Surely A Large Human
Date registered: Jun 2006
Vehicle: '08 C219
Location: Between Earth and Mars
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It's later than you think
Commentary: But why are pundits silent on return of double-digit inflation?
PORT WASHINGTON, N.Y. (MarketWatch) -- Double-digit inflation has returned to the United States for the first time since the bad old days of 1981. So why are most pundits silent?
Perhaps they are taking their cue from the recent drop in oil prices. After all, the earlier jump in the price of petroleum is generally recognized as the main reason why inflation heated up in the first place.
Or maybe they buy into the argument that the economy will slow enough to prevent business from raising prices and labor from getting pay raises. When times are bad, boosting prices or wages almost always reduces demand for these particular goods and services.
It could also be that these folks are worried that any tightening by the Federal Reserve will exacerbate the already-sick housing market, thereby pushing the economy over the edge and into recession.
Whatever the reasons, those who profess not to be worried that inflation is getting worse are looking at the wrong data, are cockeyed optimists, or are simply keeping their fingers crossed.
But inflation has already reached worrisome levels.
Consumer prices are now 5.6% higher than they were a year ago. This is the largest yearly increase in 17 years.
At the producer, or wholesale, level, prices are climbing even faster. July's index soared 1.2% over June's level. This is an annual rate of nearly 15%! And compared with last year, July's index was 9.8% higher -- the fastest such jump in 27 years.
If this is not double-digit inflation, I don't know what is.
What I do know is what's behind this surge in prices: too much money chasing too few goods. I also know who is responsible for this. That's right, it's none other than the creator of our supply of money and credit -- the Federal Reserve.
Over the past year, liquid money, what the Federal Reserve Bank of St. Louis calls MZM, has grown by almost 15%. That's a lot by any measure.
The time for the Fed to start pulling some of this money out of the economy already has passed. Now, no matter what the central bank may do going forward, we are destined to deal with even higher rates of inflation.
Unfortunately, to listen to Fed chief Ben Bernanke's recent remarks, the Fed is not likely to tighten anytime soon. It would appear that he, too, believes the "What, me worry?" arguments I listed above.
But one reason why the economy is limping instead of sprinting is that wages are not keeping up with prices. As I pointed out in my column of June 9, unlike the 1970s, the last time the U.S. was afflicted with stagflation, the average worker's buying power today is declining.
Indeed, the gap between the 12-month rise in consumer prices and the annual increase in average hourly earnings is now the widest in recent memory. Little wonder why people are cutting back, especially since they have little if any savings and are unable to tap the equity in their homes.
It stands to reason, then, that the best way to boost spending would be to damp down inflation. The resulting rise in interest rates would not hurt as much as some think because the banks aren't lending much money, anyway.
At any rate, any drag from higher rates can always be countered by another dose of fiscal stimulus.
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