Saturday, July 9, 2011
The top chart is an update of the Misery Index as of June (assuming the CPI will be reported as up by 3.7% in the 12 months ended June). At 12.9, the index is now higher than at any time since May 1983. The components of the Misery Index are included in the second chart for informational purposes.
Some observations worth noting: Every significant rise in inflation has preceded a rise in the unemployment rate. Why? Because the Fed starts fighting the rise in inflation by tightening monetary policy, and a scarcity of money (and high real interest rates that it entails) slows and eventually crushes the economy. Similarly, every significant decline in inflation has preceded and/or accompanied a decline in the unemployment rate. Since the unemployment rate moves inversely to the health and strength of the economy, we can say that, based on the experience of the U.S. economy over the past 50 years, high and rising inflation is bad for growth, and low and falling inflation is good for growth.
Posted by Scott Grannis at 10:54 AM