What Inflation?
If there is one economic factor that the experts on Wall Street have consistently been wrong about, it is inflation. Ever since the great intervention in the economy after the Lehman implosion these analysts have been explaining that the consequent huge increase in the money supply would inevitable – inevitably – produce a sharp increase in inflation. This line of reasoning has been taken up by the right wing echo chamber and is now approaching full blown cacophony.
For two straight years we have been lectured by these orthodox economists and their various political hanger-on that the policies of the Fed and our neo-socialist government will do nothing but untold harm to our economy. Those policies will, they say, lead not to economic health, but to economic ruin brought on by the debasement of the dollar and an associated, uncontrolled, burst of inflation. It is this prospect, so they say, that is preventing businesses from investing, and is undermining consumer confidence.
Government is the problem.
Where have we heard that before?
Those of us who argue differently are dismissed as crazy interventionists who don’t realize the consequences of this supposedly reckless monetary regime.
Well.
Let’s look at the facts.
Inflation, when we take away the volatile stuff like food and fuel, has steadily chugged down a disinflationary path. The experts have been wrong in their forecasts for twenty-four months and counting. It is this adjusted, or core, measure of inflation that we look at to understand the trend of prices within the economy. Food and fuel prices jump about all over the place and tend to mask the underlying trend. This is not to say that those jumps are not real, but that they do not signify anything of deeper meaning within the overall price structure of the economy.
And what is today’s news about consumer prices?
The unadjusted Consumer Price Index rose just 0.2% in October. Core inflation was flat for the third month in a row, and has risen only 0.6% over the last year. This is the lowest level of core inflation ever reported. The trend line is still downward. We are perilously close to deflation and getting closer each passing month.
In other words the facts completely refute the imminent inflation disaster argument. Utterly and totally refute it.
Not that I expect it to go away. Those who fan fears of inflation do so on the basis of two things:
- An ideological dilike of government intervention in the economy
- A misreading of the economic situation
The ideology is well known and often drives otherwise sensible people to hold odd and anti-socail policy positions. The second is less well known, but is more pernicious since is based upon wrong headed economic theory.
So, to make my case once again: We are stuck in an odd economic situation. The normal outcomes from an expansionary monetary policy, assuming strong employment and demand, could be upward pressure on prices. That assumes the economy fails to expand in real terms in response to the change in money supply. But. These are not normal times. In fact we are so far from normal that we may not return there for a decade or more. We have an economy with a very large gap between its capacity or potential and its actual level of activity. We are going through a steady reduction in debt, and that implies a loss of cash for spending. We have very weak employment to go with this weak demand. Flooding money into this kind of economy may reduce interest rates enough to stimulate activity, but it will not shift prices.
Think about this from a practical business point of view. In the face of weak demand for your products, it makes no sense to raise prices. It makes sense to cut them.
If enough businesses cut enough prices we enter deflation.
If demand for the stuff needed to make consumer goods is sufficiently weak, those prices will drop too. And that includes wages.
The only reason that commodity prices are jumping about at the moment is that many emerging economies are growing well. It is not a reflection of overly strong demand in the developed economies.
So the experts are absolutely wrong. Inflation is nowhere in sight. Those folks who signed the letter published in the Wall Street Journal two days ago were urging the Fed to back away from its “inflation inducing” policies. Their point of view is thoroughly debunked by today’s news.
Will we see them change their mind in view of the new facts?
Of course not. Why let facts get in the way?
Fact based policy making is so yesterday.
