Inflation Is Bringing Back Higher Growth!

Popular Economics Weekly

Consumer prices are on the rise and the Fed’s December rate hike doesn’t look misplaced at all, says Econoday. Year-on-year core prices (without food and energy prices) rose 1 tenth to plus 2.2 percent for the highest rate in more than 3-1/2 years. This rate, as tracked in the line of the accompanying graph, is breaching the 2 percent policy line that isn’t going unnoticed at the Fed.

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Graph: Econoday

Yet this is exactly what is needed to presage higher economic growth this year. It has been the lack of inflation that has kept the Fed from raising interest rates sooner. Why? Because inflation leads interest rates, not the reverse. I.e., prices have to rise before banks react by raising their lending rates. Barron’s economist Gene Epstein predicts 3 percent plus GDP growth this year, almost one percent above the consensus of so-called ‘blue chip” economists.

In fact, higher inflation has to accompany higher growth, since profits can’t increase without the ability of businesses to raise their prices at or above the inflation rate. And growing profits are the only circumstance that will cause businesses to expand and create more jobs.

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Barron’s Epstein bases his upbeat prognosis on continued healthy consumer spending that will overshadow the drop in manufacturing and exports, in particular. Ex-gas retail sales month-to-month (the dark columns) expanded for seven months in a row which matches the longest streak in five years. Year-on-year, ex-gas sales are at a very respectable plus 4.5 percent and reflect special strength in vehicle sales, up 6.9 percent on the year.

Consumers are less optimistic about their prospects this year, but will still spend more. The Index now stands at 92.2 (1985=100), down from 97.8 in January. “Consumer confidence decreased in February, after posting a modest gain in January,” said Lynn Franco, Director of Economic Indicators at The Conference Board. “Continued turmoil in the financial markets may be rattling consumers, but their assessment of current conditions suggests the economy will continue to expand at a moderate pace in the near-term.”

The housing market and governments also have to contribute some spending to boost growth above the 2.4 percent GDP rate predicted by most economists. Housing starts (ie, construction) are holding above 1 million units per year, and existing-home sales have soared to a 5.47 million annual rate in January. That was the second-highest monthly pace since 2007 and 11 percent higher than the same period a year ago.  But it could also mean a housing shortage, as existing-home inventories dropped to a 4-month supply.

State and local governments have also increased their spending on education and infrastructure upgrades, in particular. And, the federal $305B STIRR transportation highway bill, and $1.1 trillion current year spending agreement should boost federally financed programs that contribute to increased growth. President Obama signed the $1.1 trillion spending package on December 17 to fund the government through next September, averting the risk of a government shutdown. The measure removes the threat of a government shutdown until Sept. 30, about a month before the 2016 elections, and the beginning of the new fiscal year.

What better reason for optimism can there be than removing the threat of a government shutdown? This, and some rising inflation are in fact all good reasons for our optimistic prediction of better growth this year.

Harlan Green © 2016

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

About populareconomicsblog

Harlan Green is editor/publisher of PopularEconomics.com, and content provider of 3 weekly columns to various blogs--Popular Economics Weekly and The Huffington Post
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