Where is the Inflation?

Financial FAQs

Stocks and bonds are rallying, as it looks like inflation is still falling, rather than rising. This is good news for investors, but prices aren’t rising enough to boost economic growth yet. Boosting inflation seems to be the central challenge for both US and Europe, in particular, as they attempt to recover from the Great Recession.

 

Graph: Reuters

Though prices are no longer falling, they are not yet rising overall, either. And the reason is clear. Household incomes aren’t yet rising above the current low inflation level of 1.9 percent, which means they are barely keeping up with rising food, housing and services prices. If the CPI consumer price index seems suspect, then we can look at the various other indexes, including the Personal Consumption Expenses deflator followed by the Fed.

Graph: Calculated Risk

This Calculated Risk graph shows the year-over-year change for these four key measures of inflation. On a year-over-year basis, the Cleveland Fed’s median CPI (yellow line) rose 2.2 percent, the trimmed-mean CPI rose 1.9 percent, and the CPI less food and energy rose 1.9 percent. Core PCE (green line) is for June and increased just 1.5 percent year-over-year.

One can see from the graph that inflation has struggled to even reach 2 percent, the Fed’s stated goal. Whereas during the 1990s, and the longest growth cycle in our history, it remained closer to 3 percent.

So we know that low inflation is a sign of slow growth, just as in Europe. Yet policy makers know how to boost inflation—raise household incomes by supporting policies that create more jobs, of course. Yet Republicans and conservative Demos resist any kind to government expenditures that would create jobs—such as public infrastructure maintenance and repairs.

This is when government expenditures are at an all-time low as a percentage of GDP, while some $10.8 trillion in cash and cash equivalents sit in financial institutions driving up stock and bond prices. Private businesses should benefit from this cash hoard, but aren’t investing sufficiently in new plants and equipment domestically. They are investing overseas, of course, where costs are lower.

That leaves governments and consumers to boost economic growth, and as during President Roosevelt’s New Deal, consumers can’t spend more if they can’t find jobs. It’s a pity, since the long term unemployment rate is still 12 percent, including part time workers. And there is still plenty of work to be done if we want to pay forward our economic growth to future generations.

Harlan Green © 2014

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