September 17, 2019

Economix Blog: Little Cause for Inflation Worries



Dollars to doughnuts.

Periodically I am asked whether we should worry about inflation, given how much money the Federal Reserve has pumped into the economy. Based on the Bureau of Economic Analysis data released Friday morning, this answer is still emphatically no.

The personal consumption expenditures, or P.C.E., price index, which the Fed has said it prefers to other measures of inflation, fell from March to April by 0.25 percent. On a year-over-year basis, it was up by just 0.74 percent. Those figures are quite low by historical standards, and helped push consumer spending up. (Measured in nominal terms, consumer spending fell slightly in April. After adjusting for inflation, it rose.)

When looking at price changes, a lot of economists like to strip out food and energy, since costs in those spending categories can be volatile. Instead they focus on so-called “core inflation.” On a monthly basis, core inflation was flat. But year over year, this core index grew just 1.05 percent, which is the lowest pace since the government started keeping track more than five decades ago.

Source: Bureau of Economic Analysis, via Haver Analytics. The core P.C.E. price index refers to the price index change for personal consumption expenditures, excluding food and energy. Source: Bureau of Economic Analysis, via Haver Analytics. The core P.C.E. price index refers to the price index change for personal consumption expenditures, excluding food and energy.

Low inflation may be one reason that consumers have proven so resilient in recent months (in addition to the lift they’re getting from rising home prices). A measure of consumer sentiment released Friday by the University of Michigan surged in May, and is at its highest level since July 2007.

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Economix Blog: Starving the Beast

In the 1950s, government spending fell quickly after the Korean War ended. In the second quarter of 1956, the total government gross domestic product was $91.4 billion, at an annual rate. That was 0.4 percent lower than the $91.8 billion rate three years earlier, in the third quarter of 1953.



Notions on high and low finance.

It would be almost 60 years before another such decline was recorded.

The G.D.P. report released Friday states the total government part of G.D.P. – federal, state and local – came to $3.0306 trillion in the first quarter of this year. That is 0.01 percent below the $3.0309 trillion recorded four years earlier.

Those are nominal figures, not adjusted for inflation (as are the figures in the chart below). On a real basis, the decline was 6.5 percent.

Source: Bureau of Economic Analysis, via Haver Analytics

Those who complain about big government will point out, correctly, that some government spending does not show up that way in the G.D.P. accounts. Transfer payments like Social Security are recorded when the recipient spends the money, and characterized based on what he or she bought. But the figure does include all the salaries paid by governments, and all the things they buy, from schoolbooks to rifles.

Governments as a group had 648,000 fewer employees in March than they had three years earlier. Some of that decline – 87,000 jobs – reflects temporary employment for the 2010 census, but the rest reflects real cutbacks. Most of that decline has been in local government jobs, and most of the fall in local government jobs has come in schools.

Source: Bureau of Labor Statistics, via Haver Analytics

In the G.D.P. numbers, state and local spending is up a little over the last three years, measured in nominal terms. The decline came from federal spending.

Aides to Ronald Reagan used to talk about “starving the beast.” In the Obama years, it is happening.

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