Economy > Inflation, Deflation, Stagflation
Thursday November 13 2008 08.37 GMT
put Britain on the brink of deflation
UK / USA
food inflation > coffee prices UK
Consumer Price Index
UK inflation since 1948
cost of living
surging cost of living
The retail prices index (RPI),
measure of inflation UK
preferred measure of
the consumer prices index CPI
Q&A: Inflation and deflation UK
pace of inflation
the specter of inflation
tame inflation data
a spike in inflation
surge in inflation UK
soaring inflation UK
Stagflation is a period
economic growth is stagnant
but when prices rise.
Recession is at least
of negative economic growth.
Inflation Slowed in August,
Reflecting a Weak Economy
The New York Times
By CHRISTINE HAUSER
of inflation in the United States slowed slightly in August, when a rise in food
prices was tempered by easing prices for gasoline and automobiles, according to
government statistics released Thursday.
The Labor Department said the Consumer Price Index rose 0.4 percent last month,
a slight deceleration compared with the 0.5 percent rise in July. The index,
although it reflects just one month of data, is a closely watched indicator that
guides analysts in assessing the economy. Other reports released Thursday showed
weakness in the jobs market and an uncertain outlook for manufacturing.
“The story is very much the same: that economic growth is slow,” said Kurt J.
Rankin, economist for PNC Bank, about the day’s data.
The inflation figures for August reflected the volatility in prices for items
such as food and energy. Prices for gasoline moderated, with a 1.9 percent rise
in August after a 4.7 percent jump in July. Food prices rose 0.5 percent
compared with 0.4 percent in July.
When those components were stripped from the index, the core C.P.I. showed that
prices rose in August at the same rate as in July, 0.2 percent. That was in line
with analysts’ forecasts in a survey compiled by Bloomberg News.
On a year-over-year basis, the core C.P.I. was up 2 percent in August compared
with 1.8 percent in July.
Paul Ballew, a former Federal Reserve economist and now chief economist at
Nationwide, said that the August C.P.I. number was consistent with expectations
set earlier by such things as automobile prices, which were basically flat in
“Those pockets of weakness were in areas already expected and known,” he said.
Of more importance to investors were events in the European debt crisis and
speculation as to what Federal Reserve policy makers would say after a meeting
next week, Mr. Ballew said. Although the chairman of the Fed, Ben S. Bernanke,
has given no sign that there would be fresh stimulus measures, market watchers
were weighing the possibility of any measures that would promote the economic
recovery in the United States.
With the year-over-year core C.P.I. at 2 percent, it was bumping up against the
top limit of the Fed’s unofficial target rate. But the Fed also relies on
another closely watched measure of inflation, the price index for personal
consumption expenditures, which was up 1.6 percent in the 12 months that ended
in July, the latest government data shows.
“It definitely gives him room under the ceiling, if they want to ease policy,”
said Kevin Logan, senior economist at HSBC. One such move would be for the Fed
to shift bonds in its portfolio to bring down longer-term interest rates. But
the central bank cannot raise rates, Mr. Rankin of PNC Bank said, because it
would slow economic activity.
In addition, the latest figures show that inflation is set to outpace wage
growth, which would be a “significant blow” to potential economic growth because
70 percent of the economy is based on consumer spending, Mr. Rankin said.
“Even those with jobs are not able to put that money back into the economy in a
way that would create jobs,” he said. “Now we are getting to the point with this
inflation number, even those with jobs are less capable of driving economic
Steve Blitz, the senior economist for ITG Investment Research, also said that
the latest data did not add any impetus to notions that the Fed would respond
with policy action at its meeting on Sept. 20-21.
“I think because of the headline number and all of the conservative politics
behind it, this certainly does not give Bernanke any cover towards doing
anything big,” Mr. Blitz said. “The only thing that is going to give him the
cover is what is going on in Europe.”
Mr. Blitz said the C.P.I. data reflected more of a shift in prices rather than
inflation, because there was no accompanying rise in wages, and some elements of
the data suggest the possibility of future economic activity in specific sectors
as capital is directed more efficiently.
For example, rents are a factor pushing the index higher, Mr. Blitz said, but
that could be positive for the economy if it continues because it can spur
construction in multifamily homes and rental housing.
In addition, a weaker dollar is also pushing up the C.P.I., which means imported
goods are more expensive. Domestic producers might see an opening to compete
with imported products.
