Inflation: Is it finally back?

By Felix Salmon
August 18, 2011
0.5% inflation figure today is certainly worrying, even if I wouldn't go as far as Joe Weisenthal, who says that it "screams stagflation".

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The much larger than expected 0.5% inflation figure today is certainly worrying, even if I wouldn’t go as far as Joe Weisenthal, who says that it “screams stagflation”. For one thing, we had negative inflation in June, of -0.2%, so there might be an element of mean-reversion here. But if you look at the 12-month inflation figures, they’re all pretty high, with a headline number of 3.6% — significantly higher than anybody at the Fed would normally feel comfortable with.

The problem is separating the signal from the noise. The Fed has one time-tested way of doing this, which is to strip out food and energy prices: if you do that, inflation was just 0.2% last month, and 1.8% over the past year. Meanwhile, energy costs have gone haywire:


It’s very hard to know what to make of a series like this, where you can have 37.2% annual inflation in fuel oil even when it’s fallen in price for three successive months, and where price volatility in fuel is closely connected to price volatility in the markets generally. Gasoline alone, with its 4.7% rise in July, accounts for fully half the headline 0.5% inflation rate — and although no one can know where gas prices are going to head going forwards, it seems improbable that they’re going to continue to rise at that kind of pace. In that sense, gas-price inflation, although certainly painful now, is not something self-perpetuating which the Fed can or should worry about when setting monetary policy.

It’s also worth remembering that the heavily-indebted US economy could do with a little bit of inflation right now, to help deflate real debts and chivvy along growth: an annual core inflation rate of 1.8%, although the highest we’ve seen since 2009, is much closer to optimal than the 0.6% number we saw last October.

So my feeling is that inflation figures, like stock-market prices, should be treated as less than gospel during this summer of volatility. Food and energy prices are crucially important parts of America’s household budgets: they can’t and shouldn’t be ignored. But there are very strong linkages between the two: 97% of the fertilizer applied to crops is manufactured from natural gas, a lot of energy is expended trucking food to supermarkets, and then of course there’s this:


If I were the Fed, I’d be looking very closely at the dynamics of food and energy prices, to work out the degree to which we’re just seeing normal market-based volatility, and the degree to which we’re seeing a secular upwards trend here which is going to have a nasty effect on inflation for the foreseeable future. That said, even if it’s the latter, it’s hard to see what the Fed can do about it. Marginally higher short-term interest rates aren’t going to have much effect on oil prices or refineries.


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You have a lot of Krugman admirers in your readership, in significant part because he recommended you. If you are going to write about a topic like inflation trends that he has sliced and diced, study up on what he has written recently and let it show. Informed disagreement is more than welcome, but you need to play above the rim in this game.

Posted by kenjd | Report as abusive

Here is yet another article that mentions the habit of “stripping out” the volatile food and energy items. There are a lot of older folks out here for whom those are major expenses.

Your chart is a helpful indicator of why our actions with corn cause food prices to rise elsewhere.

Posted by Bartolo | Report as abusive

This is a really, really disappointing article, Felix. There isn’t going to be significant inflation until wages rise as well. As long as wages remain stagnant or fall, there cannot be any increase in average inflation: the most that can happen are short-term spikes driven by supply shocks.

And if you think 0.5% inflation is “worryingly high”, you need to get your head checked.

Of course, short-term price spikes due to supply shocks do have real impacts on peoples’ lives, but if the Federal Reserve responded to these supply shocks by tightening monetary policy, that would simply make things worse.

Posted by JasonDick | Report as abusive

“And if you think 0.5% inflation is “worryingly high”, you need to get your head checked.”

Mr. Dick, that is month-on-month, not year-on-year.

Posted by DanHess | Report as abusive

EIA gas prices all formulations:

07/04/11 – 3.634
07/11/11 – 3.695
07/18/11 – 3.736
07/25/11 – 3.754
08/01/11 – 3.766
08/08/11 – 3.730
08/15/11 – 3.662

Oil prices – September futures (CME Group):

Posted by GRRR | Report as abusive

kenjd, playing above the rim with that comment

Posted by johnhhaskell | Report as abusive

What can be done about it? Remove tax subsidies for Corn for ethanol (or if they’ve already gone, don’t reintroduce them). Apart from that, the US debt needs a bit of inflation to shrink it. In the 1970s oil shocks and high inflation era this gave a big benefit to stocks which were pretty much the only asset that kept up or outpaced inflation. Maybe we could do with more of that?

Posted by FifthDecade | Report as abusive

Felix – the feed corn and ethanol corn graph can be tricky if the data does not take into consideration the dry and wet grains extracted from ethanol processing waste. These dry and wet grains still have plenty of nutrition left and can be fed directly to cattle, hogs, etc. So while the total of feed corn has decline the total of ethanol byproducts has gone up by a significant factor.

Posted by Ghoghogol | Report as abusive

Also, 97% of the nitrogen fertilizer applied on crops is from NG. But certainly not 97% of total fertilizers applied. Potash (potassium) and phosphate (phosphorus) are both mined and not extracted from heating/pressuring air, as is the case with nitrogen.

Posted by Ghoghogol | Report as abusive

Eaxctly, Ghoghogol. Nitrogen is one third of the mix.

A little inflation and stagflation might help green industry take off. Being pee is very high in nitrogen (don’t get any ideas the wife wants you to pee in the garden guys) why has it not become a sustainable source?

We use manure and compost, so why not recycle to the nth degree? Organic gardening indeed =) nd/cambridgeshire/8357134.stm

Although the URL is tongue in cheek I am serious. Properly treated sludge can be transformed into energy, yet we use corn and other food sources.

How about renewable energy like this? purification.php

Posted by hsvkitty | Report as abusive

“It’s also worth remembering that the heavily-indebted US economy could do with a little bit of inflation right now, to help deflate real debts and chivvy along growth.”

Do economists take an oath or something that inflation cures everything? What I would like to see is increases in wages or income by quintile. I suspect the Goldman employees keep up with inflation very well, everybody else, not so much.
Its kinda like reporting GDP – why is it never reported per capita?

Posted by fresnodan | Report as abusive

Hsvk – Jeremy Grantham talks about closing that loop in one of his most recent commentaries. Night soil was used for centuries in China. Diligently collected to boost yields for rice, millet, soybeans, wheat…

By concentrating it in public sanitation systems, we raise the bacterial toxicity and the concentration of excreted pharmalogic byproducts. This makes it harder to close the circle in present times. I think the benefits of public sanitation outweigh the losses of nutrients but there is room for experimentation here. Closing the circle, while avoiding the dangers above would be monumental IMO. tDownload.aspx?target=JUBRxi51IICeBY%2bw 647w%2b8yc1qw89rRWuey6UVkZcqOnBQRhvyPRCn LyVzPUi0O5g1UqS1NM%2fpFFF8Fngaxz44dhmRat 65AjEMJqCcCI5t%2fq7KUqhLxzPuhOAOHRHA1u

Posted by Ghoghogol | Report as abusive

Mention bacteria and everyone immediately thinks ‘bad’ but there are many good bacteria too. Many of these purify the human biological waste and make it usable for other purposes.

Same could be said about materials we bury in landfills. Why not burn the rubbish and turn it into energy?  /07/politics-is-all-rubbish-these-days/

Posted by FifthDecade | Report as abusive