The death-knell of Bernankeism

[bemildred]

Well, that didn't take too long ...

The producer and consumer price indexes announced last week were significant in that they sounded the death-knell of Bernankeism. No longer will it be possible to inflate the money supply by pretending that inflation in the real economy is not a problem; other means will have to be found to perpetuate the shell-game.

In previous months, the consumer price index (CPI)in particular had benefited from some very fishy seasonal adjustments to remain close to the Fed's targets and only a little above 4% on a year-to-year basis. Even so, the rise of the producer price index (PPI)at 7.2% in the year to May 2008 should have caused alarms. This month, all possibility of doubt was lost. The CPI rose 1.1%, putting it fully 5% above its level in June 2007, while the PPI rose a staggering 9.2% on a year to year basis.

I just want to say I remember the 1970s, and 9.2% is not "staggering". But it's on the way there ...

This puts inflation securely in the 1970s framework. If you look at the annual figures for 1970s consumer price inflation, you will find only one figure below 4% (and that in 1972, when price controls were in effect) but you will find several figures, both in the early 1970s and in the 1975-77 period of consumer price index quiescence, that were in the 4-6% range. Since a major effect of inflation is psychological, the fact that inflationary pressure has decisively moved back into the 1970s range is important.

At 5% per annum, inflation cannot be ignored. Investors cannot buy fixed-income securities without taking account of the fact that the principal of those securities will have devalued by more than half by the time they are repaid (if they are of 15 years or longer maturity.) The combination of inflation and un-indexed income and capital gains taxes rapidly raises the tax rate on capital returns to an extremely high level, depressing still further the incentive to save.

http://www.atimes.com/atimes/Global_Economy/JG23Dj05.html