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Right now a little inflation is good news
12/16/2009 9:27 am EST
It’s back. Or at least investors can smell the faint whiff of it amidst the seasonal tang of freshly cut Christmas trees.
And that’s actually a good thing.
On December 15 the Bureau of Labor Statistics announced that the Producer Price Index (PPI), which measures price increases at the wholesale level, had climbed 1.8% in November driven by rising prices for food and energy. The core PPI, which excludes those two categories on grounds that prices in those sectors are too volatile, rose 0.5%.
The next day the bureau reported that prices at the consumer level (the Consumer Price Index or CPI) had increased by 0.4% in November led by higher prices for energy and healthcare. That increase followed a 0.3% climb in the index in October. The core CPI, which excludes food and energy prices, was unchanged in November
I know that inflation hawks, on the outlook for any signs that the massive increase in government deficit spending as a result of the twin fiscal and economic crises has led to an increase in inflation, reacted negatively to this news. To them the increase in the headline PPI and CPI is a sign of that runaway inflation is just around the corner.
I’m worried about the long-term inflationary trend too. Anyone who looks at the deficits piled up in the United States (and in much of the rest of the developed world) has to worry about the possibility of runaway inflation at some point in the future.
But not yet. As Federal Reserve chairman Ben Bernanke told the U.S. Senate Banking Committee recently, the U.S. economy is operating with so much unused capacity—so many factories are running at 50% of full speed and so many workers are unemployed—that a rapid increase in inflation is unlikely any time soon.
(Of course, the definition of “anytime soon” isn’t very precise. But the term isn’t any more or less vague than the Fed’s promise to keep interest rates low for an “extended period.”)
In the short-term of “anytime soon” a bit of inflation is actually a good thing. It’s a sign that the U.S. economy is growing—prices should rise if the economy is recovering from the Great Recession—and that the United States will escape the prolonged period of deflation that has keep the Japanese economy trapped near zero growth for much of the last decade.
None of this means we—investors, Fed officials, our representatives in government—shouldn’t be worried about runaway inflation in the long run. Just that right now a little inflation is a positive signal of economic recovery.
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