Regarding the Uptick in Inflation: Economic Growth is Not the Culprit

By at 14 November, 2018, 4:15 pm

by Raymond J. Keating-

The U.S. Bureau of Labor Statistics noted that the Consumer Price Index increased by 0.3 percent in October. That was the fastest monthly increase since January of this year.

Over the past year, CPI inflation registered 2.5 percent. But over the past six months, the annualized inflation rate came in at 2.2 percent.

Like any other uptick of inflation into a range no one should be comfortable with if it prevailed over the longer haul, the October 0.3 percent increase warrants attention. But then again, inflation always warrants attention.

The real issue is placing monetary policy on a solid foundation, and that means understanding the true causes of inflation.

Incorrect Assumptions

The widely accepted though incorrect assumptions about the causes of inflation were reflected in The Wall Street Journal’s report on this latest bit of data, citing concerns about a “tight labor market that is spurring some wage growth” and about the possibility that “rapid economic growth” might drive “inflation too high.”

This harkens back to a notion spawned by the Phillips Curve, namely, that too much employment and/or economic growth is the wellspring of inflation.

In reality, though, inflation is a monetary phenomenon. Economic growth, that is, the production of more goods and services, works against inflation, while wage growth ultimately reflects changes in market conditions and increased productivity. These are not inflationary impulses.

To the extent that inflation accelerates in the near term, that will be a result of the massive expansion in monetary base (i.e., currency and bank reserves) concocted by the Fed starting in late summer 2008.

The current Fed began to reverse course on this policy late last year, but it has a long way to go. For good measure, while the Fed seems to be working to get monetary policy back on some reasonably solid foundation, it remains unclear if the Fed is doing this with a clear understanding on how monetary policy and inflation interact.


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

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