Inflation: Looking Back, Looking Ahead

By at 12 January, 2018, 11:45 am


by Raymond J. Keating-

Friday (January 12) morning brought some good news on Consumer Price Index (CPI) inflation.

Specifically, CPI inflation came in at only 0.1 percent for December. That’s a welcome slowdown compared to higher rates in the three of the previous four months. In fact, over the past three months, CPI inflation has settled down some, coming in at 0.1 percent in December, 0.4 percent in November, and 0.1 percent in October.

For all of 2017, from December to December, inflation ran at a tame 2.1 percent. That was the same rate as prevailed in 2016. And for the past six years, inflation has averaged 1.5 percent.

So, in terms of actual inflation numbers, the record over the last six years has been solid.

However, at the same time, unprecedented loose Fed monetary policy for nearly a decade has created uncertainty regarding what might be on the horizon regarding inflation. Currently, it’s becoming easier to stumble on experts crowing about faster economic growth generating inflation. Of course, that’s not how it works. Increased economic growth – by definition, a faster rate of economic output – works against inflation, since we all should understand that inflation is a monetary phenomenon, whereby, as the old saying goes, inflation results from too much money chasing too few goods.

In the end, faster economic growth should make it easier for the Fed to find a way out of the mess it has created. Consider that the monetary base skyrocketed from $875 billion in August 2008 to $4.2 trillion in September 2015, subsequently wandering, with the December level coming in at $3.9 trillion. At the same time, bank reserves jumped from only $11.7 billion in late August 2008 to $2.8 trillion in mid-2014, and registering $2.2 trillion in December of this year. The question remains: What’s going to happen given these previously unimaginable levels of bank reserves.

In the end, if we see an acceleration of inflation in coming months, that would be a result of chickens coming home to roost regarding this bizarre stretch of monetary policy; it would not be due to faster economic and employment growth.


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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