Inflation Calms in October

By at 14 November, 2023, 4:25 pm

by Raymond J. Keating – 

After two months of inflation, once again, jumping higher, a flat reading in the Consumer Price Index (CPI) for October was most welcome.

As noted in the chart below from the latest CPI report from the U.S. Bureau of Labor Statistics (BLS), inflation disappeared in the month of October after running hot in the two previous months.

Listening to the talking heads on this and other monthly inflation reports can be misleading as to what inflation and the most recent details actually are about, that is, what they mean. So, let’s review quickly.

First, inflation is not necessarily about price increases in certain industries. Instead, inflation is an ongoing increase in the general price level. So, while information about where prices are rising and falling has obvious value, such increases and decreases happen all of the time – when inflation is high and when it is low. The point, again, on inflation is a sustained increase in the general price level.

Second, when inflation does take hold, month-to-month changes can be volatile. As a result, uncertainty grows throughout the economy.

Third, as the old saying goes, once the inflation genie is let out of the bottle, it’s hard to stuff it back in. That was evident with the jumps in CPI during August and September.

Fourth, it’s important to stay focused on the ultimate cause of inflation, that is, excess money supply growth, or too much money chasing too few goods. But how did inflation remain so tame until early 2021, given the growth in the monetary base (currency in circulation plus bank reserves) engineered by the Fed starting in late summer 2008 and continuing for then 13 years?

A key point is that loose money often is a necessary, but not sufficient cause of inflation. When the pandemic hit in 2020 and afterward, supply chains seized up for an extended period, while at the same time the government issued support via checks to individuals. That combination proved to be quite sufficient to ignite inflation.

As I’ve argued before, getting inflation under control is not about the Fed trying to further slow the economy by hiking interest rates. Instead, it needs to be about the Fed rolling back its unprecedented explosion in the monetary base, while the private sector continues to grow. That latter point would be aided by pro-growth policies like tax and regulatory relief, open trade, and reining in the size and scope of government.

Yes, robust growth with low inflation not only is possible, but it’s occurred throughout U.S. history, and it most certainly can again.

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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