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Like it or not, history shows Ben Bernanke is right to say inflation isn't knocking at the door.
Bernanke, the widely criticized chairman of the Federal Reserve, shot back Sunday evening at the inflation hawks who claim quantitative easing â?? the Fed's plan to buy $600 billion of Treasury debt over eight months, in hopes of boosting asset prices and nudging a sluggish economy forward â?? will send inflation soaring and destroy the dollar.
When hawks cry
"We've been very, very clear that we will not allow inflation to rise above 2% or less," Bernanke said. "We could raise interest rates in 15 minutes if we have to."
But Bernanke knows his 15 minutes of inflation-fighting fame aren't coming any time soon. As long as one American in six is jobless or underemployed, there's no reason to expect inflation to lift off, no matter what the Fed does.
And don't just take his word for it. Economists at Goldman Sachs last week noted that since 1950, inflation has never risen during any two-year period that started with unemployment above 8%.
It is, admittedly, a small sample, with only three periods registering above 8% on the jobless scale since World War II: 1975, 1981-1984 and 2009-10. But in each case inflation fell during the subsequent two years by between 1 and 2 percentage points (see chart, right) -- even during the 1970s, now recalled unfondly as a bubbling cauldron of inflation.
The current cycle fits quite well in the falling-inflation framework. Inflation has fallen basically straight down since the so-called super spike of 2008, which saw the price of oil surge briefly to $147 in the summer before the financial system collapsed in the fall.
It was in response to this trend, as much as anything else, that Fed officials this fall started talking about the need to maintain price stability â?? in this case, by trying to boost inflation.
Bernanke and other Fed officials have stressed that they will revisit their quantitative easing plans whenever new data arrive, giving rise to talk that the central bank may cut short its QE plans next spring. With the economy showing signs of life and the Bernanke backlash surprising many observers, even some who see a strong case for additional QE have been trimming their expectations for the size of the Fed's purchases.
But let's face it, that's mostly wishful thinking. For all the modest gains in manufacturing output and the heartier-than-expected appetites of consumers -- and for all the understandable fear that there will be an inflationary period years down the road -- there is no sign the jobs bust will abate in the foreseeable future.
The unemployment rate was last below 8% in January 2009, at 7.7%, and economists don't expect it to drop below 8% again till 2013, according to the latest survey of 43 forecasters conducted by the Federal Reserve Bank of Philadelphia.
That explains why the Fed continues to fret over deflation, a spiral of falling wages and prices that makes heavy debt loads more burdensome by raising real interest rates.
Easing isn't easy
"We're getting awfully close to the range where prices would actually start falling," Bernanke said Sunday on 60 Minutes. "But if the Fed did not act, then given how much inflation has come down since the beginning of the recession, I think it would be a more serious concern."
What's more, the length of the current spell of high unemployment is on track to set an unhappy record. The unemployment rate was 8% or above for 12 months in the 1975 recession and at that level for 27 months between 1981 and 1984.
We are currently at 22 months. Try finding someone who doubts we set the record next May.
You won't find that someone at Goldman, where economist Ed McKelvey writes in the firm's US Economics Analyst that core inflation â?? excluding food and energy prices â?? should rise at a minuscule 0.5% annual rate through 2012.
"Although we expect growth to rise materially above its potential rate over the next two years," he writes, "the U.S. economy will still be operating with considerable slack throughout the period." Not that anyone will cut Bernanke any, surely.
You failed to mention one very important key ingredient of inflation which could add a lot of credibility to this article. The GDP strips out food and energy prices to calculate the rate of growth. My personal observations show these two major staples of our daily existence to be spiraling upward and out of control faster then Lindsay Lohan's attorney posts bail. Mr. Bernanke and the Fed will continue as Superhero defender of the inflationary universe and expect many other eccentric justifications to make the public more comfortable spending 600 billion bucks.
This is such a piece of propaganda. In the 70s inflation was out of control so the Fed increased rates to double digits. IF this was done today America would be CRUSHED with interest payments on the debt; say good by medicare, social security, food stamps... This article overlooks the obvious facts I have just stated.
the Fed is punishing the middle class. What good does it do with all of QE1, QE2 and bail out policy to middle class Americans? We are the one who suffer the most when we play by the rules. We do not live byond our means. We work hard and pay taxes with what left over is in the bank now with zero interest. We lost our purchasing power. Look at all commodity prices since they start with all of these policies: gold has jumped over 30% in 2year (less than $1000 to 1400)oil from $60 to $90 at a moment and look at food price increase 20%-100% each. Who will be benifit from these policies? The investors and the poors? We middle class Americans need to raise up to vote all of these politicians out of office next time and take back our country.
Seems like there are a lot of angry commenters to this article. Nothing like irrational backlash and appeals to emotion in the face of overwhelming fact.
Stay classy America.
Inflation vrs. deflation
The way in which our government measures inflation is mostly based upon consumer's wants and not needs. Think about it: fuel and food is outside of the equation--2 Needs for everyone to survive. Therefore,in order for it to be relavent to everyone as a whole, it is contrived in order to benefit the government (understood to be a synonym for the people as a whole--by the people who invented and defend its implementation) Such ones are definately thinking about the disaster which would result when the interest rates go up and our payments in order to borrow to run this government are undoable. There definately exists inflation for one of two groups which comprise of the haves and the havenots. Now kiddies, can you guess which one it is?
