Thursday, August 18, 2011

Consumer price inflation continues to rise

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.


Benjamin Cole said...
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Benjamin Cole said...

The CPI for July was at 225.92, about 2.7 percent above that of July--July of 2008, that is.

That's right. A 2.7 percent increase in the CPI over a three-year period. Below target.

And we have a huge, 10-15 percent gap in production to potential.

This hysteria about minute rates of inflation mystifies me.

We are precisely in the situation--low interest rates, low inflation, stagnant output--that has defined Japan since 1990.

Milton Friedman advocated the Bank of Japan print money way back when. They did not listen, and the ballgame shifted to China and South Korea. Where they do print money.

China's central bank is known to favor growth even at the expense of some inflation.

Meanwhile, property and equities markets have cratered 80 percent in the 20 years in Japan.

I can only hope that Mitt Romney gets elected President, at which point the punditry about "inflation'" will evaporate (along with the brayings of that bilious knave, Governor Perry). Sheesh,

Now is not the time to fight inflation--even if we had enough inflation to worry about. Which we don't.

William said...

Mr. Grannis:

I am kind of simple minded. I have a hard time believing that a business would not make a good investment decision because the Fed Fund rate was 0.5% that he would make because the Fund's rate was the present 0.25% i.e. corporate borrowing rates being 0.25% higher than now.

I can understand how this would slightly improve the banks' interest rate spread and yield them $ Billions more in earnings which would help improve there balance sheet.

But I am wondering wouldn't it be overall better for the economy if at a 0.5% Funds Rate, the $2 or 3 Trillion in money market funds were earning something more for savers who might have a little more to spend??

My calculator can't calculate .5% of $2 Trillion but it is a lot of money.

TradingStrategyLetter - Weekly Summary said...

Savers be damned! Borrowers and spenders rule the day! It is a free for all on Wall Street! Consumer prices rising - Philly Manf Index implodes. Jobless rate more than likely excellerates on the upside by Xmas.
If you have flat wages or no job or can't borrow or get ZERO return on your funds - EVERYTHING looks and is inflationary. You can afford less and less each week. A sour economic gobbleygook bill of goods have been sold to the defenseless taxpayer!

McKibbinUSA said...

Perhaps forces are in play that are exogenous to US fiscal and monetary policy...