The Inflation Rate-More Administration Fiction?

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This story was edited by Ryan Troup with MoneyNews.com Staff for the Story Behind the Story...This story was published Tuesday January 4, 2000 at 12:01 AM. It is copyright © Newsmax.com.

Inflation-the word that has ignited so much passion by Fed decisionmakers for decades-practically doesn't exist today. If you believe the numbers.

Last month, the inflation rate-as measured by the consumer price index-was up just 0.1%. This is an annual rate of about a half of a percent-in real terms just about zero.

The inflation rate is key for continuing the booming economy. Greenspan has said he will move swiftly to crush any incipient inflation. For most of the Clinton era he has not had to use interest rates to tame inflation.

Inflation usually goes hand in hand with easy credit. Oddly public and private debt has been expanding with no inflationary effects. And loose credit has also feeding the bull market. Last quarter, margin debt for equities surpassed the amount for debt issued to consumer borrowers.

Low interest rates and loose credit by the Fed have been predicated on low inflation numbers. And, if you believe the numbers, inflation is almost extinct.

Can we believe the inflation numbers put out by the Clinton administration?

Consider that oil prices-the fuel of 1970's stagflation-has more than doubled in the past year. Still, the inflation rate barely registers this.

Then take a look at monetary growth this past year. The three month annualized growth rate of the US monetary growth at the end of 1999 shows a phenomenal growth rate of 27 percent. This growth rate is almost triple the highest rates in the past fifty years.

Inflation used to be defined as too many dollars chasing too few goods. But the money supply growth would suggest wild inflation. Fed apologists argue that the large increase in monetary growth was a temporary measure to inject cash liquidity just in case the Y2K bug caused a bank panic.

The same apologists say that with Y2K behind us the money supply can be deflated and inflation will never appear. (This belief is like saying you can fill a balloon with water, and because you know it will be emptied soon, it will have no effect on the balloon.)

Who's kidding whom? Of course, money supply growth affects the inflation rate. And so does the increased price of oil. Last we checked the U.S. is still dependent of electric power supplied by oil, heating by oil, transport by cars and trucks, airplanes fed by jet fuel and so on.

No effect? Huh?

Obviously somebody has been trying to explain away common sense. On December 15, the New York Times Business section and the Wall Street Journal both led with page one stories explaining why inflation has almost disappeared.

The Times quoted experts as saying inflation has disappeared largely because of telecommunications, the internet and deregulation of major industries.

The Journal tackled the oil problem head-on, headlining that "Petroleum is Less Relevant in New Economy." Stated differently, a nation of hamburger flippers is no longer affected by oil producers the same way as a country whose economy manufactures steel. America no longer produces steel. We flip hamburgers.

That may be true, but even though we are not making the steel, it doesn't mean we have stopped using it, and somebody in the world who produces steel is now paying double for the same oil they were using a year ago. Those costs will inevitably been passed along to American consumers. That's called inflation.

Not everyone is sanguine about the "non-inflationary" money supply growth.

Michael Belkin, president of Belkin Limited, an economic forecasting firm, wrote last month that if the Fed "intentionally pumps up the monetary base at the fastest rate in history [as has been the case]-the US equity market speculative bubble will obediently expand further. But this is only a temporary monetary boost designed to thwart Y2K panic in financial markets. So the flipside of a stock market rally [in December 1999] based on Fed Y2K credit expansion should be a collapse early next year when the excess credit is removed."