Once Again, No Inflation Round Here

Once upon a time, increasing inflation was a problem for the U.S.  But that time was a generation ago – 1966-1980 to be precise, over 30 years ago.  Since then it’s down, down, down. We’re now bumping along at near zero inflation and we’re flirting with deflation.  Yet, many of the talking-heads class continue to fear and rave on-and-on about inflation.  Republicans this week grilled Ben Bernanke in Congressional hearings, urging him to fight harder against inflation (see here for a good sarcastic analysis).  So I’m going to let David Leonhardt of the New York Times do the writing here:

On Capitol Hill, members of Congress are grilling Ben Bernanke, the Federal Reserve chairman, about his attempts to lift economic growth by reducing long-term interest rates — the Fed’s so-called Q.E.2 program, or quantitative easing. Some members of Congress think Mr. Bernanke is fighting the wrong battle. They want him to take steps to stamp out inflation, which they believe is dangerously high or soon will be.

Here is core inflation — economists’ preferred measure of inflation, because it’s more predictive than headline inflation — over the last 40 years:

Does it look dangerously high?

Or might the slow pace of economic growth and the high level of unemployment be larger problems?

Now just in case you’re thinking, “yeah he’s just a journalist and that’s only the Core CPI measure”, let’s see what the other measures are saying.  I turn to a graph Menzie Chinn of Econbrowser:

First, inflation rates for core CPI, personal consumption expenditure deflator, and PPI (finished goods), on a three month annualized basis, are either under 1 percent, or in the case of the PPI, less than zero percent.

Figure 1: Three month annualized inflation for core CPI (blue), core personal consumption expenditure deflator (red), and core PPI (green). NBER recession dates shaded gray. Source: BLS, BEA via FREDII, and author’s calculations.Second, what about pressures from the labor market? Labor compensation (so, wages and salaries and benefits) is growing at 2 percent (q/q, annualized).

Figure 2: Quarter-on-quarter annualized growth rates for private sector labor compensation (dark blue) and unit labor costs for nonfarm business sector (orange). NBER recession dates shaded gray. Source: BLS, BEA via FREDII, and author’s calculations. However, the relevant cost of labor to a firm is the compensation cost divided by per hour output, i.e., unit labor costs. In 2010Q4, the q/q annualized growth rate of this series was a negative figure.

Of course, if you’re wealthy and heavily into financial assets (like say Bill Gross of PIMCO), then you want to continue to fight inflation and get that rate even lower, maybe even into deflation.  After all owners of financial assets get wealthier in real terms when deflation happens. Of course deflation will destroy the economy and anybody who owes money, but they don’t seem to care about that.