Friday, August 15, 2008

Core inflation holding relatively steady

According to Brian Wesbury and Bob Stein (click here), "Inflation is the leading menace to the economy." Although I usually agree with their postulate, I don't see inflation as much of a “menace” right now. The core CPI inflation on an annual basis was 2.5% in July, barely above the 10-year average of 2.21%, below the levels close to 3% between mid-2006 to early 2007, and way below the 4.58% average since 1970 (see graph below).

IMHO, unless and until the core CPI inflation starts to rise, inflation is not a big problem. For example, inflation was a huge problem in the 1970s and early 1980s, but it was when CORE CPI INFLATION was increasing by double-digits, not just oil, energy and food prices. By definition, inflation is a phenomenon when all prices, in general and on average, are rising, not just food and energy. With core inflation so low and stable, I don't see how inflation can be a menace. And with oil prices plummeting and the dollar soaring, look for August inflation, both overall and core, to moderate.

1 comment:

Lloyd Traven said...

Charlie: How does this correlate to the recent release of statistics pointing out that the July inflation rate was the highest in the last 27 YEARS? I believe that I caught this on NBC, likely because I was stuck there for the duration of the Olympics. They were including fuel, food, etc, and of course, also included lower housing values, auto values, etc.
Inflation NOT an issue? Tell that to growers facing 20% increases in pots, film, chemicals, and 30+% for fertilizers, soil, etc---and don't forget to add energy, labor, etc. BTW, medical just went up again, and let's not forget tuition.
We've had this discussion face to face, and it sure feels different in the trenches.