“Here what you have is an interesting mix of price signals that could very well
help growth going forward,” Mr. Blitz said.
A weekly report from the Labor Department showed that for the second consecutive
week, initial claims for jobless benefits rose, increasing by 11,000 in the week
ended Sept. 10 to 428,000. That was up from the previous week’s 417,000, which
was revised up from 414,000.
Economists generally take any level over 400,000 as a continued sign of weakness
in the labor market.
In addition, the Federal Reserve reported that industrial production increased
0.2 percent in August after having advanced 0.9 percent in July.
Total industrial production for August was 3.4 percent above its level of a year
ago, the Fed said.
Inflation Slowed in August, Reflecting a Weak Economy,
Americans to Fed:
prices are too high
Thu Apr 7, 2011
By Daniel Trotta
(Reuters) - On the streets of America, the debate over inflation is over. Prices
are too high and rising too fast, many people say.
"The government says inflation is low, but that's not what I'm seeing at the
grocery story," Jorge Alberto, an 88-year-old retiree in Miami, said walking out
of a supermarket. "My pension is being put to the test."
Policy-makers at the U.S. Federal Reserve largely agree that promoting economic
growth is still more urgent that constraining a nascent pick-up in consumer
They look beyond the volatile fuel and food prices that have pushed up inflation
and focus instead on data showing little if any upward rise in wages, something
they would see as the seed of a sustained and broad-based rise in prices.
"I don't think the Federal Reserve has a clue about us little people," said J.
McKeever, an instructor at the Montessori Institute of Milwaukee.
"I am very frugal, so I watch what I spend. And what I have noticed in recent
months is that I have less money before than I used to, while making the same
amount of money and having to pay for health care," she said.
Across the country, Americans tell of a disconnect between the real economy they
live in and the macroeconomic picture as described by economic indicators.
Consumer prices rose 0.5 percent in February from January, and 2.1 percent over
the previous year but the rates were half that when stripping out food and
"There are no salary increases and you know you have the pressure at work to
cut, but on a personal level everything else keeps going up. You never seem to
be able to catch up," said Paty Peterson, 50, of suburban San Francisco.
Policy-makers at the Fed must weigh how much the perception of inflation might
trigger actual price increases. The worry would be if businesses pushed up
prices to cover their rising costs and workers in turn demanded higher wages to
cover theirs -- which could spark a self-feeding cycle.
Consumers' inflation expectations rose briskly in March, according to the
Thomson Reuters-University of Michigan survey.
U.S. households are facing higher prices for staple products such as Tide
laundry detergent and Hershey chocolate bars as cocoa, sugar, oil, wheat, corn
and other commodity prices climb.
Major consumer products makers have said in recent weeks that they will be
raising prices including Procter & Gamble Co (PG.N: Quote, Profile, Research,
Stock Buzz), which said it would raise laundry detergent prices 4.5 percent in
June. Kimberly-Clark Corp (KMB.N: Quote, Profile, Research, Stock Buzz) is
raising prices on diapers, baby wipes and toilet paper as much as 7 percent.
"My grocery bill is up 30 percent over last year," said Cheryl Holbrook, 47, who
educates her seven children at home in Mobile, Alabama. "We have to pinch every
little penny and make it squeak."
The Fed's hawks, who stress the risks of inflation, have stepped up their
argument that it may be time to wind down the central bank's $2.3 trillion
securities-buying program to stimulate the economy. So far, they have been
out-argued by those who see recovery from the Great Recession as fragile and
still in need of a boost.
The European Central Bank, by contrast, on Thursday raised interest rates for
the first time since 2008 to contain rising prices.
If underlying prices rise, or an inflationary psychology starts to take hold,
the Fed could change course.
A recent Reuters poll found long-term expectations for the food and fuel prices
that have pushed inflation higher in recent month are on the rise.
Consumers meanwhile complain that food and gasoline consume too much of their
income, forcing difficult decisions to stay within budgets.
Eileen Reilly, 72, a retired resident of the Chicago suburb of Geneva, said
higher gasoline and food prices have forced her to drive less, buy a cheaper
food for her dog Lucky, and stop taking pills for a liver condition she declined
"My doctor said I could die if I don't take them," Reilly said, rolling her
eyes. "I told him that I'm 72 and I'll be dead soon as it is. Besides, it was
either the pills or the car and the dog. And I need the car and I love the dog."
