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Monday, June 20, 2011

The Latest Inflation Data

The Bureau of Labor Statistics (BLS) provided the latest chapter in the Consumer Price Index (CPI) inflation story on June 15.

The inflation tale has been one of suspense for the past 33 months. The Fed opened the monetary floodgates in September 2008, and has left them open ever since. Given that inflation is ultimately a monetary phenomenon, i.e., too much money chasing too few goods, we were left worrying as to when inflation would accelerate. A kicking in of inflation would also compound uncertainty as it becomes less predictable and more volatile.

Inflation picked up in 2009, increasing from 0.1% in 2008 to 2.7% in 2009. Matters calmed to 1.5% CPI inflation for all of 2010.

However, inflation started accelerating in the second half of 2010, and has continued to run hot since.

The BLS reported that CPI was up 0.2 percent in May.

Over the past 12 months, CPI inflation (before seasonal adjustment) registered 3.6%.

And for the past six months, CPI inflation (seasonally adjusted) registered a 5.1% annualized rate.

Indeed, the only potential positive in the inflation data for the past year is that the monthly CPI change slowed some over the past two months, i.e., from 0.5% in March to 0.4% in April and 0.2% in May.

The Federal Reserve's loose monetary policies has achieved nothing in terms of boosting the economy. Instead, it has created inflation and inflation risks, which in turn, take their toll on risk taking and the economy.

The mystery looking ahead is: Now that quantitative easing two - QE II - is due to finish up at the end of June, what's next? Will the Fed, if the economy continues to struggle, decide to move with a QE III, or will it ever get back to its real job, that is, maintaining price stability?

Don't be surprised if the Fed continues with policies that do not work - and extends the suspense in terms of what entrepreneurs, investors and consumers need to worry about regarding the economy.


Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council.

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