Wednesday, June 16, 2010
Here's the latest update on inflation at the producer level. The core PPI is only up 1.3% in the past year, but it is up at a 2% annualized pace over the past six months. Total inflation is up 5.1% over the past year, and 3.6% annualized over the past six months. Draw a line down the middle at you might conclude that the underlying rate of producer price inflation is somewhere in the range of 2-4%.
I like this next chart, which plots the level of the producer price index on a semi-log scale. The chart divides inflation history into "regimes" that are in turn based on the stance of Fed policy.
The Fed was effectively a passive entity in the early 1960s, because we were on a strict gold standard. Not surprisingly, inflation was effectively zero back then. Beginning in 1966 the Fed began to stray from the gold standard, keeping interest rates low in spite of a gradual outflow of gold, and inflation became significantly positive. Inflation took off beginning in 1974, in the wake of the devaluation of the dollar, and the Fed was ineffectual at trying to stop it all through the 1970s. The Volcker Fed then brought it back into control in the early 1980s. But for the past six years inflation has been more volatile and generally higher than at any time since the early 1980s. Since 2004 the underlying rate of inflation has been about 3.5%. 2004, not coincidentally, was when the Fed switched to an overtly accommodative policy stance after having been generally restrictive since the early 1980s.
Inflation is not dead, it is alive and well. Deflation is not a risk.
Posted by Scott Grannis at 10:12 AM