Kevin Gray in Miami,
Mark Felsenthal in Washington,
Verna Gates in Birmingham,
Nick Carey in Chicago, Brad Dorfman in Chicago,
John Rondy in Waukesha,
Peter Henderson in San Francisco)
(Writing by Daniel Trotta)
Americans to Fed: prices are too high, R, 7.4.2011,
Little Inflation Could Help a Lot
The New York Times
By TYLER COWEN
fiscal stimulus has not yet been a striking success, perhaps it’s time to
consider new monetary remedies for the economy.
That is the argument of Prof. Scott Sumner, an economist at Bentley College in
Waltham, Mass., who is little known outside academic circles but whose views
have been spreading, thanks to his blog, TheMoneyIllusion
Professor Sumner proposes that the Federal Reserve make a firm commitment to
raising expectations of price inflation to 2 to 3 percent annually.
In his view, policy makers in Washington are doing too much with fiscal policy —
overspending and running excess deficits — and not doing enough on the monetary
While his views are controversial, they are based on some assumptions that are
not. It is commonly agreed among economists that deflation brings layoffs and
sluggish investment. Yet, energy price shocks aside, we have been seeing
downward pressure on prices. Futures markets and Treasury Inflation-Protected
Securities — more precisely, the spread between the yield on TIPS and
traditional securities — suggest current expectations that inflation will remain
well under 1 percent. Economists generally agree that this is not ideal, and
Professor Sumner urges the Fed to try especially hard to overcome the
But how would the Fed accomplish this feat? This is where his recommendations
The Fed has already taken some unconventional monetary measures to stimulate the
economy, but they haven’t been entirely effective. Professor Sumner says the
central bank needs to take a different approach: it should make a credible
commitment to spurring and maintaining a higher level of inflation, promising to
use newly created money to buy many kinds of financial assets if necessary. And
it should even pay negative interest on bank reserves, as the Swedish central
bank has started to do. In essence, negative interest rates are a penalty placed
on banks that sit on their money instead of lending it.
Much to the chagrin of Professor Sumner, the Fed has been practicing the
opposite policy recently, by paying positive interest on bank reserves —
essentially, inducing banks to hoard money.
The Fed’s balance sheet need not swell to accomplish these aims. Once people
believe that inflation is coming, they will be willing to spend more money.
In other words, if the Fed announces a sufficient willingness to undergo extreme
measures to create price inflation, it may not actually have to do so. Professor
Sumner’s views differ from the monetarism of Milton Friedman by emphasizing
expectations rather than any particular measure of the money supply.
The Keynesian critique of this remedy is that printing more money won’t
stimulate the economy because uncertainty has put us in a “liquidity trap,”
which means that the new money will be hoarded rather than spent. Professor
Sumner responds that inflating the currency is one step that just about every
government or central bank can take. Even if success is not guaranteed, it seems
that we ought to be trying harder.
Arguably, we can live with 2 or 3 percent inflation, especially if it stems the
drop in employment. Consistently, Professor Sumner argues that the Fed should
have been more aggressive with monetary policy in the summer of 2008, before the
economy started its downward spiral. Somewhat tongue in cheek, he once wrote on
his blog: “Like a broken clock the monetary cranks are right twice a century;
1933, and today.”
It may all sound too simple to be true, but has the status quo been so good as
to silence all doubts? Many advocates expected that the $775 billion allocation
to fiscal stimulus would be followed rapidly by generous funding for health care
and other reforms. But at the moment, the American public, rightly or wrongly,
is blanching at higher government spending and higher taxes. In contrast, a Fed
stance in favor of mild price inflation need not require higher taxes or larger
While these arguments have not won over the economics profession, neither have
they been refuted. Economists like Paul Krugman have suggested that a public Fed
policy favoring 2 or 3 percent price inflation isn’t politically realistic in
today’s environment. Still, mild inflation might still be a better shot than
hoping for a fiscal stimulus that is big enough, rapid enough and ambitious
enough to work.
IF there is a flaw in Professor Sumner’s argument, it is that aggregate demand
doesn’t always drive business recovery. Circa 2007, for reasons of their own
making, various sectors of the economy were in a vulnerable position. These
included real estate, the automobile industry and retail sales. Higher price
inflation would not have solved their problems, which stemmed from basically
flawed business models that depended on rampant credit. Still, a different Fed
stance might have limited the secondary fallout from the financial crisis.