CPI backs out food and fuel. Not sure about you but in Tempe AZ both my food and fuel are more expensive in the last 2 years.
Wow. The inflation myth. Let's try to understand why commodity prices are increasing.
"Food and fuel" are items with inelastic demand; i.e. people will always buy it, regardless of price (why, because we need to eat, warm our homes and drive to work). When they finally can't offord them, prices drop. For example, when oil hit $147/barrel, was that the result of supply and demand? Peak oil? Rabid inflation? Speculation? I pick speculation and inflation, but regardless, the prices were unsustainable and quickly fell once the recession hit.
Now, if you have a big bucket of money, where are you going to put it? Commodities that everybody has to buy. Best defense against deflation.
And for those of you that don't think deflation in housing matters, remember 70% of homeowners have a mortgate. If home prices drop below the outstanding balance on the mortgage, those home are taken out of the market (as they can only be sold at a loss, meaning there will only be a sale if it is forced or abandoned). Imagine if things got bad enough that 70% of homeowners simply walked away.
And, if you really want to see what was going on before the crisis, when inflation should have been a concern, go look at the statistics on private debt (the oecd web site has some information). You will see that private debt increased to $13t in 2008 from $7t in 2000, almost all of it mortgage related. That's $700b/year of credit money being dumped into the economy. Put the Fed's actions up against those numbers and I'm not overly concerned about inflation either.
We need to assist the entrepreneur community. With policies that help in terms of tax breaks for business owner, and more leverage with the legalities of small business ownership. This is the main reason for the economic downfall, it is why we are at a 10% unemployment rate. Unbelieveable, we can fix this if America takes action. http://www.adrianquarless.com
Right On!
Ya know, until there's a serious plan to bring balance to this country's budget, well...interest rates will eventually rise. That coupled with an increase in the money supply spells trouble and I'm not even going in the direction of what our payments will look like on our national debt. Can anybody spell awheelbarrowofcashorasiverdimeforagallonofmilk?
QE increases the monetary base, not necessarily the money supply if the money multiplier is falling (check any introductory economics book).
Inflation is defined, whether you like it or not, as an increase in the cost of living. People do not buy precious metals on a regular basis, they pay for rent, buy clothes, cars, etc. And the average price of these items, which is what the CPI measures, has been growing at a very slow pace even including food and energy prices.
Inflation takes place when demand for goods and services rises faster than productive capacity, which causes firms to raise their prices faster. Anyone who thinks that with 10% unemployment and 65% capacity utilization by firms this is a probable scenario needs to have their mind examined.
The inflation index is an embarressing and obvious scheme to avoid measuring the inflation in prices that actually matter to most consumers. Everyone has to eat. Everyone has to drive. The price of food and fuel are not volatile. They have gone up in a linear fashion if you use a ten week running average. Anyone who isn't very wealthy knows this from experience.
It looks like Helicopter Ben has the media duped. Yea maybe there is deflation because there are fewer jobs and fewer services and store products and less manufactured goods. I have one question.... Why is the food I eat and buy up higher in price and if you think that prices are still low at the supermarket, then why have the product packaging grown smaller, in effect inflation. Fuel prices are higher because oil is higher because the markets dont believe helicopter Ben and neither do I.
Colin Barr you are dead wrong, The FED's stated goals in launching QE2 were to trigger a "wealth effect" and boost inflation in September or did you forget that? Which FED should we believe? The FED 2 months ago, or the FED today?
If you understand economics then you know true inflation is the expansion of the currency supply and rising prices are the symptom of it. The FED charts you didn't show which reveal it is inflationary are the adjusted monetary base chart AMBNS and the Currency in Circulation chart.
US adjusted monetary base - This chart starts in 1918 and passes through the great depression, WWII and all else, we have printed more dollars in the last 2 years than all the prior years since we first started printing dollars in our countries 234 year history. http://research.stlouisfed.org/fred2/series/AMBNS?cid=124
Currency in Circulation â?? This chart clearly shows the monetized debt is finding it's way back into circulation and therefore is causing prices to rise. http://research.stlouisfed.org/fred2/series/WCURCIR?cid=32215
House prices where the crash occurred are down, but food, and other costs are going up. Wait until between March and July when futures prices catch up to the store shelves. I can't tell you how frustrating it is to read these baseless happy, happy, joy, joy stories written that not telling the people the truth, you are not helping anyone with writing inaccurate pieces Colin.
http://www.zerohedge.com/article/quick-glance-real-world-inflation
thats all i gotta say...the numbers dont lie...people do....zerohedge, and most other realistic charts that consider "FOOD" and "GAS" show whats coming our way.
How far out of touch can Berknuckle and his Harvard morons be?
for all you who knock Mr B...and how easy is that , what is your solution??..what would you do different ???,,don't tell me what can't be done tell me what you think should be done,,
Anyone who doesn't realize that inflation has already started and will continue has his head in the sand. As a consumer, I can go to the store and see the rising prices. And with China sitting on billions of U.S. Dollars, all those goods that Walmart sells are going to start rising in price as the Chinese turn their focus to their domestic economy and say screw the U.S. Maybe Bernanke doesn't have his head in the sand, but he certainly appears to have it someplace else where the sun don't shine.
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