Watching Inflation

If you go back to Economics 101, when money supply growth gets out of control, inflation eventually results.

And since the summer, the Federal Reserve has been juicing up money supply in an unprecedented way in an attempt to salvage the credit system and the economy. Of course, as we have seen, that plan has not worked out too well.

Now, the question is: When will inflation start to kick in?

While one month does not make an inflation problem, it is worth noting that CPI inflation for February, which was announced today, registered 0.4 percent. That followed a 0.3 percent increase in January.

With the decline in prices in late 2008, inflation for the past year was basically nonexistent. But the increase in the past two months warrants watching.

Again, getting back to economic basics, keep in mind that inflation is still all about too much money chasing too few goods. Given the current economic climate, the less-than-stellar expectations for the economy over the coming year or so, and the Fed’s loose money, stagflation has to be on the list of worries for entrepreneurs and investors.

Raymond J. Keating
Chief Economist
Small Business & Entrepreneurship Council