Last week the government released its latest inflation numbers — the CPI (Consumer Price Index) pertaining to August 2003. It showed a very modest increase in consumer prices of less than a third of a percent for the month. This means that if you look at inflation over the entire year ending in August, the inflation rate is a modest 2.2 percent. There’s even better news: Since some prices tend to fluctuate more wildly than others (oil, for instance), it makes sense to look at the rate of inflation with such volatile categories excluded. This statistic is called “core CPI.” The rate of core inflation was only 1.3 percent over the past year.
This is the lowest yearly price increase since 1966. The age of inflation inaugurated by LBJ may well be over.
Why does this matter?
Inflation occurs when prices in general rise, as opposed to some prices in particular rising. For instance, if almost everyone buys a suit from the tailor, a loaf of bread from the grocery store, and vegetables from the farm stand, the price of suits, bread, and vegetables goes up. That would be inflation if you could only buy suits, bread, and vegetables. But if people are only buying vegetables, the price of vegetables go up, and the price of suits and bread go down, as people aren’t buying as many of those items as they are vegetables.
Some would say that when the economy grows it causes inflation because people feel confident and go out and buy, for instance, more cars and washing machines. When almost everyone goes out and buys cars and washing machines, what some people call “consumer confidence” rises and the prices of cars and washing machines go up. But if people buy more of these items instead of college educations or business equipment, then the prices of college educations and business equipment go down. Some people would still call that inflation, but they’re forgetting that inflation happens when the prices of everything in general rise, not just certain types of products.
If economic growth doesn’t cause inflation, then what does? The answer: too much money.
Think of 1940 silver dollars. The reason they’re worth so much today is because there are so few. But if the U.S. Treasury started making more 1940 silver dollars so that everyone had some, they’d be worth a lot less. The same holds true for normal dollars: If the U.S. Treasury makes more than needed, it would seem that everyone was richer — until prices rise. That’s inflation.
There is some danger of inflation with current Federal Reserve policy. Nevertheless the Bush economic boom is not an inherently inflationary event. The remarkably low inflation rate that we have seen over the past year is proof of that.
— Jerry Bowyer is a successful entrepreneur who hosts a radio program and a television program dedicated to business and leadership. He is the author of The Bush Boom: How a “Misunderestimated” President Fixed Our Broken Economy.