PROTECTING SMALL BUSINESS, PROMOTING ENTREPRENEURSHIP

Economic Roundup: Slow Growth and Higher Inflation?

By at 15 February, 2017, 11:27 am

SMALL BUSINESS INSIDER

by Raymond J. Keating-

According to the news out on the morning of February 15, the industrial sector of the U.S. economy continues its lackluster ways, while CPI inflation is on the rise. That leaves some scratching their heads. It shouldn’t.

The Consumer Price Index rose by 0.6 percent in January. Of course, monthly changes in CPI often are quite volatile, and a big chunk of the January increase had to with energy prices. But over the past year, CPI inflation has stepped up a bit to 2.5 percent, and the annualized inflation rate over the last six months came in at 3.8 percent. That’s certainly troubling, and warrants watching given the fact that the Fed has run unprecedented loose money since the summer of 2008.

Meanwhile, industrial production – which measures the real output of the manufacturing, mining, and electric and gas utilities industries – declined in January by 0.3 percent. That came after a nice 0.6 percent step up in December, but being down in four of the last six months.

As for the manufacturing sector, output grew by 0.2 percent in January, and has experienced slow growth over the past five months.

For all of 2016, industrial production actually declined by 1.0 percent, which was the first down year since the last recession, and for manufacturing, 2016 output growth was a mere 0.1 percent.

Also, keep in mind that real GDP growth in the fourth quarter of 2016 was only 1.9 percent, and for all of 2016, growth registered a dismal 1.6 percent. That 1.6 annual rate for 2016 tied for the lowest growth rate (1.6 percent in 2011 as well) during this poor recovery/expansion period after the last recession.

Hence, for those who see economic growth generating inflation – i.e., the idea of an “overheating” economy – we have the head scratching. But inflation is not about too much economic growth. Quite the contrary, inflation results from excessive growth in the money supply relative to money demand, that is, too much money chasing too few goods. Therefore, no one should be surprised to see a possible stepping up in inflation – again, given the massive increase in the monetary base by the Fed since the summer of 2008 – even as the economy continues on a very sluggish growth path.

Other than how the Fed will eventually rein in its loose money (which is a significant uncertainty), the nation needs faster economic growth for a host of reasons, including the fact that increased production of goods and services works against inflation.

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Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council.

Keating’s latest book published by SBE Council is titled Unleashing Small Business Through IP:  The Role of Intellectual Property in Driving Entrepreneurship, Innovation and Investment and it is available free on SBE Council’s website here.

 

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