PROTECTING SMALL BUSINESS, PROMOTING ENTREPRENEURSHIP

Economic News: Low Inflation – Expected and Welcome

By at 11 October, 2018, 4:54 pm

Small Business Insider

 

by Raymond J. Keating-

Good news on the inflation front came via the Bureau of Labor Statistics latest report on the Consumer Price Index. Specifically, CPI inflation ran at a mere 0.1 percent in September.

In fact, from February to September, inflation has been very tame. And if we look over the past year, CPI inflation ran 2.3 percent.

The most interesting aspect of the inflation story is the bewilderment served up by assorted experts who subscribe to the mistaken notion – also known as the Phillips Curve – that faster economic growth and/or employment growth drive inflation higher. These folks seem shocked that inflation has not yet ignited.

In fact, some talking heads seem to be asserting that we are actually seeing higher inflation. That’s plainly contrary to the facts. Instead, such an assertion is simply a mistaken assumption. Look at the data, and it’s clear that inflation, at least right now, is not an issue.

In reality, increased economic growth – that is, increased production of goods and services – works against higher inflation. When we see solid growth, we should expect tame inflation. Of particular importance in the GDP data are investment numbers. Specifically, private investment growth has been strong, and that will funnel into productivity gains. And we saw a solid step up in productivity growth in the second quarter of this year.

Quite simply, strong economic growth does not lead to or generate inflation. Instead, inflation is a monetary phenomenon. Inflation results with too much money chasing too few goods, or to put it another way, when money supply runs ahead of money demand. So, the real risk over the past decade-plus was the Fed’s massive, unprecedented expansion in the monetary base (which largely sat in expanded bank reserves, and hence failed to drive up inflation). Another plus recently has been the current Fed working to rein in the monetary base.

Looking ahead, a combination of tax and regulatory relief, with a move toward sounder monetary policy, amounts to a solid economic recipe.

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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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