monetary policy liquidity inflation cpi

Hit the brakes, Ben -- Danger -- inflation ahead
inelastic demand

Prices are rising fast, even if the government's CPI isn't

Price increases, numerous as they are, are being masked by declines in something. This 2010 article is from MarketWatch, Feb 23. The writer is MarketWatch's chief economist.

by Irwin Kellner

Later this week, Federal Reserve Chairman Ben Bernanke will present his semi-annual report on monetary policy to the Congress. In it he will probably go to great lengths to reassure policymakers that the Fed intends to keep flooding the economy with liquidity for a while longer. But instead of keeping the pedal to the metal, Bernanke should be talking about hitting the brakes.

Even though unemployment is high and business has lots of spare capacity, inflation has returned -- although you wouldn't know it from a glance at the behavior of the consumer price index.

However, if you examine the CPI more closely, you will see a different picture altogether. Among other things, this means looking at the top-line number, which includes food and energy.

The so-called "core" rate of inflation, which excludes food and energy, is misleading. You know why? Because we all consume these items -- they are part of everyone's cost of living.

In the real world, these and other prices are going up, some quite sharply. And it's not just the notorious 39% hike in insurance premiums announced by a California insurance company. No, Virginia, lots of prices are going up, while in some cases portion sizes are being reduced. (See my column of March 24, 2009.)

I am referring to items that you and I purchase just about every day. Besides energy, these include food, health care, transit fares, local taxes and tolls. To these you can add telephone and cable bills, toiletries, beauty products, and, yes, haircuts (mine just went up 8%).

But these increases, numerous as they are, are being masked by declines in big-ticket items such as cars, computers, housing and cell phones, to name a few. As you know, these are items that we don't buy every day, week, month, or even year.

Because of this, the CPI's rate of change looks under control. This is why the money mavens think that they don't have to tighten right away.

Why the plethora of price hikes at this time?

It's a no-brainer. With at least two quarters of growth under our belts but sales still weak, many companies have apparently decided that this would be a great opportunity to boost profits by raising prices -- while the central bank still has the hammer down.

Behind this is the notion that the demand for most goods or services is inelastic. In other words, higher prices will not reduce people's willingness to buy. Business apparently believes that consumers will pay more without a fight -- after all, they have in the past.

To be sure, some consumers will resist, forcing some companies to back down. But when push comes to shove, most firms will keep trying to raise prices one way or another, and they will get away with it too.

This is why the Fed chief has to take his foot off the gas and hit the brakes. It's not too late to keep a little inflation from becoming a big one.

Remember the words of the late, great economist Milton Friedman: "Inflation is first and foremost a monetary phenomenon."

JJS: Kellner’s is not the first article we’ve run on the inaccuracy of official data for inflation. Far from it. And “reputable” economists also complain that the data for the rest of the economy -- from unemployment to GDP -- also distort reality. Getting good data to do good science is never easy. But the government, catering to political needs, makes it harder.

While it’s good to have Kellner join this chorus, it’d been even better to have him think outside the box. Should one man -- Ben Bernanke now -- have the power to set the basic lending rate, which drives the inflation rate? Shouldn’t the market of all borrowers and lenders be setting the lending rates, without any politics?

And should the central bank -- Bernanke’s Fed -- be the only one with the power to increase the money supply? Shouldn’t local currency groups -- the ones closest to actual producers and consumers who know if any new currency is needed -- be allowed to at least compete with the Fed, breaking the monopoly on legal tender?

And should we even have inflation? Is it a natural phenomenon like rust? Isn’t it a symptom of a system that’s either corrupt or incompetent or both?

And finally, in our present system, we make money from debt and we go into debt for land. So, if we borrowed to buy a building, but at the same time rented the land from one’s community -- as is done in Hong Kong, Israel, and most US port districts -- then our mortgages would be smaller, so overall debt in the economy would be smaller, so inflation would slow down, stop, and eventually reverse, making the issue of measuring it a non-issue. Such is the power of geonomics, of losing taxes and subsidies while recovering and sharing the value of land and resources.


Jeffery J. Smith runs the Forum on Geonomics.

Also see:

The data point to a recovery leaving some behind

How the Fed Prints Money Out of Thin Air

Coburn Questions 100 Stimulus Projects

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