Art Laffer's Perspective on Inflation and The Dollar

Art Laffer is one very smart economic cookie. Witness his erudite editorial in last Thursday's Wall Street Journal.

In a polite slap at other economists, he wrote,

"But to confuse an increase in commodity prices with general inflation is a serious mistake, one which often seduces otherwise clear-thinking economists."

Laffer's point is that a combination of worldwide commodity price increases, and US dollar weakness, have resulted in a temporary rise in some prices in the US. This does not, he emphasizes, equate to general inflation in the US economy. That is a function of money supply versus economic growth. By comparing inflation-adjusted Treasury yields with nominal Treasury yields, Laffer demonstrates that inflation expectations have remained surprisingly stable and low since 1999.

In effect, Laffer cautions us to avoid confusing the temporary rise in dollar-denominated commodity prices with general US inflation involving the too-rapid expansion of the monetary base.

What a clear, simple and elegant reminder of what measures on which to focus, and how to understand them. What a very intelligent economist Art Laffer is.