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Thursday, August 21, 2008

Peak Inflation?

John Berry joins those saying there's no reason to panic about inflation:

Inflation's Peak Signaled by Tame Labor Costs, by John M. Berry, Commentary, Bloomberg: U.S. inflation reached its highest level in more than a quarter-century this summer. The good news is that the worst of the price increases probably is behind us.

The surge in commodities prices ... drove the year-over-year increase in consumer prices, to 5.6 percent in July. Now, with the prices of ... many ... commodities in retreat, the month-to-month changes in the consumer price index will settle down.

The bad news is that the drop in inflation won't be sudden... What's reassuring is the absence of signs that the surge in inflation has triggered a wage-price spiral. ... While that's hardly cause for celebration among workers who have seen their inflation-adjusted pay fall, some of that loss is being regained as the cost of gasoline comes down. ...

The break in commodity prices is ... good news for Federal Reserve officials, whose prediction that inflation would moderate was based largely on the expectation that such prices wouldn't rise forever. ...

Commodity prices haven't just stopped rising, they have declined. And so long as the outlook for economic growth is weak in the U.S. and Europe, and slowing in many other regions, a quick rebound in commodity prices seems unlikely.

Similarly, productivity growth was strong in the first half of this year, and while slower economic expansion in the second half probably means productivity gains will be smaller, they won't disappear. ...

While the U.S. inflation outlook has improved, there is still a risk that something goes wrong. And even if it doesn't, the Fed's 2 percent target for the overnight lending rate is too low to be maintained indefinitely.

That said, it's ''a good time to be patient, because I do think we will see better news on the inflation front,'' in part because of falling oil prices, Gary Stern, president of the Minneapolis Federal Reserve Bank, said yesterday in an interview.

Let's hope he's right.

    Posted by on Thursday, August 21, 2008 at 12:15 AM in Economics, Inflation, Monetary Policy, Oil | Permalink  TrackBack (0)  Comments (12)

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