Thursday, August 18, 2011
The July CPI rose by more than twice as much as had been expected (0.5% vs. 0.2%), while the core CPI rose by 0.2% as expected. The trend in inflation by just about any measure is up. Over the past six months, the CPI is up at a 4.0% annualized rate, and the core CPI is up at a 2.6% annualized rate.
That both measures are rising is a testament to the fact that monetary policy is accommodative. It is also a testament to how wrong the conventional thinking is about what causes inflation. Inflation was not supposed to be nearly as strong as it has turned out to be, since the economy is operating at least 10% below its trend capacity, and according to Phillips Curve doctrine, an economy with so much "slack" or idle resources should be dangerously close to, if not already mired in, deflationary quicksand.
Instead of deflation, we are experiencing what so far could be called a mild-to-moderate case of stagflation: a weakly growing economy with rising inflation. This is the same sort of condition that characterized much of the 1970s. Both eras have some common monetary denominators as well: accommodative monetary policy, a weak dollar, low to negative real interest rates, and strong gold and commodity prices. Once again we are seeing proof that easy money doesn't stimulate growth, it just stimulates inflation.
Note in the above chart that when real yields were below their long-term average (e.g., from 1965 through 1980) inflation was generally rising. When real yields were above average (from 1980 through 2000), inflation was generally low and falling. As I explained in detail yesterday, low real yields are symptomatic of easy money, and they are part of the rising inflation process.
Please, Mr. Bernanke, take away that punchbowl! We don't need any more spiked Kool Aid.
Posted by Scott Grannis at 8:19 AM