Inflation “Eases,” But Worries About Fed Policy Persist

By SBE Council at 10 August, 2023, 12:55 pm

by Raymond J. Keating –

Inflation continues to ease, with the release of the latest Consumer Price Index report from the U.S. Bureau of Labor Statistics.

CPI inflation registered 0.2 percent in July (on a seasonally adjusted basis).

Over the past three months, annualized inflation ran at roughly 2 percent, and over the past six months, it came in at approximately 2.8 percent. And for the past 12 months, inflation registered 3.2 percent.

As noted in the following chart, the U.S. had its worst bout of inflation since the 1970s and very early 1980s from early 2021 to mid-2022.

Source: Federal Reserve Bank of St. Louis, FRED

Matters have calmed since then. With the Fed running historically loose money since the summer of 2008, the post-pandemic economy – with supply-chain issues and government support checks – proved to be the right mix for inflation to finally ignite.

Thankfully, the private sector has worked to free up and expand production, while the Fed has done at least one thing right in the battle with inflation, that is, beginning the process of reining in loose money. (See the following chart on the monetary base, i.e., currency in circulation plus bank reserves).

Source: Federal Reserve Bank of St. Louis, FRED

That combination (and not foolish Fed manipulation of interest rates) has worked to bring down inflation. However, as noted in the following chart, since February of this year, the Fed has taken a slight detour from reducing the monetary base.

Source: Federal Reserve Bank of St. Louis, FRED

Let’s hope this recent Fed activity is nothing more than a temporary detour, and that the Fed quickly gets back to reining in the monetary mess it had been running for so long. If not, the threat of inflation reigniting will continue to loom.

Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council. His latest books on the economy are The Weekly Economist: 52 Quick Reads to Help You Think Like an Economist and The Weekly Economist II: 52 More Quick Reads to Help You Think Like an Economist.