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Economics & Research Blog

Inflation Data Get Worse, and the Fed Won't Clean Up the Mess

Ben Bernanke&

By Dr. Joe Webb
Published: July 16, 2008

Ben Bernanke's testimony this week indicated that they're waiting to see inflation in wages before they will act to stop inflation by raising interest rates. After all, it's not until people's salaries rise that there's real inflation, right?
The convoluted logic really puzzles me. People's wages are being depressed by inflation, because employers are spending money that would otherwise go to employees on energy and commodities. The CPI was 5.0% today, but was at a 7.9% for the last three months. There is also a focus on core inflation, which excludes food and energy. Energy is up 24.7% in the last 12 months, making food's 5.3% look tiny. The core inflation rate is only 2.4%, and there is good reason for it.
As food and energy rise in price, demand for other items is being squeezed out. Of course core inflation is not going up: the swift and steep rise in energy costs means that other products and services are not able to increase their prices because demand is decreasing. This could go on for months: core prices could look tame because the CPI does not measure the quantity of goods and service that consumers demand. That is, because there is less demand for non-food and non-energy products, sales could drop like a rock, and it could be misinterpreted as economically healthy because prices are not rising. (This goes back to an old economic argument that inflation is cause by excess demand [generally a Keynesian argument], when it is actually caused by too much money [a Friedman and Austrian argument]). Pardon the digression, which kept us from more bad news.
The Producer Price Index (PPI) report was worse. It rose 9.2% since last June. The PPI measures the prices for goods and services after they are created sold to businesses or wholesalers, and before they enter the consumer marketplace. In recent years, the productivity of the distribution, transportation, and retail system more than covered the costs and they never appeared in the CPI. Now, however, they will.
Your company must be prepared for more inflation ahead. The Federal Reserve, who has created this inflation in the first place, has no short-term desire to stop it. Tread carefully.
Make sure key employees are happy: these higher consumer prices may push them to look for greener pastures for wage increases when you can least afford to lose their services. Strive for efficiencies that are permanent and not gimmicky. Look for ways your customers can use print more effectively and at lower total cost.
In Monday's column I'll deal with these issues in greater detail and also discuss the latest productivity data for our industry. Warning: the Postal Service's productivity is greater than ours. That's a disturbing thought, isn't it?
Monday's Audio Chart of the Week will continue our short series about how printers are coping with the slow economy. We'll review what large shops are doing.
See you then.

Dr. Joe Webb is one of the graphic arts industry's best-known consultants, forecasters, and commentators. He is the director of WhatTheyThink's Economics and Research Center.



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