Is Inflation Coming Back?

Lehigh Valley Economic Report 
Dr. Kamran Afshar
Chamber Chief Economist
​The Chamber’s Finance Committee

According to the Bureau of Labor Statistics (BLS) consumer price index rose by 0.2% in December 2019. This sets the inflation rate for 2019 at 2.3%, which is low on historical bases, however, it is the highest inflation we had since 2011 when it peaked at a high of 3%. 

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Increases in the price of gasoline by 7.6% and healthcare by almost 4% pushed the overall inflation in 2019 to 2.3%. There were other interesting price changes in 2019 also; beef roast prices rose by 7%, while eggs became 3% cheaper. And electronics prices continued to pull down the overall inflation with computers dropping by 15% and TV becoming 20% cheaper during the year, which was not really much of a surprise. However, I’m sure this one will surprise almost everybody by hearing that new car prices, according to the BLS, rose by only one-tenth-of-one percent last year! That is because the new car that the BLS prices every month does not really exist; it is the price of a new car if it had the same equipment and quality that it had in 1997 but built in 2019. All the additions and improvements are deducted from the price, which goes to the joke that the salesman says and do you also want an engine to go with car you just bought! 

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Before the Great Recession, inflation was rising at a pretty healthy rate, reaching as high as 5.6%, however, the recession wiped out that inflation alongside 8.7 million payroll jobs, a booming housing market, more than 500 commercial banks as well as thousands of other businesses. 

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Prior to the Great Recession the FED’s major concern was to prevent the rate of inflation from continuing to climb while not killing the labor and stock markets. Well we know how that one went. 

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While the FED was behind the 8 ball at the beginning of the Great Recession, it rapidly cutup and to its credit, it then liberally provided credit to the banking system helping many banks fend off bankruptcy. As it was also rapidly raising the amount of high-powered money in circulation, increasing it by more than 4-fold. Still some 500 banks disappeared during that period. 

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In the process the FED expanded its balance sheet and reduced the rate of its overnight loans to member banks to almost zero. It should be noted that during the same period, many European center banks reduced their rates to below zero to encourage their member 
banks to borrow and lend. 

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The unemployment rate now at 3.5%, the economy at full-employment, and while the rate of economic growth is dropping, it still presents a potential for higher inflation. Inflation rate over the last 3 months was 3.3%, significantly higher than the 1.8% of the previous 12 months. Adding this to all the uncertainties of the international markets and politics, shows a higher probability of real inflation in 2020.

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