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Inflation

July 31, 2012
by pjunkin
0 Comment

At the gas station I pass every day on my way to work, a gallon of regular gasoline was $3.15 today.  A week ago, it was $3.05.  A few months ago, I saw it at around $3.39.  Global energy macro-dynamics, not withstanding, that is a pretty volatile commodity.
I don’t pay as much attention to the price of various food items at the grocery store (probably because I don’t see them every day).  But, after checking with the manager of a local grocery store, the price of a gallon of milk is just about as volatile.  (And interestingly, for the last year or so, the trend in milk prices has been down.)
The Federal Reserve is charged with controlling inflation.  Its target for inflation is 2% – as measured by the “Consumer Price Index Less Food and Energy” which is a basket of goods excluding food items and energy costs.  “But I have to drive and eat” you are saying.  True, but to keep inflation in line when it is moving up and down significantly on a regular basis would be pretty difficult and might cause other problems in the financial system.  The chart below shows how volatile the basket including food and energy (blue line) is compared with the one without them (red line).
Inflation Graph
With that backdrop, what does the future look like for inflation?  Well, the classical definition of inflation is too many dollars chasing too few goods.  Over the last few years, the Fed has been injecting “dollars” into the economy to boost spending to boost the economy.  Given the severity of the economic crisis, this process will take longer than most recoveries.  So, we haven’t begun to see the effects of inflation from the extra liquidity – yet.  At some point, there will be inflation, but nobody knows when.  It will likely hinge on the greater economic condition, which will likely change without a real definite catalyst – much like what happened in the stock market on March 9, 2009, when “the market” decided that that

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