PROTECTING SMALL BUSINESS, PROMOTING ENTREPRENEURSHIP

Keeping Inflation in Check

By at 15 March, 2018, 8:33 am

 

by Raymond J. Keating-

Let’s be clear: inflation is never a good thing.

Inflation is a rise in the general price level, and therefore, it is an erosion in the value of the currency and a decline in purchasing power. It means that a dollar is worth less tomorrow than it is today; it buys less in the future than it does today.

For good measure, when inflation starts to pick up, as history teaches, it often gets out of control, and becomes hard and very painful to rein in. Therefore, it is bewildering that one occasionally hears, as has been the case recently, someone in government and an “expert” here and there spouting off on television that a little inflation would be a good thing. The only response to that is: “No. Wrong. Stop saying such silly things.”

The Latest Inflation Data

The Bureau of Labor Statistics released the latest CPI data on March 13, and CPI inflation ran at 0.2 percent in February, down from a 0.5 percent increase in January.

Over the past year, CPI inflation ran at 2.2 percent. Inflation running around 2 percent is generally viewed as tame. But also keep in mind that over the past six months, inflation ran at annualized rate of about 3.6 percent – which most definitely is not tame.

Keeping Inflation in Check

Looking ahead, policymakers need to stay focused on sound measures. That means Congress and the White House need to zero in on matters like tax and regulatory relief, and opening global markets. Meanwhile, the Federal Reserve should be focused on maintaining price stability.

In turn, it’s important to keep in mind the real cause of inflation. It’s not a so-called “overheating economy” due to too much economic growth or too much job creation, and so on. Rather, inflation results from the money supply growing faster than the demand for money. So, economic growth actually works against inflation. The best thing that the Fed could do is drain down a massive, unprecedented level of bank reserves, which would reduce uncertainty about the future of inflation.

The Fed embarked on a wild experiment starting during the 2008 economic mess, and it has been wildly lucky for a nearly a decade that the results have been tame on the inflation front. It would be welcome if the Fed stepped back from its largely fruitless effort to juice up the economy, and get re-focused on maintaining price stability.

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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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