Inflation Low So What?

Inflation

The Labor Department report released today provided inflation numbers that were not encouraging for many watchers of the economy. The consumer price index, which measures the change in cost of a fictional basket of typical consumer goods, rose just one tenth of one percent, half of the 0.2 percent rise the previous month. Growth has remained low, but what does this really mean?

Consumers are mostly okay with low inflation rates. Prices do not change too much, and when they do, they do so slowly. Consumers can budget more easily and have ample time to take advantage of low prices. The price of televisions, for example, have dropped nearly 30 percent since 2012.

When inflation stays low for too long economists, like those working at the Federal Reserve start to worry. They become concerned that prosperity will suffer. They are subject to pressure from business interests to do something about slow growth.

A few years ago, much higher inflation rates were expected to be reached by this time, as a reaction to the very large economic stimulus in the form of a bond buying program which the Fed has been running for the last few years. The bond buying program has been slowly reduced, referred to by the financial industry as “the taper”, because the economic stimulation seemed to be working, at least for the top of the economic pyramid.

As the unemployment rate moved down towards the magic 6.5 percent threshold, recent talk was often about how the Fed was soon to go back to “normal” tactics in managing the economy, most likely by raising interest rates.

What with inflation still so low, however – well below the 2 percent target rate – interest rate hikes are probably the worst thing the Fed could do now. Increasing interest rates is the method typically used to brake the economic engine, to avoid the kind of run-away inflationary trend last experienced by the US economy in the 1980s.

Yet business editorials abound urging some tactic to increase inflation (maybe even just writing a lot of business editorials about it) must be implemented because the economy, they claim, is in desperate need of growth.

In some ways the term “growth” can be understood to mean “profits”.

Examine a typical (fictional) earnings report, the kind heard so often it barely registers: “Company Example missed forecast target of $6.5 billion as they announced only $6 billion dollar earnings for 2013. Analysts were disappointed and concerned about the firm’s growth prospects.” Nothing special, right? Now consider how pathologically greedy the same statement sounds when you take away the hand waving of growth as the most important measurement of economic activity. “Analysts were disappointed with $6 billion dollars of profit.”

Maybe they don’t remember that a perverse obsession with growth at all costs is what caused the worst economic recession the country had seen since the Great Depression.

What will raise the wages of people across the economic spectrum is simply raising their wages, receiving more of the existing profits which they help generate every day. There is no need to justify wage increase with predicted costs increases based on predicted inflation increases.

Simply realigning economic expectations to see that billions of dollars in profits can never be a disappointment should allow pundits and the Fed to say, “Low inflation, so what?”

Op-Ed By Brian Ryer

Sources:

The Washington Post
Los Angeles Times
CBS News

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