)
I've identified 5 different inflationary periods on the chart, with the annualized rate of inflation noted for each. It begins with the wonderful years in the early 1960s when inflation was basically nonexistent. From '66 through '73 we had inflation that resulted from massive government spending programs that the Fed felt obliged to monetize to some degree. Then from '74 through '82 we had the calamitous inflation that resulted from a massive devaluation of the dollar and a Fed that could never tighten enough. From '83 through '03 we enjoyed relatively low and stable inflation thanks to Volcker's bold monetary tightening in the early '80s, and Greenspan's able stewardship of the Volcker legacy. From '04 on, we've had mostly easy policy from Greenspan and Bernanke.
Inflation in the past six years has averaged about twice what it did from '83 through '03, and to judge from the Fed's super-accommodative policy stance, inflation threatens to move even higher. At the very least this chart reminds us that Fed policy does make a difference. It is not unreasonable to expect inflation to be 3% or more in coming years, regardless of how weak the economy is and how much economic slack exists. Bernanke & Co. are stuck in their Phillips Curve rut, much like the Fed was stuck in the 1970s; always thinking that a weak economy would keep easy money from being inflationary. It didn't work then and it's not likely to work now. Very unfortunately for all of us who believe that low and stable inflation is a precondition to prosperity.
Posted by Scott Grannis at 11:19 AM