Government Claims Retail and Wholesale Inflation Dead, Economy Rolling

The Bureau of Labor Statistics late this week released data for inflation at both the producer and consumer levels indicating that inflation is not only under control, but non-existent. On Thursday, the BLS released the Consumer Price Index for June, showing that seasonally adjusted inflation at the retail level was zero. On Friday, the BLS released the Producer Price Index for June, showing that inflation at the wholesale level was zero. Excluding food and energy, consumer prices rose a modest one tenth of a percent for June, and producer prices actually fell by a tenth of a percent during the month.

These results surprised some economists and other outside observers who had seen anecdotal evidence of continuing upward momentum in prices at least at the retail level. The mystery was further deepened because the BLS report showed that the core inflation rate for consumers was only neglibly different from the rate that includes price changes for energy and food. That would mean the Bureau had found no inflationary pressures pushing up the costs of products ranging from meat and produce to gasoline and deisel fuel, even though it appeared to consumers as if such prices were marching ever higher as the Summer began. The Bureau had previously reported that prices in May had actually fallen by six-tenths of a percent; as such, the government's data points to a two-month period in which the economy was experience deflation, a situation entirely at odds with the Federal Reserve Board's continuing pursuit—at least in its stated policy—of combatting persistent, underlying inflationary pressures in the U.S. economy.

In other news, the Federal Reserve reported on Friday, in its monthly Industrial Production and Capacity Utilization Release, that industrial production roared upward in June by nine-tenths of a percent, led by increased output by utility companies due to warmer-than-usual weather. However, even excluding this somewhat anomalous push, overall production jumped by a surprisingly healthy four-tenths of a percent. The capacity utilizing rate reached exactly 80 percent, beating the concensus projection that the nation's factories would use 79.6 percent of capacity for the month.

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Excess money can, in the short run, cause an economy to increase real output, but in the long run, output reverts to previous levels while prices rise to reflect the lesser value of the larger money supply in circulation.

  The Bureau of Labor Statistics' claims that inflation was non-existent in June notwithstanding, the unanticipatedly strong pace of industrial activity has some economists worried that the underlying cause can be traced back to a return to expansionary monetary policy by the Federal Reserve inducing short-term real output increases that will later wither into a burst of inflation. Even though the Federal Reserve had previously declared that it had abandoned the "accommodative" monetary policy that had allowed the Bush Administration and its Congressional allies to cut taxes while prosecuting two wars, recent evidence from data and the Fed's own statements seem to indicate that,

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The Federal Reserve periodically declares its target for the federal funds rate; but in practical terms, it allows the rate to vary from this declared target.

  despite a record string of declared increases in the discount rate, the central bank is nevertheless expanding the money supply in a manner that could be interpreted as propping up an economy that would otherwise be showing signs of recessionary pressures. In its June 30 Press Release, the Federal Open Market Committee, while announcing another quarter-point bump upward in the federal funds rate, also stated, "[T]he stance of monetary policy remains accommodative and, coupled with robust underlying growth in productivity, is providing ongoing support to economic activity." The question on some economists' minds is whether this return to expansionary monetary policy is supporting the 'robust' growth of the economy, or in fact creating it.

Data released over the past couple of weeks, together with stong performances by the stock markets, definitely indicate that the economy is picking up steam going into the deep part of Summer. With oil prices now well entrenched in the $60 per barrel range, the problem for economists boils down to one of how an economy that, just months ago, was showing weaknesses in employment, stocks, and retail sales, could have managed such a dramatic turnaround. While some would argue that the true viability of neo-conservative economic policies is at the heart of this near-miracle, a few outside observers are wondering how much of this is the genius of Bush Administration politics and economics versus how much is an old-fashioned magic show of creative government data management coupled with greenback printing presses working overtime.