Of course, there’s a risk that inflation could get out of hand and rise above 2
or 3 percent. That said, the Fed has battled inflation successfully in the past,
and could do so again if necessary.
Professor Sumner has been working for 20 years on what he hopes will be a
definitive economic history of the Great Depression. In this manuscript,
tentatively titled “The Midas Curse: Gold, Wages, and the Great Depression,” he
argues that Sweden in the 1930s made a credible commitment to expansionary
monetary policy and had a milder depression as a result.
Professor Sumner’s proposals may not be public policy now. But if there is one
thing economists should know, it is that we should not underestimate the power
of an idea.
Tyler Cowen is
a professor of economics
at George Mason University.
How a Little Inflation Could Help a Lot, NYT, 1.8.2009,
spectre of 'stagflation'
It was the
curse of the 1970s
– rampant inflation and stagnant economic growth.
Now there are fears that Britain
could once again be haunted by the spectre of
14 May 2008
By Sean O'Grady, Economics Editor
A combination of stagnant output and high inflation not seen for decades is set
to haunt policy makers for months if not years to come.
the credit crunch, the housing market at its lowest ebb in 30 years, high street
sales at their most miserable in half a decade, and industry reporting a
collapse in orders, prices are still rising – and at an ever-faster rate. The
Chancellor, Alistair Darling, did not admit as much in his mini-Budget
yesterday, but his injection of £2.7bn of spending power into the economy may be
designed to prevent a catastrophic collapse in demand as Bank of England policy
makers find their room for manoeuvre to reduce interest rates constrained by
In April, we discovered yesterday, consumer price inflation hit 3 per cent, well
above the official target rate of 2 per cent, and a whisker away from the level
at which the Governor of the Bank of England, Mervyn King, is obliged to write
an open letter to the Chancellor of the Exchequer explaining the failure of
The jump, from 2.5 per cent last month, is the most dramatic since 2002, and the
rise in the cost of living is unusually broadly based. The retail price index,
which includes housing costs, rose to 4 per cent, up from 3.8 per cent the
previous month. Increases in the sort of basic items that families have to buy
were the highest. Food is 7.2 per cent up on a year ago, with analysts expecting
10 per cent inflation in a few months. And it's the essentials that are up the
most – bread by 13 per cent, butter by 32. 2 per cent and eggs by a third. The
increase in food prices is the fastest since 1990.
The twin effects of the credit crunch and the commodities crunch have sucked
purchasing power out of the economy while increasing the cost of housing, food,
energy and almost everything else. Global food prices are up 40 per cent in a
year and oil is up by 70 per cent – a barrel costs four times what it did in
2004. With the American property market still in freefall and the sub-prime
crisis as acute as ever, little seems to ease the credit crunch. Propelled ever
higher by an insatiable demand from China and other fast-growing emerging
economies there also seems little end in sight to the rise in commodity prices.
The 15 per cent decline in the value of sterling – as steep as when the pound
was forced out of the ERM on "Black Wednesday" in 1992 – has exacerbated
inflationary pressures. The fall is hitting living standards, especially for
pensioners and the poorest.
Electricity bills are 8.3 per cent higher and gas up 3.7 per cent. Heating oil
is a staggering 59.4 per cent more expensive than this time last year. Yesterday
British Gas became the latest energy supplier to threaten yet more price rises
by the end of the year, having raised its tariffs by 15 per cent in January.
Average household gas bills could top £1,000 in 2008. The average price of
petrol rose by 1.9p per litre between March and April this year, with diesel up
by 4.2p a litre.
During the past few years or so, the Bank of England's Monetary Policy Committee
(MPC) would have a simple remedy for such an increase in prices – a rise in
interest rates. During the "Great Stability", a decade of generally low
inflation, low interest rates and rapidly rising living standards, policy makers
could expect to influence the economy relatively easily. Now their task is more
difficult, as they are pulled between the need to fight inflation and avoid a
The Bank of England recognised the danger of inflation this time last year, and
began a programme of interest-rate rises to rein it in. Then came the credit
crunch, the risk of recession, and the plan was abandoned. The fear was of a
slump, one that would damage the economy so badly that, if anything, the
longer-term danger would be of inflation undershooting the target as demand and
confidence collapsed. The need to prevent this happening while tolerating a
"temporary spike" in inflation has been the Bank of England's rationale for a
series of interest-rate cuts since last autumn. However, after a quarter
percentage point cut to 5 per cent in April, the Bank has chosen to keep rates
on hold this month. It could mark the end of that plan, and a return to a keener
watch on rising prices.
