The Commerce Department reported today that the economy has slowed drastically in the second quarter to date, while inflation is sharply higher due primarily to food and energy prices.
The nation’s Gross Domestic Product grew at a 2.5% rate in the second quarter, compared to 5.6% in the first quarter–much lower then economists’ expectations. It is the lowest showing since the last quarter of 2005, when the economy was reeling from Hurricanes Katrina and Rita.
Inflation was sharply higher, showing a 4% rate; if you exclude energy and food prices (which I don’t understand why anyone would want to do that if you want a valid reading of inflation’s pinch on consumers), the rate is still 2.9% and sharply higher than the Fed’s “comfort zone” of 1 to 2%.
The figures begin to put Fed Chairman Bernanke into a vice-like grip when it comes to interest rates, which the Fed has raised repeatedly in recent quarters. His Hobson’s Choice: continue to increase rates to try to put a brake on inflation thus slowing the economy further, decrease rates to stimulate the economy but further fuel inflation, or do nothing and let existing negative trends continue unabated?
I’d be curious to know how much of an impact the housing market is having on the economy, which continues to show drastic cooling in light of higher interest rates and sky-high prices. That will probably not show up in the numbers for a while longer.
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I’ve lamented at length over on Housing.com as to why they continue to use the CPI as the inflation gauge, when it deliberately excludes the two costs that matter the most to any person–food and energy.
I’m no economist, but I think we could weather the inflation storm just fine if we raised wages. But that won’t happen in a Congress that refuses to raise the pathetic minimum wage unless they also get to repeal the estate tax.
Bernanke is obssessed with inflation for several reasons. First, it’s that same bullshit psuedo-machismo “credibility” that’s pushing Ehud Olmert to bomb Lebanon into oblivion. Bernanke has to “prove himself” to Wall Street, and as you and I both know, all they care about is ensuring profits rise.
Second, and more insidiously, Bernanke comes from the school of thought that believes you can defeat anemic economic gains without public spending. He’s all about killing the New Deal economy, because the current model–consumers leveraging their equity to pay for everything and being crushed under debt–suits the financial industry fine. I wrote a bit more about that here.
It’s ugly and getting uglier by the day, brother.
Bernanke chose a very bad time to be elected chairman of the Fed. Greenspan left him many years’ worth of a mess in accumulating personal debt, asset bubbles, and a generally unbalanced economy running on artificial stimulus. If another recession is around the corner, as I and others think, I think it’s going to be a hard one indeed. Sooner or later the piper must be paid, and it will be paid on Bernanke’s watch–no matter how macho he wants to appear to Wall Street.
The reason that energy and food are excluded from the core inflation numbers is their volatility. Those prices can demonstrate excessive swings either way which don’t give us a true reading of inflation. However, energy inflation does eventually trickle into the “core” inflation numbers as it affects the price of practically everything. “Core” inflation gives us a better reading of where prices are going.
In response to Martin, rasing wages only contributes to inflation, it doesn’t solve the problem. That would lead to an “expectation” of inflation which is a vicious circle that is very hard to break. Bernanke is showing that he will be tough on inflation. He has to. Just the believe that he might not stamp out signs of inflation would lead to higher prices. He’ll get more leeway as he strengthens his inflation-fighting credentials.
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