That Pesky Inflation Genie

By at 12 October, 2023, 3:35 pm


by Raymond J. Keating –

The inflation genie is proving to be hard to cram back into the bottle – as expected.

As noted in the latest report from the Bureau of Labor Statistics, inflation, according to the Consumer Price Index, registered 0.4 percent in September. And that came after a jump of 0.6 percent in August.

This is troubling in an assortment of ways.

First, after a few months of “calm” on the inflation front, these past two months point to an annoying persistence. But again that’s not totally unexpected, as history shows that once set loose, it’s a serious challenge to get inflation back under control.

Consider that after getting clear of the immediate effects of the pandemic, inflation ran hot from early 2021 to mid-2022. (See the following chart.) The subsequent story was uneven. From July 2022 to July 2023, we experienced a general calming, with eight of 13 months showing positive results. Those positives held during four of five months from March 2023 to July 2023.

Source: Federal Reserve Bank of St. Louis, FRED

But again, the data over these past two months are worrisome. Indeed, if you annualize what we’ve experienced over the past two months, that would translate into an annual inflation rate of 6 percent.

Indeed, inflation continued to rank as the top issue of concern for small business owners – 89% expressed concern about inflation, and 52% reported that revenues have not kept pace with inflation in SBE Council’s latest Small Business Check Up Survey Q3. 

Inflation – which is a persistent rise in the general price level – eats away at incomes and purchasing power. It pushes up interest rates and raises various taxes, like the real capital gains tax. It creates volatility and uncertainty. Indeed, the ills are many.

And since inflation ultimately is a monetary phenomenon – in particular, too much money chasing too few goods – Federal Reserve policy comes into focus. In fact, the Fed provided the foundation for inflation via monetary policy starting in 2008 that was so loose it was without historical precedence in the U.S. But the Fed’s response to inflation has emphasized jacking up interest rates in the hopes of slowing economic and employment growth, in the wrongheaded belief that inflation is about an overheated economy. Of course, there’s nothing “overheated” about the U.S. economy.

The Fed is Taking the Wrong Approach

So, the Fed’s jacking up of interest rates is not the way to fight inflation, and it hasn’t helped our situation. Some minimal reining in of the monetary base by the Fed starting in early 2022 has been positive, but much more is needed on that front. (See the following chart.)

Source: Federal Reserve Bank of St. Louis, FRED

Ideally, we need to see pro-growth policies being implemented by Congress and the White House – such as tax and regulatory relief, reining in government spending, and advancing free trade – while the Fed must get serious about reining in the money supply. Until that happens, private sector entrepreneurs, businesses, investors and workers are left to do what they can to generate innovations, efficiencies and growth that will work against inflation.

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.


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