Tellingly, the MPC knew how bad the new inflation figures would be when members
met last Thursday. Economists now believe that a rate cut that had been
predicted for June will also be cancelled. The Inflation Report, due from the
Bank today, will tell us more about how they see the likely "path" of rates over
the next year or so.
Matters are made more complicated because the Bank's "policy rate" is almost
irrelevant when market interest rates remain stubbornly high, thanks to the
credit crunch. Almost as fast as the Bank of England has been reducing rates the
commercial lenders have been raising them and putting up their fees for
arranging a mortgage, cutting the flow of funds into the housing market by a
Attempts to "inject liquidity" into the banks by swapping government securities
for unwanted mortgage-backed securities have been only partially successful. At
least for now, the Bank seems more concerned about inflation. Even so, there is
little chance of the MPC raising rates to address this danger. Mr King said as
recently as two weeks ago that "it doesn't make sense to raise interest rates at
this stage to induce a recession to keep inflation below 3 per cent".
Yet a recession may be just what Mr King gets – no matter what he and his
colleagues do. The British economy is growing at its slowest rate for three
years, with expansion in the first quarter of this year just 0.4 per cent,
compared with a rise of 0.6 per cent in the previous quarter. Bank officials
have admitted that its forecast for growth is consistent with the possibility of
a brief, shallow recession, that is negative growth. Few now expect the
Government's official estimate of growth in a 1.75 per cent to 2.25 per cent
range to be achieved. Most independent observers put the growth rate much lower,
some as low as 1 per cent this year. Even the bottom range of the Treasury's own
projection would be consistent with a quarter or two of virtually no growth, as
close to a recession as makes no difference. Some sectors are already in, or
close to, recession.
Most ominously, this week saw a sharp rise in the number of "forced sales",
consistent with last week's poor news on repossessions. The accidental leak by
the Housing minister, Caroline Flint, of an expectation of a 5 to 10 per cent
decline in house prices looks optimistic by some standards.
This time next year, on the conventional four-year cycle, the country should be
in the middle of a general election campaign. Gordon Brown may find himself
haunted not only by the spectre of stagflation, but by the infinitely more
terrifying spectre of humiliation and defeat.
The spectre of 'stagflation', I, 14.5.2008,
Consumer Price Drop
Prompts Fear of Deflation
November 20, 2008
The New York Times
By JACK HEALY
In another sign that the struggling economy continues to slow, consumer
prices tumbled by a record amount in October, carried lower by skidding energy
and transportation prices, raising the specter of deflation.
The Consumer Price Index, a key measure of how much Americans spend on
groceries, clothing, entertainment and other goods and services, fell by 1
percent in October compared with prices in the previous month, the Labor
Department reported Wednesday morning.
It was the steepest single-month drop in the 61-year history of the pricing
survey and raised concerns about deflation as the economy contracts and demand
for goods and services plunge. Another report released Wednesday indicated that
new home construction continued to fall. “This month it’s more than slowing,
it’s outright contraction,” said James O’Sullivan, United States economist at
UBS. “And yes, if you extrapolate that, it’s deflation.”
A continued decline in prices could worsen the economic slowdown by making it
harder to pay off debts and would negate the impact of interest-rate cuts by the
Even excluding volatile food and energy prices, prices dropped 0.1 percent in
October, the first such decline in more than two decades. Mr. O’Sullivan said
that he expected core prices, which are up 2.2 percent this year to continue to
fall back, but he does not expect them to slip into negative territory..
“You’re going to see huge declines in a month’s time in the November reports,”
Mr. O’Sullivan said. “That’s the biggest part of the weakness.”
Energy prices led the decline in October, falling 8.6 percent as the price of
gasoline continued its steady slide from highs of more than $4 a gallon. The
costs of transportation fell 5.4 percent while clothing prices fell 1 percent.
“It’s funny that just a few months ago everyone was wringing their hands over
inflation,” said Nariman Behravesh, chief economist at Global Insight. “It’s
gone. It’s over.”
