Tuesday, December 14, 2010
The November producer price index rose a bit more than expected, but as the above chart shows, over the past few years there hasn't been much change in the level of inflation according to this measure. Abstracting from the huge volatility of oil prices in 2008, producer prices have been rising at about a 3.5% rate for the past 6-7 years on average, while core prices (ex-food and energy) have been rising a little over 1% a year for the past two years. I note that even though this recovery has been sluggish, unemployment has been unusually high, and there has been an extraordinary amount of "slack" or idle resources, inflation has bounced back faster in the current recovery than it did following the 2001 recession. That's just more proof that inflation doesn't respond to the strength or weakness of the economy as the Fed's Phillips Curve Theory of Inflation suggests.
This next chart puts things in a long-term perspective. It shows the producer price index on a semi-log scale, so the slope of the line becomes the inflation rate. I've indicated different inflation regimes on the chart, beginning with the early 1960s when inflation was as low, subdued and steady as it has ever been (and it's not a coincidence that the U.S. was on a strict gold standard at the time).
Inflation has quickened somewhat since 2004, which not coincidentally was when the Fed first started getting serious about easing policy to pump up the economy and to avoid deflation, but it is still far below the hectic pace of he late 1970s (thank goodness). Easy money hasn't done much for economic growth—and there's no reason to think it should, since a nation can't print itself to prosperity—but it has given us a faster pace of price increases at the producer level. Sooner or later this should give us a quickening of inflation at the consumer level. Put another way, the ongoing rise in commodity prices—industrial commodity prices have risen a total of almost 12% a year for the past 9 years—must at some point translate into higher prices for many consumer items.
Posted by Scott Grannis at 9:41 AM