PROTECTING SMALL BUSINESS, PROMOTING ENTREPRENEURSHIP

Inflation Woes and Policy

By at 13 October, 2022, 10:36 am

SMALL BUSINESS INSIDER

by Raymond J. Keating –

The latest Consumer Price Index report from the U.S. Bureau of Labor Statistics was disappointing, but not surprising. Inflation ran at 0.4 percent in September.

As noted in the following chart from the BLS, that was up markedly from the two previous months. And for the past year, inflation ran at a hot 8.2 percent.

Among the many problems that consumers, small and large businesses, and investors face during times of high inflation are volatility and uncertainty in terms of month-to-month changes in the general price level. So, one can have a couple of months of hope that inflation might actually be “calming” – such as what happened in July and August – only to see inflation spike once more.

Of course, other inflation-generated problems include rising input costs for small businesses, and declines in real income, which when combined with increased uncertainty, for example, work to undermine economic growth.

It’s Not an “Overheated Economy”

Indeed, those who blame inflation on a so-called overheated economy are simply dead wrong when one looks at the data and history.

It turns out that when inflation ignites, more often than not bouts of stagflation (that is, recession or slow growth combined with inflation), to varying degrees of severity, are experienced. After all, if we accept the idea that inflation results from too much money chasing too few goods, that’s effectively the same as saying that monetary growth is excessive compared to money demand or economic growth.

Finally, we must add to the list of grave concerns regarding inflation the following: The Federal Reserve’s counter-productive efforts to kill the economy in name of fighting inflation. In reality, the Fed jacking up short-term interest rates in order to fight inflation perversely does more to feed stagflation.

In the end, low inflation and solid economic growth should go hand-in-hand, and in order for that to happen, we need supply-side growth policies from Congress and the White House – such as tax and regulatory relief that incentivize entrepreneurship and investment – and monetary policy focused on low inflation and a stable dollar. This is not happening.

Congress needs to be focusing on pro-investment, pro-business policies. The Fed needs to be concentrating on reining in the unprecedented expansion of the monetary base it has engineered since 2008, and simply leave interest rates to the market.

Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council. His latest book is The Weekly Economist: 52 Quick Reads to Help You Think Like an Economist.

 

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