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Friday, September 17, 2010

Inflation of Not Inflation

Regarding the August Consumer Price Index data released on September 17, the question is: Inflation or not inflation?

A Wall Street Journal report opened: "U.S. consumer prices rose in August for the second consecutive month driven by gasoline and food, but underlying inflation was flat last month."

Many analysts, along with our Federal Reserve chairman, seem more concerned with so-called core inflation (inflation less food and energy). Unfortunately, inflation is a rise in the general price level, not a rise in prices excluding certain items. In addition, of course, for individuals and businesses, food and energy tend to be rather significant expenditures.

As for the CPI report, the good news is that CPI inflation over the past 12 months registered a mere 1.1%

Worth watching, however, is the fact that seasonally adjusted changes in the CPI came in at 0.3% in August and 0.3% in July. If that trend continues, it is cause for serious concern.

One of the economic threats looming is that the economy continues to struggle - particularly in terms of jobs creation - and inflation picks up. The reason that this stagflation scenario cannot be ignored is due to the massive expansion in the monetary base engineered by the Federal Reserve since September 2008.

As we all learned in Economics 101, inflation is a monetary phenomenon, i.e., too much chasing too few goods. And as many were reminded, but some seem to have forgotten, in the 1970s and very early 1980s, slow growth and higher inflation can happen at the same time.

Raymond Keating, Chief Economist, SBE Council

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