What Inflation?

I’d be remiss if I didn’t pass along today’s news on inflation. There isn’t any. Nada.

Well that’s the story at the wholesale level where prices rose at an annual rate of 1.1% in September on the backs of volatile gasoline prices. As we all know energy and food contribute a lot of noise to any index of prices because they tend to bounce around a lot. This has real consequences for businesses and consumers in that no matter how volatile those prices are they still represent a drain on expenditure. But as an indicator of the pressures within an economy they are very bad measures. So we strip them out and look at ‘core’ prices. The advantage of this adjustment is that it allows us to see how the underlying and more dangerous long term effects of capacity constraints are either waxing or waning.

When September’s numbers are thus adjusted the rate of underlying inflation turns out to be zero. Literally. The core September rate was 0.0%.

The significance of this enormous.

It means that, despite protestations from hawks of all kinds, the Fed’s activities to support the economy have had no impact on inflation whatsoever. Those of us subscribing to a more Keynesian view of the world are not surprised at all. Indeed we expected it. Those who subscribe to market magic are presumably stunned that their theory is breaking apart so easily. They will have to resort, yet again, to the old ‘just you wait’ argument. They will no doubt warn us in serious tones about the impending explosion of inflation and the implied debasement of our currency. They lack all credibility. They have been issuing warnings about impending problems for what seems like a lifetime. You would have thought that something so imminent would have turned up by now. But no. It remains impending.

The rest of us can relax and focus our attention on solving real rather than imaginary problems.

The specter of inflation is a ghost. We ought not be afraid of ghosts. We have other more urgent issues to address. As today’s report confirms.