Inflation Picked Up in January

By at 13 February, 2024, 3:33 pm

…and the Fed’s Mess


by Raymond J. Keating – 

Getting inflation back under control once it ignites always proves to be tricky, especially when monetary authorities get the causes and remedies wrong.

This warning returns as inflation – as measured by the Consumer Price index (CPI) – ticked back up in January 2024 to 0.3 percent, according to the latest report from the U.S. Bureau of Labor Statistics. That came after three consecutive months of relative calm on the inflation front. (See the following chart.)

Source: Federal Reserve Bank of St. Louis, FRED

The January monthly inflation rate of 0.3 percent was the third worst monthly performance over the past nine months. And over the past 12 months, inflation ran at 3.1 percent, and over the past six months at a roughly annualized rate of 3.4 percent.

It also must be noted that one month is not a trend when it comes to inflation, and the performance on the inflation front has improved dramatically since mid-2022 compared to the previous year-and-a-half. However, inflation should be running at roughly 2 percent, at most, so in excess of 3 percent remains quite troubling.

As for this being a one-month measure, inflation is about a persistent rise in the general price level. Therefore, we could just as easily see a step down in inflation in coming months – as well as a step back up. This speaks to two more problems when inflation is elevated – volatility and uncertainty.

The Inflation Fight

As for how to deal with inflation, there arguably are two main schools of thought.

The first is that inflation is caused by an “overheated” economy, in particular, too much economic and/or employment growth. This is where the Federal Reserve is at, and therefore, has been focused on raising interest rates. The problem is that an economy that grew by 2.5 percent in 2024 and 1.9 percent in 2023, with the current employment-population ratio standing at 60.2 percent (see the following chart), it’s hard to argue that the U.S. economy is somehow “overheated” (whatever that actually means).

Source: Federal Reserve Bank of St. Louis, FRED

The second school of thought is that inflation ultimately is about excessive growth in the money supply, that is, too much money chasing too few goods. The Fed has direct control over the monetary base (currency in circulation plus reserves), and that has expanded in an unprecedented way since 2008. (See the chart below.)

Source: Federal Reserve Bank of St. Louis, FRED

As I’ve noted before, combine loose money with pandemic supply-chain challenges and ginned up demand via government pandemic checks, and inflation took off. However, as noted in the following chart, throughout 2022 and into very early 2023, the Fed seemed to be moving in the direction of at least starting to rein in the monetary base.

Source: Federal Reserve Bank of St. Louis, FRED

However, that process not only stopped but was reversed starting in March 2023.

So, the Fed is pretending that a sluggish economy is overheating, and therefore, playing the dangerous game of trying to manipulate the economy by manipulating interest rates. At the same time, when looking at the monetary base, the Fed is actually loosening monetary policy.

This bizarre combination is destined to cause economic problems. This leads to two questions. First, how bad will such problems get? And second, can private-sector entrepreneurs, businesses and workers save our economy from bad policymaking by the Fed, along with the White House and much of Congress?

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, The Weekly Economist II: 52 More Quick Reads to Help You Think Like an Economist and The Weekly Economist III: Another 52 Quick Reads to Help You Think Like an Economist.


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