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Inflation - Not Done Yet (Vol. 115)

One month does not make a trend


The good news is that headline inflation last month was down to 3%. The bad news is that Core inflation was down minimally to just under 5%.


The politicians focus on the best news, and never any underlying issues. The underlying issue here is that the reason total inflation is down is food and energy. When core inflation, which excludes food and energy, is better, that is what they highlight. When total inflation, which includes food and energy, is better, that is the highlight as it was last month.


What are the facts?


Energy is the key to the data last month. Energy prices had moved down which brought the total inflation down. Wow! Making progress. Not so fast. Take a look at the chart below for commodity prices.





I don't know what the next few months' inflation will be, but it is likely higher in total inflation as a result of food and energy moving quickly back up. That doesn’t mean the trend isn't in the right direction, but we are not done yet - inflation is not under control and the policies that the Fed follows will continue to be restrictive until it is. .


There are some good and bad things working that impact the trend in real inflation. The money supply has actually decreased about 4% over the last year. That is good because the primary cause of inflation is the excessive growth in the money supply (money supply growing faster than real output of goods and services). See No Spin #39, Do Federal Deficits Cause Inflation? which explains this.


On the other hand, government spending continues to explode and now the deficit for this year is expected to be $1.6 trillion, up from $1.4 trillion just a few months ago. This must be financed in some way, and if the government does not print money to service the deficit as it has been doing until the last year, (and which drove the rise in inflation over the last two years), then it will have no alternative but to borrow it from the private sector, which is good for inflation but bad for the economy as it takes capital from productive resources, and drives up the cost of borrowing.


The implication of this is that the Fed will be under continued pressure to raise interest rates and control the money supply, in order to slow the economy. This will reduce aggregate demand for labor and commodities which will lower prices or slow the rate of price increases. This is the only means the Fed has to control inflation.


BOTTOM LINE


The high level of inflation we’ve seen in the last two years is not done yet, even if it has been moving in the right direction. There is one good way to control inflation and improve the economy. Economists and politicians all know the formula, but the politicians will not do it for fear of not being reelected.


CUT GOVERNMENT SPENDING AND BALANCE THE BUDGET. That will work (it will also avoid the Debt Bomb).


If there is no deficit, then the government does not have to borrow any more money and there is no need to print more since there is no deficit to finance. Even if we have small deficits, if the debt is growing slower than the economy, we are moving in the right direction. The enormous deficits projected by the CBO over the next 10-30 years will cause the Debt Bomb to eventually explode.


We, the folks on Main Street, are seriously impacted by bad economic policy, and must demand fiscal sanity from our representatives. It is up to us to let them know that is what we demand. Then, and only then, will they do the right thing.


Speak up; Speak out. It is easy to express your opinion - go to our website and Contact Congress. CLICK THE LINK BELOW NOW!


LEARN ECONOMICS, THEN VOTE SMART


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