Monday, May 16, 2011

We Shouldn't Be Concerned About Inflation? Really?

The Federal Reserve continues to argue that Americans should not be worried about inflation.  The recent bumps in the Consumer Price Index, we are told, are just temporary, being caused by special circumstances in the world, particularly affecting food and energy prices. 

The problem I have with this is that the information about inflation keeps getting worse…and not just in the United States. 

In the United States we see that the year-over-year rate of increase in the Consumer Price Index has established the following trend starting in November 2010: 1.4%; 1.7%; 2.2%; 2.7%; and, finally, in April 2011, 3.1%. 

And, the increases in the overall index also include increases in the major component of the index, the owner’s equivalent rent component of the housing price index, as follows over the same period of time: 0.2%; 0.3%; 0.5%; 0.6%; 0.8%; and finally, in April 2011, 0.9%.

These estimated “rental” numbers, obviously, help to keep the overall Consumer Price Index from rising too rapidly.    

But…everything is moving up!

And the world?

This morning the headlines read, “European Inflation Rises to Fastest in 2 ½ Years,” (  And, Jean-Claude Trichet, the President of the European Central Bank, is envisioning higher bank rates in the future.

In India, ”Wholesale Prices in India Rise 8.66 Percent in April From Year Earlier,” (, and, the Indian government is seeking higher interest rates.

In China ( the Chinese government has raised interest rates and increased the required reserves in the banking system.

Meanwhile, the Federal Reserve System in the United States continues to flood the banking system with excess reserves, 50 percent of these reserves ending up as cash assets in foreign-related financial institutions within the United States (  The Fed seems to be underwriting the “carry trade” throughout the world.

How can inflation not be in our future?

Commercial banks in the United States are sitting on $1.6 trillion in cash assets…excess reserves, if you will. 

The Federal Reserve is pushing to help the Obama Administration reduce the unemployment rate!  And, the Fed does not seem to want to back off of this objective.

The Fed is encouraged because business loans, commercial and industrial loans, at the biggest 25 commercial banks in the United States finally seem to be increasing giving some hope that businesses will start hiring people at a faster rate in the future. (See my post from yesterday, mentioned above.)  So, monetary policy seems to be starting to work.

But, the momentum of economies is slow to gain speed and this momentum is slow to contain once it has begun. 

The fear in the developing countries is that the economic momentum is “too hot” and needs to be brought down.

The fear in the developed countries is that stagflation is going to take over…the momentum will take place in prices while inflation will not be combated to any degree because of the employment concerns. (See “Threat of Stagflation Rears Its Head”:

We shouldn’t be concerned with inflation?

I don’t think the American government in its current state of mind can live without credit inflation.  The habit is too imbedded in the political psyche.  

The federal government has underwritten credit inflation for the past fifty years.  As a consequence, the public debt of the United States government has increased at a compound rate of growth of about 8 percent over the last fifty years.  Credit market debt has risen by more than 10 percent per year over the same period of time.  These rates of increase are not slowing.

Inflation will come in one way or another because there is no end in sight of the current attitudes toward debt creation.

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