“The dominant and common factor is the plunge in gasoline prices, which drove
the bulk of the weakness,” Mr. Sullivan said.
In a speech Wednesday at a Washington conference, the vice chairman of the
Federal Reserve, Donald L. Kohn, said the risk of deflation remained slight but
was increasing. “Whatever I thought that risk was, four or five months ago, I
think it is bigger now even if it is still small,” Mr. Kohn said. The Fed, he
added, needs to be aggressive, if necessary, to prevent a drop in prices.
But economists said the Federal Reserve had limited its options after repeatedly
cutting interest rates in recent months. The target rate for the federal funds
rate is now 1 percent after a cut of half a percentage point in October. Still,
many are expecting another cut at the next meeting in December.
A report on the beleaguered real estate market showed that housing starts fell
4.5 percent in October, to a seasonally adjusted 791,000. Housing starts last
month were 38 percent lower than their October 2007 levels.
Shares on Wall Street were sharply lower Wednesday morning following the reports
Economists said the tumbling consumer prices offered more evidence that
companies ranging from boutiques to airlines to car dealerships were beginning
to offer deep discounts to compete for a shrinking pool of disposable cash.
Americans have tightened their spending as job losses mounted and easy credit
dried up, and retailers are bracing for a punishing holiday shopping season.
“We’re looking at a pretty deep recession now,” Mr. Behravesh said. “ All of a
sudden, any pricing power that companies might have had is gone. You’re going to
see discounting like crazy going on. All kinds of sales. You’re going to see all
kinds of prices being slashed.”
With consumers pulling back, many analysts are expecting a difficult Christmas
shopping season. Retail sales, for example, were down 2.8 percent in October
from September, and 4.1 percent from October 2007 as consumers pared their
The price of food and beverages edged up in October, and was still 6.1 percent
higher than the same period last year. Alcohol, cereal, meat, fish and desserts
were all more expensive in October while the price of produce and dairy products
And while energy prices fell sharply in October, they were still an unadjusted
11.7 percent higher than a year ago, thanks to a long run-up in oil and energy
costs. The decline in consumer prices was just the latest symptom of an ailing
economy. On Tuesday, the government reported that wholesale prices dropped a
record 2.8 percent last month as commodities prices plummeted on slumping
worldwide demand. Crude oil prices, which peaked near $150 a barrel this summer,
are now hovering at $55 a barrel, and the prices for gold, silver and other
metals have collapsed.
Consumer Price Drop
Prompts Fear of Deflation, NYT, 20.11.2008,
That ’70s Look: Stagflation
February 21, 2008
The New York Times
By GRAHAM BOWLEY
Lately, many people are hearing an echo — faintly perhaps but distinctly
audible — of the stagflation of the 1970s.
Even as economic growth sags, oil and gasoline prices are surging to new
heights. Gold is on the rise, along with the prices of such basic commodities as
wheat and steel. And on Wednesday, with the latest government report on consumer
prices, there are signs that overall inflation, after years of only modest
increases, may be breaking out of its box.
For the Federal Reserve and its chairman, Ben S. Bernanke, all this could not
come at a worse time. With the credit markets in disarray from the collapse of
the housing bubble, Mr. Bernanke is cutting rates in a headlong rush to blunt
the risks of recession.
But in putting its emphasis above all on reviving growth, America’s central
bank, according to some economists and even a few Fed officials, may face a
bigger inflation problem down the road.
“They are cutting rates with a bill to be paid later," said John Ryding, chief
United States economist at Bear Stearns. “The question is not, will we get
inflation, but how much will it cost to stuff the genie back in the bottle. This
has the feel of 1970s stagflation.”
Over the last 12 months, consumer prices are up 4.3 percent on average,
according to the Labor Department. The core index of consumer price inflation,
which excludes food and oil, was 2.5 percent higher in January than a year
earlier, significantly above the Fed’s unofficial comfort zone of a 1 to 2
percent underlying inflation rate. That’s a far cry from the double-digit
inflation rates that battered the economy at times in the 1970s, but still
Analysts like Mr. Ryding say that by tolerating such price rises and maybe even
allowing them to escalate, the Federal Reserve is risking its hard-won
credibility as an inflation fighter, which will ultimately require it to push up
interest rates higher than otherwise to contain the damage.
