Friday, May 13, 2011

More Confusion On Inflation

When a nation's central bank chief misuses the term 'inflation,' it's probably too much to expect the country's premier daily business newspaper to do otherwise.

Yesterday, Kelly Evans' Ahead of the Tape column focused on fears of inflation versus an economic slowdown.

She wrote,

"That suggests investors today pretty much agree with Federal Reserve Chairman Ben Bernanke's assertion that the recent rise in commodities prices will provide only a fleeting boost to inflation."

For about the millionth time, I'll quote Milton Friedman that "inflation is always and everywhere a monetary phenomenon."

Thus, a more accurate statement by Bernanke would have been something like,

'The recent rise in commodities prices will provide only a fleeting boost to overall consumer goods prices. But those price rises are not to be confused with inflation, which, when it comes, will have been caused by overly easy monetary policy.'

The folks on Bloomberg television have been contending recently that we'll see inflation, but not of the cost-push or even demand-pull types so typically expected by many economists. Thus Evans' piece suggested economic sluggishness is the greater worry now, because demand isn't rising sufficiently, nor job growth and wages rising sufficiently, to cause those sorts of "inflation."

Well, to cause price rises, anyway. Whether it's monetary inflation is another matter.
Of course, events such as a Greek debt restructuring and a fall in the Euro could send the dollar higher, temporarily saving Ben's super-easy monetary policy from driving up dollar-denominated commodities prices quite so high.

But, on balance, when debt issuance and dollar creation far exceed GDP, for a long time, the value of the currency is headed for trouble. Even if investors still buy the bonds and grant the currency reserve status, it's likely not to retain its value, and, thus, cause goods price in dollars to become more expensive.

Now that's inflation.

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