PROTECTING SMALL BUSINESS, PROMOTING ENTREPRENEURSHIP

Should Business Owners Be Concerned About Inflation? The Latest on CPI’s Jump

By at 12 August, 2020, 3:16 pm

by Raymond J. Keating-

When the Consumer Price Index (CPI) spikes by 0.6 percent in two separate, consecutive months, that normally would be a case for deep concern, or even panic. After all, that would point to inflation running at a 7.2 percent annualized rate. Yikes.

But these are not normal times, and this two-month jump in the CPI amounts to noise and adjustments occurring around the coronavirus pandemic, the resulting shutdowns and overall economic woes – at least, for now.

Source: Federal Reserve Bank of St. Louis, FRED

As noted in the above chart, after running slow and steady for months, the CPI declined by 0.4 percent in March, by 0.8 percent in April, and by 0.1 percent in May. This reflected the general price declines occurring as the huge parts of our economy were shut down, and employment plummeted.

The subsequent increases in the CPI reflect the opening back up of the economy, and resulting price recoveries.

Generally, one should expect these wild changes in the CPI to settle down as the economy climbs back to something at least close to normal.

Of course, such expectations can turn out to be off. And in fact, unprecedented loose monetary policy largely prevailing since late summer 2008, and being ramped up further in recent months in response to the pandemic, feeds into real uncertainty as to where inflation might eventually be headed.

The worst case would be anti-growth fiscal and regulatory policies – such as tax hikes, increases in regulations, protectionist trade burdens, and ever-expanding government spending – combined with loose money. As history shows, that would a recipe for stagflation. But let’s hope that such a scenario is not in our future.

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

 

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