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Home Publications Blogs Beat the Press News Flash!!!! Prices Rose Last Month!

News Flash!!!! Prices Rose Last Month!

Saturday, 19 March 2011 08:26

CNBC and USA Today told readers the shocking news that:

"A special index created by the Labor Department to measure the actual cost of living for Americans hit a record high in February, according to data released Thursday, surpassing the old high in July 2008."

The piece later went on to present a comment from Stephen Weiss, who is identified as being with Short Hills Capital:

"This speaks to the need for the Fed to include food and energy when they look at inflation rather than regard them as transient costs."

Actually this story is incredibly confused in almost every dimension. Prices rise almost every month with this "special index" and every other consumer price index as can be seen in the chart below.


Source: Bureau of Labor Statistics.


There was an extraordinary surge in commodity prices at the beginning of 2008 which was reversed when the world economy sank into recession. Now that the economy is starting to recover and developing countries like China and India are growing rapidly, prices for commodities are recovering from their recession slump. It was entirely predictable that prices would reach a "record high" again as they did in 1999, 2000, 2001, 2002, etc.

This news also provides no reason whatsoever why the Fed should shift its focus from core inflation, which excludes food and energy prices, to the broader measure that includes these prices. The Fed's actions will have virtually no effect on food and energy prices. These will be determined by world demand. The Fed could raise rates and slow growth in the U.S., but this would have only a marginal impact on the price of food and energy worldwide. Unless we can find a way to slow growth in China, India, and Latin America, we are not likely to see much reduction in food and energy prices.

Comments (3)Add Comment
written by skeptonomist, March 19, 2011 12:15
In the 1970's and 80's the Fed reacted to headline inflation. It was thought that inflation was inversely related to unemployment and that the "wage-price spiral" was the culprit. The unprecedented raising of rates at that time was intended to increase unemployment and reduce wages. As William Greider put it in his 1987 book "Secrets of the Temple", "Volcker wanted wages to fall, the faster the better. In crude terms, the Fed was determined to break labor". It seems to have succeeded; almost all real wages and salaries took a terrible fall from 1973 to 1980-90.

The alternative would have been not to attack wages, and just allow the money supply to expand temporarily to accomodate the increased commodity prices (grains and oil) and any wage increases needed to compensate (although in fact wages did not respond to inflation in the 70's). This is actually what usually happened in the 19th century when there was no central bank. But apparently protecting the assets of creditors outweighed the ill effects of putting the country through several recessions and killing real wage growth - who would have thought that the Fed would have these priorities?

The change in Fed policy to focus on core inflation is actually an advance for working people. It will now allow some pure commodity inflation to take place without trying to clamp down on the economy, which in practice would mean clamping down on employment and wages. If the Fed does take action it will be bad news again for wage earners. It remains to be seen what the Fed will do if wages actually begin to rise for any reason.
written by Jim Creamer, March 19, 2011 2:14
The capitalist control of public discourse simply doesn't work. Why? Because those who profit the most from controlling public discourse control the public media commons.

Dean Baker repeatedly points out the nonsensical talking points of Karl Rove's Republican Party and yet Dean Baker's message barely makes it to 0.0001% of the American People (3,000 people out of 300,000,000 Americans). Why? Because those profit the most from controlling public discourse prevent Dean Baker's message from reaching the public media commons.

Our Founding Fathers never in their wildest dreams could have predicted that 90% of the public media commons would be controlled by 6 companies (GE/Comcast, Fox, Disney, Times Warner, CBS and Bertelsmann). For this reason, there is a pressing need for a rewrite of the 1st Amendment to the US Constitution.

This Corporate Media dumbing down of America has reached crisis proportions. Bernanke, Geithner and Paulsen belong in jail for their trillion dollar give away to their banker buddies. The American Public has been kept in the dark to Paulsen and Bernanke's unconscionable act to allow Lehman Brothers to go Chapter 11 (for the immediate benefit of Goldman Sachs) and freeze up the World Capital Markets in September 2008. Paul Volcker didn't allow the same to happen to Continental Bank in 1984.

It is high time to rewrite the 1st Amendment and let the public discourse sun shine on the corrupt practices of Wall Street and Washington, DC.
written by joe, March 19, 2011 10:31
"The change in Fed policy to focus on core inflation is actually an advance for working people."

Exactly which is why so many Republicans call for Fed to stop focusing on core.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.