Inflation can be a scary word, but there’s nothing to fear in new numbers released this week.
Government data that came out Thursday showed prices for the most common consumer goods -- one of our standard measures of inflation -- jumped 0.3 percent in April and were up 2 percent over the past year. That’s nearly double the pace of increase just two months ago.
The news comes on the heels of a report showing a spike in the prices that businesses are able to charge for what they produce. The so-called producer price index rose 0.6 percent in April, nearly three times what analysts were expecting.
The numbers are just a snapshot of price changes in one month against a backdrop of a year of persistent underperformance. Yet they were enough to revive the dreaded specter of inflation, with former Federal Reserve Chairman Alan Greenspan arguing Wednesday that “the presumption that it’s no longer on the horizon … is a mistake.”
But let’s look at the last time that inflation as measured by the 12-month change in the consumer price index hit 2 percent. It was in July, with broad increases in prices for apparel, tobacco and food. The numbers were released on the same day as data showing new claims for unemployment benefits over the past week hit a six-year low. Stock markets tumbled as investors worried the reports would spook the Fed into ending its stimulus campaign early.
Now here’s what actually happened: Just three months later, inflation hit a post-recession low of 0.9 percent. The Fed surprised Wall Street by waiting until the end of the year to announce it would start scaling back its support for the economy. And stock markets rallied to record highs.
There’s also a philosophical shift underway. The 1970s were a harsh lesson in the dangers of unchecked inflation -- one that few who lived through that era can forget. But rising prices do not always lead to runaway inflation, just as tapping the gas pedal on your car is not the same as flooring it.
Rising prices are a sign of growing consumer demand -- and that demand is the engine of the American economy. A little bit of inflation also helps reduce the cost of doing business, which means companies can hire more people. And inflation makes debt easier to pay off, which anyone with a student loan or a mortgage can appreciate.
Indeed, one of the most puzzling aspects of the recovery over the past year has been why inflation has remained so low -- not just in the United States but across the globe. The European Central Bank is debating options for injecting more stimulus to the region to combat the problem of low inflation. Within the U.S. central bank, several officials have argued that persistently low inflation is a reason to keep juicing the recovery.
In fact, the Fed has been falling far short of its 2 percent goal for inflation. According to its preferred measure, which is derived from consumer spending data, inflation is running at just over 1 percent. That means that the Fed actually wants inflation to start rising so it can meet its target.
Of course, that message may be lost on Wall Street. In mid-afternoon, all three of the major U.S. stock indexes were down about 1.25 percent. But it's not the first time in this recovery that good news has gotten garbled.