PROTECTING SMALL BUSINESS, PROMOTING ENTREPRENEURSHIP

Economic News: Inflation Calms in Recent Months

By at 12 July, 2018, 6:04 pm

Small Business Insider

 

by Raymond J. Keating-

Inflation, as measured by changes in the Consumer Price Index, has notably calmed in recent months.

As reported by the U.S. Bureau of Labor Statistics, CPI inflation registered 0.1 percent in June. That came after 0.2 percent in both April and May, -0.1 percent in March, and 0.2 percent in February. This five-month stretch marks a welcome calming in inflation compared to the previous six months in which inflation ran higher and was more volatile.

Consider that from August 2017 to January 2018, CPI inflation came in at an annualized rate of approximately 4 percent. Over the five months since, however, the annualized CPI inflation rate registered about 1.44 percent.

Over the past 12 months, CPI inflation (before seasonal adjustment) came in at 2.9 percent.

Again, the recent slowing of inflation in these last five months is most welcome. It’s good news for consumers, investors, small businesses and workers, who see less of their earnings lost to inflation, which is a kind of tax.

Finally, it must be kept in mind that, contrary to many assertions by various policymakers and media reports, along with more than a few economists, faster economic growth does not cause inflation. To the contrary, increased production of goods and services works against inflation, since inflation basically is about too much money chasing too few goods.

Chart 1

In reality, inflation remains a monetary phenomenon, and the concern over the past decade has been the Federal Reserve jacking up the monetary base to unprecedented levels (see Chart 1) during and after the 2008 financial mess and the recession. Bank reserves wound up skyrocketing as a result, and uncertainty has been tied to the possibility of reserves stoking inflation by flooding the economy and how the Fed would rein in the monetary base.

It’s worth noting that the monetary base actually has declined some since August 2017, with bank reserves declining as well. Much work remains, but the Fed’s moves over the past year are welcome, and need to continue.

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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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