Wednesday, November 17, 2010

Inflation: Bittersweet News

The Lehmann Letter (SM)

Inflation remained low last month (2.4%) and low over the past year (1.2%) the Bureau of Labor Statistics announced today:

Consumer Prices

(Click on chart to enlarge.)

Recessions shaded

Gasoline (9.5%) and fuel oil (14.5%) accounted for all of the inflationary pressure in the last 12 months. Inflation would have been negligible without them.

Since imports account for most of our energy needs, this tells us that inflation is not a cause for concern within our domestic economy. That's a function of demand's slow growth at home. Here's why.

When demand grows rapidly and pulls production up with it, the economy strains to supply the goods and begins to operate less efficiently. Think of your car's engine as an analogy. It speeds up when you depress the accelerator, but you get fewer miles per gallon. That's expensive. The same thing happens to the economy. If we make the economy grow too fast, it does so in a less efficient and more costly fashion. That's the supply-side lesson.

We have looked at the supply-side in this month's letters and yesterday's letter showed that the economy still has plenty of slack. We're running at a smooth 50 mph, not an overheated 80. That holds costs and inflation down but, of course, does not provide a job for all who need one.

So today's low-inflation news is bittersweet. The low inflation that we enjoy today is a consequence of not running our economy fast enough to generate full employment.

(The chart was taken from [Click on Seminars and then Charts.] Go there for additional charts on the economy and a list of economic indicators.)

© 2010 Michael B. Lehmann

No comments: