Summary:
Steve Chapman believes talk of stagflation is misplaced. Although US economy is practically stagnant, contrary to what most people seem to believe, inflation is not out of control. Rise in inflation solely due to rise in food and energy prices. Inflation has not spread to other areas of economy: core inflation been very constant Food and energy are notoriously unpredictable: can suddenly climb or plunge for reasons having nothing to do with how much money is in circulation. Food and energy prices due to supply and demand, which tends to be self-correcting. Note: not due to weakening dollar: dollar has remained stable for last three months, during which we have seen the sharpest rise in energy prices. (Published: 12/06/08)
Notes:
- economy can already be described stagnant, given negligible growth
- but: to get stagflation, also need inflation
- contrary to popular impression, has yet to show itself
- for months, Fed has been trying to stimulate lending by cutting interest rates
- in normal times, that can be inflationary
- but: these are not normal times
- because of mortgage crisis, banks are inclined to cut back on loans
- means shrinking money supply
- Fed has to use expansionary tools to counter that contractionary effect and try to avert recession
- if it's got the balance right, result will be that inflation won't rise or fall but stay the same
- critics say Fed has surrendered on inflation:
- pumping money out in a desparate attempt to prevent a full-fledged downturn
- see weakness of the dollar
- critics say Bernanke has let the dollar sink
- has in turn pushed up the price of oil and doomed us to the sort of inflation we haven't seen in a long time
- but: theory and evidence at odds:
- dollar has actually been stable over the last three months, both agains the euro and other currencies
- three months ago: price of oil below $100; now: above $130
- a dollar that's not declining can't explain why oil prices are rising
- if the dollar were steadily losing value, gold should also be soaring in price
- but: gold been trading well below $900 (versus close to $1000 in March)
- also: inflation has not spread across to the rest of the economy
- core rate (excludes food and energy) has been constant for a long time
- note: main reason for leaving out food and energy is that they are notoriously unpredictable and can suddenly climb or plunge for reasons having nothing to do with how much money is in circulation
- you can get high energy or food prices even when inflation is in check
- but: you can't get high prices everywhere else unless the Fed is pumping too much money into the economy for an extended period of time
- rising costs of food and energy are a major problem
- but the problem is not inflation
- worldwide demand for some key commodities has risen faster than supply
- unlike inflation, which tends to feed on itself, supply and demand changes tend to be self-correcting
- therefore: makes sense for Bernanke not to get too wrought up about $4 gas
- Fed's job is not to maintain price stability in any specific good or service
- it is to maintain general price stability
- preferably while keeping the economy at a healthy pace
- so far the Fed has managed to keep inflation in check
