Inflation Is A Little Deal
By Lawrence Kudlow
On the surface, Alan Greenspan's favorite inflation index -- the personal consumption
deflator -- took a nasty move upward to 3.2% in the first quarter GDP report, following
a 2.5% quarterly rise in Q4. So the market buzz has now shifted to predictions of a 50
basis-point hike in the fed funds rate at the next meeting on May 16.
Below the
surface,
however,
the core
consumer
spending
deflator
rose only
1.9% at an
annual rate,
about the
same as the
fourth
quarter.
Meanwhile,
the
four-quarter
change of
the core
PCE price
index
stands at an
historically
low 1.6%, only teensy weensy slightly barely above its low point of 1.2% in early 1998.
So, really, there's not much happening on the basic inflation front. The core GDP deflator registered a
measly 1.7% four-quarter rise, while the GDP chain-price index came in at 1.8%. All this is a little deal, not
a big deal. A high-class problem.
At the cutting-edge margin of the
new economy, the year-to-year
change for information processing
technology investment (including
the Commerce Department's
inadequate software accounting)
rose 24% over the past four
quarters, including a 34% annual
rise in Q1. Meanwhile, the info
tech deflator fell at a 4% rate over
the past year, including a 3.3%
annualized rate of decline in Q1.
Though the Justice Department
won't admit it, Intel, Dell, Hewlett
Packard, Microsoft, et al continue
to benefit consumers with product
breakthroughs at lower prices.
Microprocessor advances and
bandwidth power and Internet
appliances are driving this
economy, not temporary oil shocks
that momentarily spill over into
higher prices for gasoline and airfares. Technology advance is deflationary, not inflationary.
Phillips curvers who believe that strong growth causes rising inflation are gasping for air as they bellow at
the Fed to raise rates. Just below our office windows we can see Phillips curvers marching down Seventh
Avenue, chanting "Raise rates, raise rates." They shouldn't be allowed on the streets -- very bad for public
moral and spirit -- but, after all, it's a free country.
With their blinders on, the Phillips curvers never see the decline in gold or the rise of the dollar. Nor do they
ever look at money. If they ever did, they'd see that the Fed is tight enough.
The central bank has drained liquidity big-time so far this year, offsetting last year's Y2K-related monetary
excess. Year-to-date, the level of the monetary base has dropped over $40 billion, while adjusted bank
reserves have fallen by $35 billion.
The Fed put in too much money last year, overreacting to a Y2K threat that never materialized. This year
they have righted that wrong. Problem is, all this has created a good deal of business cycle instability.
That's always the consequence of Fed fine-tuning. Two rights could make the wrong worse.
Future Fed rate hikes will only serve to tax money by raising its cost. If they go too far, then they risk reducing
money demand, along with investment and production in the economy. Fortunately, the collapse of the
Euro is overcoming the Fed by raising dollar demand. So the central bank's actions have thus far done very
little harm.
But Greenspan & Co. should go slowly from here. Monetary actions affect the economy with long lags. Weak
gold and a strong dollar are telling the Fed no more tightening is necessary. So are the monetary
aggregates.
History teaches us that strong growth, low unemployment and prosperity are solutions, not problems. Today's
good stock market performance in the face of strong numbers is another positive market indicator. Markets
are smarter than Phillips curves. The Fed should let them guide policy. If it ain't broke, don't fix it. |
