Economic Indicators: Consumer Price Index or Inflation.

Economic Indicators: Consumer Price Index or Inflation.  

Should we be worried?   

The classic explanation for inflation is too much money chasing too few goods, which certainly describes well the current situation in America. Why then, aren’t we plagued by inflation today? Without getting too technical, may I offer some perspective?

In the two-year period from late 2009 to late 2011, according to Federal Reserve statistics, the US dollar monetary base grew around 28%. And M2, the broadest measure of the money supply, increased 12.9% for the similar two-year period between November 2009 and October 2011. During that time-frame, America’s GDP grew perhaps 5%, or approximately 40% slower than the growth of the money supply.

The Nobel-prize-winning economist, Milton Friedman, claimed that the primary function of the Federal Reserve ought to be basically matching the growth of the money supply with the growth of real GDP, keeping the inflation-dragon at bay. But that is not happening at the moment as the Fed is busy monetizing debt.

Currently, if product prices go up, then consumers quickly seek substitutes.

Most retailers today tend to lower prices to make sure that inventory turns over regularly, even at a lower margin, instead of simply raising prices to generate larger profit margins. Nor are there widespread strikes over wages being too low. Instead of wage demands to raise the cost of labor, causing ripples that beget rising inflation, most employed Americans are grateful to have a job.

Obviously, business activity of the entrepreneurial sort is strongly muted today, during what has been dubbed the ‘Great Recession’. As I noted in the last two AZ Fraud Fighter newsletters, though GDP is up a bit, at least nominal GDP is, the real Unemployment Rate, at 12.1% (if we count those people who used to be employed, yet at this time are too discouraged to even look for a job) is still significant enough to heavily constrain inflation pressures, at this time.

While we are not in a recession, technically, as GDP is growing, but because so many people are still unemployed, the effect is that the economy feels like it is still in a recession, to many people.

What about when a significant recovery finally comes – will we experience significant inflation then? Probably we will, because Ben Bernanke, the current Fed Chairman, has not shown the same aptitude for monetary manipulation that has been demonstrated by either previous chairmen like Paul Volcker or Alan Greenspan.


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