PROTECTING SMALL BUSINESS, PROMOTING ENTREPRENEURSHIP

One Clear Economic Positive: Tame Inflation

By at 12 November, 2020, 3:31 pm

by Raymond J. Keating –

High inflation is a nefarious economic ill. It reduces the value of the currency; diminishes consumers’ buying power; slashes away at the value of savings and investments; hikes taxes in an assortment of ways, such as by increasing the real capital gains tax; and jacks up uncertainty, which translates into reduced investment and entrepreneurship. For good measure, when inflation does hit, it’s usually hard and costly to get back under control. Nothing good comes from stepped-up inflation.

Therefore, the U.S. has been exceedingly fortunate (and lucky?) that historically loose monetary policy since the late summer of 2008 – with an explosion in the monetary base (currency plus bank reserves) that recently has jumped higher – has not translated into higher inflation.

Instead, inflation has been tame, and the latest Consumer Price Index (CPI) report shows that the recent inflation spike amidst pandemic economic turmoil was temporary.

As noted in the following chart, inflation was running at a little less than a two percent annualized rate prior to the pandemic. The CPI dropped markedly in March and April, spiked back up in June, July and August, and then settled in September and October.

Source: Federal Reserve Bank of St. Louis, FRED

In this economy, we should count every blessing, and the return to tame inflation warrants appreciation.

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

 

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