Thursday, April 12, 2012

Inflation Tame

The Lehmann Letter (SM)

As soon as recession gripped the economy in 2008 the Federal Reserve began pursuing a "whatever it takes" expansionary policy. These steps continue to the present day as the Fed has held interest rates near zero in order to drive the recovery forward.

Critics began expressing fears of rising inflation as soon as the Fed embarked on this road. Their theory: A rapid increase in the money supply would generate a rapid rise in prices.

But it hasn't happened, and this morning's report from the Bureau of Labor Statistics confirms that inflation remains tame:

Wholesale prices were unchanged in March.

Producer Prices
(Click on chart to enlarge)

(Recessions shaded)

The chart illustrates the extreme variation in wholesale-price changes from month to month. Recent years are no exception. But you can see that inflation has not surged since the recession.

Why? Because the economy continues to operate with sufficient excess capacity to hold inflation to a minimum. There are so many idle factories, idle machines and idle people - all waiting for the opportunity to get back to work - that business can easily call upon them if it wishes to expand and can do so without offering higher prices for their services. Costs and wages have not risen because there is so much slack in the economy.

The important point: The Fed's expansionary policy did not occur in a vacuum. Monetary stimulus in a time of full employment generates inflation. Monetary stimulus with mass unemployment does not. It's as simple as that.

The Bureau of Labor Statistics releases its report on consumer prices tomorrow. Let's look forward to another acceptable report.

(To be fully informed visit

© 2012 Michael B. Lehmann

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