A Breather for CPI in May

Consumer price index inflation moved down by 0.3% in May, making for a two-month breather in inflation.

Any respite from an increase in the general price level is welcome. But we need to understand the reasons behind this decline, which followed on no change in April.

The Bureau of Labor Statistics explained the main point: “The gasoline index declined 6.8 percent in May, leading to a sharp decrease in the energy index and the decline in the all items index. The indexes for natural gas and fuel oil declined as well, though the electricity index increased.”

In fact, the 12-month increase of only 1.7% in CPI inflation, again, ties directly to a leveling off and then decline in energy costs since September.

However, the decline in energy prices of late and the related overall slowing of inflation has nothing, unfortunately, to do with sound monetary policy. Instead, it’s about economic woes and slowdowns in Europe, China, the U.S. and elsewhere. That slowing has translated into reduced demand for oil.

The long-term inflation risks remain, though, as the Fed has done nothing to remedy the unprecedented expansionary monetary policy that was run from late summer 2008 to early 2011. The leveling off in the monetary base – even a small decline since July – comes up woefully short in terms of reining in loose money. It’s only a matter of when the economy starts to pick up a bit of steam as to when inflation will reaccelerate.

When we understand that inflation is about too much money chasing too few goods, the policy actions called for today are pro-growth tax, regulatory and trade measures (i.e., lower taxes, deregulation and lower trade barriers), combined with a monetary policy regime focused exclusively on maintaining price stability (which would require the Fed to sop up the enormous excess liquidity in the system). That would lead to a high growth, low inflation economy, which is what we all need.

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Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council. His new book is “Chuck” vs. the Business World: Business Tips on TV.