PROTECTING SMALL BUSINESS, PROMOTING ENTREPRENEURSHIP

Inflation (and Related Questions) Continue to Rage

By at 13 October, 2021, 12:53 pm

 

by Raymond J. Keating –

According to the latest Consumer Price Index report from the U.S. Bureau of Labor Statistics, inflation continues to be a problem, and questions continue to swirl about how long our current bout with inflation might last.

Inflation is defined as an ongoing rise in the general price level, and high inflation creates all kinds of problems. Those include greater uncertainty; more price volatility (in a high inflation environment, prices not only rise but changes tend to be volatile); increased costs, including for small businesses, such as higher interest rates and rising input prices; a diminished value of the dollar (for example, the dollar buys less today that it did a month ago); and higher taxes, as many taxes, such as capital gains levies, are not indexed for inflation.

There’s nothing good about inflation. (See SBE Council’s recent brief titled “The Inflation Question: Key Points to Ponder.”)

Inflation has Various Origins and Causes. The Policy Mix to Fix It.  

The latest data show that CPI inflation ran at 0.4 percent in September. That was up a tick from the 0.3 percent in August, but down some from what prevailed from March to July (in the 0.5 percent to 0.9 percent range).

Over the past year, inflation ran at 5.4 percent. And over the past six months, inflation ran at an annualized rate of about 7 percent. That slowed to 4.8 percent over the past three months.

Source: Federal Reserve Bank of St. Louis, FRED

Looking ahead, at best, this current inflation challenge will last for however long it takes for the economy to work through various shortages, such as on the labor and supply chain fronts. At worst, inflation will take hold due in part to the flagrantly loose monetary policy that the Fed has been running, and will take concerted policy actions to get under control, such as the Fed reining in the money supply while fiscal policy moves in a more pro-growth direction (such as with tax and regulatory relief).

That was the policy mix in the 1980s that defeated inflation. By the way, the absolute wrong policy mix would be to continue with loose money and to impose anti-growth policies, like current efforts to increases taxes and regulations.

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

 

News and Media Releases