The inflation report always electrifies

The release of the CPI report brings forth the usual ‘terrifying’ comments:

U.S. consumer prices rose for a third straight month in June, eating away at sluggish wage growth and sending inflation to its highest rate in more than six years.

That´s pressing the point too hard, as the chart illustrates.

The next chart shows, on the same scale, the stable behavior of the core measure.

The comment below exemplifies the degree to which the concept of inflation is misunderstood.

The Fed has thus far assumed tariffs were too small to affect inflation. Maybe not much longer. Ian Shepherdson of Pantheon Macroeconomics estimates the U.S.’s 10% tariff on another $200 billion of Chinese imports could boost the core consumer price index by 0.6%, assuming competitors also raise their prices. That would add a one-time 0.6 percentage point boost to the annual inflation rate. Ordinarily the Fed ignores such one-time hits, but Shepherdson says it can’t now: Given how tight labor markets are, workers can expect a corresponding boost to their wages. While that argues for higher interest rates, the loss of purchasing power and confidence goes in the other direction. – Greg Ip

Sure, tariffs, like any consumer tax, will (not could) boost the price level. Inflation, however, is a continuous (not “one-time”) increase in the price level.

Throwing in, for ‘good measure’, “tight labor markets” does not make the argument right.

Inflation is a monetary phenomenon. When there are inflationary process going on, as happened during the 1970s, all price measures will show a rising trend (sometimes interrupted by price/wage/credit controls). However, that´s because monetary policy (gauged by what´s happening to NGDP growth) is expansionary.

The next chart illustrates. During the 1970s, as NGDP growth showed an upward trend, both producers and core consumer prices trended up. Following Volcker´s stabilization, NGDP growth stabilized, and so did inflation. By their nature, producer prices (just as headline consumer prices) are much more volatile, but that doesn´t mean, if for any reason they rise, core consumer prices will “take-off”. In fact, monetary policy has been a constraint on growth given the low NGDP growth since the end of the great recession.

Bottom line: By being overly concerned with (imaginary) inflation dangers (“overheating”) the Fed risks tipping the economy.


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