Friday, May 11, 2012

Fuel Prices Fall & Inflation Retreats

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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