Inflation and von Mises
from Peter Radford
Yesterday I speculated that the decline in the cost of basic goods like gasoline was a contributory cause of the uptick in retail sales in October. Today’s consumer price report supports that notion.
The headline rate of inflation, the consumer price index, declined 0.1% last month bringing the rate for the last twelve months down to 3.5%. That’s a large decline in the annual rate – in September it had been 3.9%. In contrast, the more important “core” rate, which strips out volatile items such as gasoline and food, rose 0.1% and has risen 2.1% over the last year. The biggest factor behind the decline in the headline rate was a 2.0% drop in energy prices, while food prices rose, but only a slim 0.1%.
The decline in the CPI, coupled with a very slight increase in hourly wages, meant that inflation adjusted earnings rose 0.3% for the month. This modest improvement in incomes appears to be the basic reason retail sales were slightly stronger than expected.
The importance of this report is simply that it debunks, or helps to at any rate, the notion that expansionary monetary policy deployed to get the economy going will inevitably feed into inflation. This is a view held by many right wing analysts, and has no substance or foundation, but exerts a tenacious hold on their thinking. It has it modern roots in the writings of von Mises, and still occupies a leading role in right wing economic policy thinking even though such right leaning luminaries as Milton Friedman considered the idea daft. If you recall we were treated to an outburst of terrifying warnings of imminent hyperinflation this summer when commodity prices drove the CPI up temporarily. The cause of those warnings was the right winger’s view that recent Fed actions such as QE1 and QE2 could only create inflation and not help the economy. In von Mises words:
“Attempts to carry out economic reforms from the monetary side can never amount to anything but an artificial stimulation of economic activity by an expansion of the circulation, and this, as must constantly be emphasized, must necessarily lead to crisis and depression”
There’s not much wiggle room in those words. The analysis is definitive: tinkering with the money supply necessarily leads to crisis and depression.
That it hasn’t, ought, in a scientific world, permanently disprove von Mises’ view. It won’t. It will linger on because of its ideological purity. But it isn’t science.
But we could say that about a lot of economics.