• Whip inflation now Whip inflation now If you listen closely, you can hear the American economy starting to hum again. Company profits are rising and employers are starting to hire. But now the inflation monster is showing signs of
• Whip inflation now
Whip inflation now
If you listen closely, you can hear the American economy starting to hum again. Company profits are rising and employers are starting to hire. But now the inflation monster is showing signs of stirring from his long, sweet slumber.
The Federal Reserve should club the inflation beast before it wakes up and tramples our prospects for long-term prosperity. That means it’s time for the Fed to raise short-term interest rates.
The old cliche holds that the Fed’s job is to take away the punch bowl just as the party starts getting fun. The idea is to keep the good times rolling without producing the sort of wild economic bacchanal that results in a recession hangover.
By that measure, the United States is beginning to improve. The economy produced 288,000 jobs last month after adding 337,000 in March. That’s strong evidence that the long job drought is behind us. Rising wages should follow as demand for labor grows.
Corporate profits were up 25 percent in the first quarter, and companies are again investing in new plants and equipment. The gross domestic product is growing at a healthy 4.2 percent rate.
All that’s just ducky. What’s worrisome is that prices seem to be rising, too. Consumer prices rose a modest 0.2 percent in April, the government reported Friday. But that monthly number tends to get knocked around a lot by volatile food and energy prices. So economists subtract food and energy to see what prices are really doing. That so-called “core” rate has been rising at a 3 percent annual pace over the past three months, up from 1.1 percent last year.
Historically, inflation has been a major economy party pooper. When out of control, it distorts business decisions, halts investment, cuts the standards of living, sends interest rates through the roof and brings on severe recession. No one wants to see mortgage rates above 15 percent again, as they were in 1981.
Once it catches on, inflation creates a psychology that feeds on itself. So history teaches that it’s best to deal with it before it gets out of hand.
At its simplest, inflation is a product of supply and demand. As the economy heats up and more people get paychecks, consumers start to buy things faster than the economy can produce them. Prices rise. Other factors, such as the value of the dollar, federal deficit spending and oil decisions by the Organization of Petroleum Exporting Countries also play a role.
The trick is to let the economy grow as fast as it can without creating inflation. And that’s where the Fed comes in. The Fed’s lever is its ability to control short-term interest rates, which affect much business and consumer borrowing. Raising borrowing costs takes some steam out of the economy.
But the Fed’s lever is slow-acting. It takes from six months to a year or more for a rate increase to slow the economy. That’s why the Fed should act at its June meeting. On its present course, the economy could be getting wild and crazy a year from now.
Fed Chairman Alan Greenspan has been sending out smoke signals for a month or so, hinting that a slow, gradual rise in rates is in the offing. That’s just what’s needed. With current rates at a 50-year low, that policy should cause little real pain.
Opponents of higher rates note that American factories are still producing well below capacity, which argues against rising prices. But the actual inflation numbers belie such complacency.
Oil prices are the wild card. At $41 a barrel, they’re at 20-year highs. They create drag on the economy, draining money out of the country and raising consumer prices at the same time. Chances are that oil prices won’t decline very much any time soon.
The oil mess may allow the Fed to raise rates more slowly, but raise them it must.
St. Louis Post-Dispatch
