Inflation Fears Are Still Largely Unfounded

Core inflation and service-sector inflation are still far below long-run averages.

The BLS reported today that annual headline inflation increased to 3.2% in April, the highest rate since October 2008.  Core inflation increased at a 1.3% annual rate, and the CPI inflation for services is 1.5% (see chart above). Most of the increase in headline inflation was from a 19% annual increase in the overall energy index, and a 33.1% increase in the gasoline index.  Based on the relatively modest inflation rates for the core CPI (1.3%) and the services CPI (1.5%), which are still running well below their respective historical averages of 3.9% and 4.8%, I am still not convinced that inflation is a major concern yet.  

Neither is Chicago Tribune columnist Steve Chapman, who wrote a column yesterday titled "Unfounded Fears: Inflation Nightmare or Runaway Prices Just a Dream," with the following five key points:

1. "Take the price of gold. It has more than doubled since Obama was elected in November 2008, allegedly because investors want a hedge against an increasingly worthless currency. But gold prices were also on a rocket during the previous eight years. And they were not a portent of raging inflation. During the administration of President George W. Bush, the consumer price index rose at an average rate of less than 3 percent per year — while gold was tripling in value.

2. Though some U.S. prices have jumped recently, most have not. The "core" inflation rate, which includes everything except food and energy, was 1.2 percent over the past year. That may seem painfully irrelevant, given the supreme importance of groceries and gas. But you can't have general inflation without core inflation. Comparisons with the last serious bout of inflation, the 1970s, suggest that today's worries are misplaced. Back then, it wasn't just fuel and food that soared: The cost of everything soared.

3. The depreciation of the dollar, likewise, is not really the unspeakable horror often portrayed. No one seems to recall that the greenback fell against the euro for most of the past decade.

4. Investors wouldn't be snapping up three-year Treasury notes at 1 percent if they were expecting their purchasing power to be ravaged by wolves any moment now. It's true that if the Fed pumps too many dollars into the financial system, it will eventually mean too much money chasing too few goods, pushing prices through the roof. But in the aftermath of the near-death experience of 2008, banks have been happy to hang on to cash rather than lend it out. By a broad measure known as M2, the money supply has been growing very slowly.

5. You can't have a wage-price spiral when unemployment is high, workers have little bargaining power and pay is stagnant. Wages and salaries, according to the Bureau of Labor Statistics, are up only 0.4 percent in the past year. Raise your hand if your pay is spiraling — upward, I mean."

MP: I've blogged recently about most of these same points - that you can't have overall high inflation without: a) high core inflation, b) high service sector inflation, c) rising wages, d) rising interest rates and e) much higher M2 growth.   

For the opposing view, see Scott Grannis and Brian Wesbury/Bob Stein and Mark Calabria.