The Lehmann
Letter (SM)
Most of us
know that gasoline prices have fallen recently. The consumer price index should
reflect that when it’s released next week. Falling fuel prices have already
affected the producer (wholesale) price index, out today:
The Bureau of
Labor Statistics reported that April prices fell 0.2%, or 2.4% at a seasonally-adjusted
annual rate. Wholesale prices were flat in March, and also benefitted from
falling fuel prices.
Producer
Prices
(Click on
chart to enlarge)
(Recessions
shaded)
As last month’s
letter on this topic said:
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.
As soon as
recession gripped the economy in 2008 the Federal Reserve began pursuing a
"whatever it takes" expansionary policy. These steps continued and
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.
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 economy
remains weak, and we suffer because of that. But tame inflation is a benefit.
(To be fully
informed visit http://www.beyourowneconomist.com/)
© 2012
Michael B. Lehmann
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