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Inflation climbs to 3.57% in May
Howard Richman, 6/19/2011

In November, when Federal Reserve Chairman Ben Bernanke explained his second massive increase in the U.S. money supply (known as QE2) to his fellow central bankers, he told them that the Federal Reserve's Open Market Committee (FOMC) was aiming for an inflation rate no higher than 2%. Specifically, he said:

This policy tool will be used in a manner that is measured and responsive to economic conditions. In particular, the Committee stated that it would review its asset-purchase program regularly in light of incoming information and would adjust the program as needed to meet its objectives. Importantly, the Committee remains unwaveringly committed to price stability and does not seek inflation above the level of 2 percent or a bit less that most FOMC participants see as consistent with the Federal Reserve's mandate.

In May, the U.S. inflation rate hit 3.57% while rising rapidly as shown in the graph below:

CPIthrough0511.gif

Apparently, Bernanke has overshot his inflation target. Many monetarists (the school of economics founded by Milton Friedman, my father's dissertation advisor) think that it is a mistake for central banks to target inflation rates instead of money supply growth rates, because, given the lag time between money supply growth and inflation, there is a danger of over-shooting inflation measures. Playing with inflation is like playing with fire. Once inflation gets started, it can get a momentum of its own.

At the moment, only one potential Presidential candidate is calling for all three of the measures that lead to stable economic growth: (1) balanced trade, (2) balanced monetary growth, and (3) balanced budgets. Governor Palin called for balanced trade agreements after meeting with Donald Trump at the end of May. She called for balanced monetary growth, balanced budgets, tax cuts and reduced business regulation in her prescient prediction back in November that QE2 would be a dangerous failure, concluding:

If the President was serious about getting the economy moving again, he’d stop supporting the Fed’s dangerous experiments with our currency and focus instead on what actually works: reducing government spending and boosting business investment through good old fashioned supply side reforms (cutting taxes and reducing overly burdensome regulations). Simply running the printing presses in order to avoid paying off your debts is no way for a great nation to behave.

Some members of the media portray Governor Palin as being stupid. But she has more economic common sense than the present Chairman of the Federal Reserve and the members of his Open Market Committee.

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Comment by Eric, 6/20/2011:

The CPI also does not include Food & Energy prices, correct?

Response to this comment by Howard Richman, 6/20/2011:
Eric: No the CPI includes food and energy. In May it rose despite the fact that gasoline prices declined.


Comment by Matt, 6/20/2011:

Ron Paul has been calling for balanced trade, balanced monetary growth, and balanced budgets for over 30 years. But, as most people fear the liberty he would restore to this country and the security, both fiscally and nationally, he would create, it seems reports like these will do nothing but inform people of useless information.

Write about the problems all you want, but until you cover the root cause of these problems, the Federal Reserve, and make a valid artical and call for its abolishment, nothing will change.  Its ability to print endless amounts of paper currency is causing the destruction of our country. Period.

Response to this comment by Howard Richman, 6/20/2011:
Matt, Can you point me to a URL where Ron Paul calls for balanced trade? It's my impression that he's in favor of free trade even when our trading partners manipulate trade to steal our industries. Also, can you point me to a URL where Ron Paul calls for balanced monetary growth? It's my impression that he's in favor of the gold standard, which often results in constrictions in the money supply that cause recessions such as the Great Depression and Andrew Jackson's recession.


Comment by Jack, 6/21/2011:

You still have to remember that Palin's comment was not out of a sincere concern for the country. That statement began with the obvious motive to attack Barack OBama. You can't take Palin serious, and attack Bernanke using ONE of her mostly politically motivated statements. IF Obama were for sound money, and balance of payments and less spending, it is very likley that Palin would go the opposite route- saying that more fiscal stimulus is needed. Why? Because her, and her Republican colleagues are playing politics, pure and simple.

If you are looking toward Palin for economic advice, you might as well listen to a frog.

Response to this comment by Howard Richman, 6/21/2011:
Jack, Palin's entire statement was quite well thought out. She predicted correctly that QE2 would not cause more than a temporary improvement in exports and that it would not cause an improvement in business investment. She was criticizing a statement made by President Obama at a press conference which supported QE2. Be sure to click on the link to her entire statement.
Response to this comment by Bruce Bishop, 6/21/2011:
In my opinion, attacks on Sarah Palin are purely sexist, since none of the standards to which she is held are ever applied to men.  For many of us, including many conservatives, the proper place for an attractive woman is barefoot, pregnant and in the kitchen. I will admit that Governor Palin has an unfortunate voice and an annoying (for some) accent.  As to her other qualities -- knowledge, experience, character, judgement -- I would put her up against any of the presidential hopefuls on either side.  The real arguments against her are elitist arguments that only register with elitists, or sexists. Unfortunately, presidential elections are decided, not by the 40% who are conservative and the 20% who are liberal, but by the 40% who are clueless.  Most of those 40% are American Idol watchers get their political news from the mainstream media or Comedy Central.  They hate Sarah Palin because "she's stoopid," and will vote for whoever is the "coolest" candidate for Prez.  


Comment by Bruce Bishop, 6/21/2011:

I believe that an honest assessment of the CPI would place it much higher than 3.57%.  In my world, rent and fuel are up significantly.  At the grocery store, I see cans shrinking, more air in the bottles, new package sizes and actual reductions in quality -- all in an effort to hide the fact that prices are going up.  What used to be a "three pound can" of coffee, has shrunk to 39 oz., then 34 oz., and now 27.8 oz., while the price has gone from $five something to $eight something.

I don't believe that producers are trying to hide the degree of inflation, but I do believe that our government would deliberately "torture the numbers" in order to avoid references to Carter era double-digit inflation.

Can someone tell me where I can find the "market basket" list that defines inflation for me?  A brief but intensive search has turned up only economic jargon.    I should be able to verify (or disprove) the published CPI figure to within a reasonable range of "about right" or "totally wrong."

Thanks to Professor's Richman for creating this blog.  Thanks also for avoiding the current fashion of dumping on Governor Palin.

 

Response to this comment by David, 6/21/2011:
John Williams at shadowstats.com seems to agree with you. By a fairly hefty amount
Response to this comment by Bruce Bishop, 6/22/2011:
Thanks David.
Response to this comment by Howard Richman, 6/22/2011:
Here's a link to the a page in the Bureau of Labor Statistics website that discusses the "market basket" list: http://www.bls.gov/cpi/cpifaq.htm#Question_7 


Comment by francis Konan, 6/31/2011:

ββI still don't understand why some people still believe that reducing gov spending is the the key. We are in this mess because the demand side of our economy is sick. That is why the gov stepped in to boost demand. Supply side economics is not the solution for a weak Demand! cuting taxes may work, we are not facing slack in ou economy, in contrary there is plenty of room for production! it's the demand stupid it's the demand




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