Most economists still expect the Fed’s policy-making committee to cut interest
rates again when it meets on March 18, engineering its sixth reduction since
September. But the fears of a revival of inflation underline the difficult
decisions it now faces.
Like the Fed, economists generally remain more concerned about the immediate
threat of recession than the more distant fear of higher inflation. Recent data
suggests an economy that may be in a downturn or close to it. The consensus view
is that the expected slowdown is likely to create enough spare capacity to suck
inflationary pressures out of the economy.
Moreover, even if some additional inflation is a side effect of the Fed’s
prescription, many economists say, it sure beats the alternative. Once the
interest rate cuts have nursed the economy through the next few difficult
quarters, they say, the Fed can easily raise rates again to respond to any
pickup in inflation.
“They are going to fix the wound now,” said David Durst, chief investment
strategist of the Global Wealth Management Group of Morgan Stanley. “They are
going to take care of the growth situation and then fight inflation when the
economy gets stronger.”
Reinforcing this view, there are few signs that inflation is seeping into the
labor market and pushing up wages in anticipation of higher prices to come.
That may be comforting to the Fed, but keeping inflation contained still may not
be easy. In recent days some officials at the central bank have gone out of
their way to warn that they are not prepared to let down their guard — even if
it means that the Fed has to be less aggressive about cutting interest rates.
In a speech this month, Richard W. Fisher, president of the Federal Reserve Bank
of Dallas, said “the Fed has to be very careful now to add just the right amount
of stimulus to the punch bowl without mixing in the potential to juice up
inflation once the effect of the new punch kicks in.”
Charles I. Plosser, president of the Federal Reserve Bank of Philadelphia,
echoed that view, saying in a speech that “we cannot be confident that a
slow-growing economy in early 2008 will by itself reduce inflation.”
“As we learned from the experience of the 1970s,” Mr. Plosser added, “once the
public loses confidence in the Fed’s commitment to price stability, it is very
costly to the economy for the Fed to regain that confidence.”
In a telephone interview, Mr. Plosser explained that the Fed seemed to be making
progress against inflation in the first half of 2007 but he started to become
more worried during the second half.
“Since the summer almost all of the measures of inflation that we look at have
begun to accelerate again, and in some cases pretty sharply,” Mr. Plosser said.
“Perhaps the inflationary pressures are more broad-based than just energy.”
While Mr. Plosser said he hoped that inflation was about to moderate on its own,
“we do have a dual mandate after all — one is price stability and the other is
“We can’t just throw one out of the window when it is convenient.”
To Bernard Baumohl, managing director of the Economic Outlook Group, such talk
is seen on Wall Street as a clever tactic intended to help jawbone inflationary
expectations downward while the Fed continues to cut rates for at least a while
“We expect Fed officials will ramp up their rhetoric in speeches and in
testimony that they will work diligently to keep inflation expectations under
control,” Mr. Baumohl wrote to clients after the latest consumer price figures
were released Wednesday. “Mere words, to be sure. But it would be a mistake to
construe them as hollow.”
Zach Pandl, an economist at Lehman Brothers, said that the statements so far
have been by less important Fed officials and that the Fed’s real views should
be measured by its actions, which are to cut rates aggressively with less
concern about inflation.
Those actions have led a number of economists to warn that the Fed’s aggressive
easing moves, combined with the strong demand for industrial and agricultural
commodities from emerging global economic powers like China and India, may be
laying the groundwork for a new era of rising inflation.
“The period of falling inflation that we have been in for all the ‘80s and ‘90s
and early 2000s has come to an end,” said Michael Darda, chief economist at MKM
Partners, a research and trading firm in Greenwich, Conn. “That is over.”
Mr. Darda points to the surge in commodity prices, including food and oil.
Long-term rates are rising in the bond market, reflecting the view that both
growth and inflation may pick up later this year and into 2009, as well as fears
about bad debt.
And, according to Mr. Pandl, a measure of investors’ inflation expectations
provided by the difference between the yield on normal Treasury securities and
Treasury inflation-protected securities “spiked quite a bit higher” after the
Fed cut rates in January even though it “has been trading lower since then.”
Then there is gold, which has historically been a refuge for investors seeking
protection from eroding currencies.
Gold “has risen a lot since the Fed began lowering rates,” Mr. Darda said.
“That’s an ominous sign. Once we are in 2009 and 2010, we are going to figure
out that inflation is far less benign.”
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