Inflation is not a signal to watch
Bernanke said that inflation will come down soon, maybe as soon as 6 months.
In at least one respect, this pronouncement matters: the direction of interest rates. Currently the Fed is in a lose/lose position: raise rates to combat inflation or lower rates to pump up the economy. A lower inflation rate gets them out of this position.
But overall, the idea of inflation going down is misleading.
For starters, inflation will naturally ease as long as commodity prices don't go up. It's just math: inflation is the measurement of the price this year compared to the price last year. Yes, food and oil prices surged in the last 6 months, but as they ease, the prices come closer to where they were a year ago. Better yet, if oil <$120 next Spring, the Fed can even claim that inflation is dropping! Break out the champagne - the Fed Governors are genuises!
Inflation matters but disposable income matters more. Let's say Jane's take home income is $100: $40 goes to gas and food and $60 to other things. With inflation, she now spends $50 on gas and food and $50 on other things. No problem: Jane will ask for a raise, the traditional way fo dealing with inflation. Except that, in a recession with rising unemployment (tickling 7.5% in california and 6% in the US), wage earners have no leverage. So an ease in inflation matters in that Jane's spending won't further erode and she'll be left with $40 on other things and $60 on gas/food. But the picture is still bleak: Jane still only spends $50 on other and not yesteryear's $60.
Joe is in worse shape. He has no job. His discretionary spending is $0.
Our economy has to adjust to both Jane's lower spending and Joe's non-spending.
The focus on inflation is like worrying about some splinters when you've been knocked on your ass by a 2 x 4. Splinters are the least of your concerns right now.
In at least one respect, this pronouncement matters: the direction of interest rates. Currently the Fed is in a lose/lose position: raise rates to combat inflation or lower rates to pump up the economy. A lower inflation rate gets them out of this position.
But overall, the idea of inflation going down is misleading.
For starters, inflation will naturally ease as long as commodity prices don't go up. It's just math: inflation is the measurement of the price this year compared to the price last year. Yes, food and oil prices surged in the last 6 months, but as they ease, the prices come closer to where they were a year ago. Better yet, if oil <$120 next Spring, the Fed can even claim that inflation is dropping! Break out the champagne - the Fed Governors are genuises!
Inflation matters but disposable income matters more. Let's say Jane's take home income is $100: $40 goes to gas and food and $60 to other things. With inflation, she now spends $50 on gas and food and $50 on other things. No problem: Jane will ask for a raise, the traditional way fo dealing with inflation. Except that, in a recession with rising unemployment (tickling 7.5% in california and 6% in the US), wage earners have no leverage. So an ease in inflation matters in that Jane's spending won't further erode and she'll be left with $40 on other things and $60 on gas/food. But the picture is still bleak: Jane still only spends $50 on other and not yesteryear's $60.
Joe is in worse shape. He has no job. His discretionary spending is $0.
Our economy has to adjust to both Jane's lower spending and Joe's non-spending.
The focus on inflation is like worrying about some splinters when you've been knocked on your ass by a 2 x 4. Splinters are the least of your concerns right now.
posted by Andrew at
9:52 AM
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