SBE Council Chief Economist Statement on Inflation

Raymond J. Keating, chief economist for the Small Business & Entrepreneurship Council (SBE Council), issued the following statement regarding the Bureau of Labor Statistics release on the May 2008 Consumer Price Index:

“As the May CPI numbers confirm, inflation continues to be a major problem – running at 4.2 percent over the past year and registering nearly 5 percent on an annualized basis over the past three months. In looking at these numbers, it is important to keep cause and effect straight. Inflation is a monetary phenomenon. The basic definition still holds, i.e., that inflation results from too much money chasing too few goods. It should surprise no one then to see that we are suffering a bout of stagflation – not nearly as bad as in the 1970s and very early 1980s, but stagflation nonetheless.

“Since inflation is all about monetary policy, the ultimate blame for inflation must be laid at the feet of the Federal Reserve. And the ills of inflation are real and significant for the economy. For example, the weakening dollar over the past few years and inflation concerns have played major parts in the run up in the price of oil. In addition, rising inflation creates uncertainty for investors. Since capital gains are not indexed for inflation, the real capital gains tax rate runs much higher than the stated nominal rate of 15 percent. A higher real capital gains tax rate means reduced incentives for investing and entrepreneurship.”

According to Keating, the answer to the stagflation problem is twofold. He says the Fed needs to get back to its main job of maintaining price stability, while Congress and the White House can boost pro-growth incentives by, for example, making the 2001 and 2003 tax relief measures permanent. Those tax measures include lower tax rates for small businesses, increased Section 179 expensing incentives, lower death taxes (which are eliminated in 2010, but then come back to full life in 2011), and lower capital gains and dividend taxes. In addition, government barriers to energy exploration and development need to be lowered, while initiatives to further regulate business should be restrained.