What’s going on with inflation?

Edit 5-4-11: Decided to change the title of this post, adding the “?”, since I realized Dick Morris’s article is more an opinion piece.

Dick Morris has a good column today on “How the Feds conceal inflation.” He not only talks about the “lying with statistics” that’s going on. He also mentions what is causing the increased prices that consumers are generally seeing.

He said that if we use the same standard that we used to measure inflation in 1980, after the Carter years, then our annual inflation rate would be measured at 10% right now. I’ve been thinking for a while that the predicted problems with inflation were overblown, that it’ll be like the 1970s, but Morris is saying it will be different, because the problem is different. He said that before, the problem was the textbook definition of inflation: too much money chasing too few goods. Demand increases while supply remains the same. Now he says the problem is there’s a “price push” on the goods we buy. I looked this up, and apparently what “price push” means is that demand remains constant, but supply decreases. Therefor prices increase without increased demand. It’s the opposite problem.

Morris says that increasing interest rates now will not help this situation, though it was the solution to the inflation problem of the 1970s. He doesn’t say what the solution for this is, but I suspect it has to do with decreasing taxes and regulation, and I’d imagine decreasing the rate of federal spending, because public debt is crowding out private credit. I’d imagine that if the Fed increased interest rates we would likely see out-of-control inflation, because banks would be more motivated to lend into the private economy. This would increase supply over the long term, but also increase demand in the short term. This would force the Fed to increase interest rates higher to try to contain the increase in demand. Morris has said we’re entering a stagflationary period, but I can see now how it could get really bad.

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