Is America about to be Hit with Inflation?

In a recent set of articles and editorials appearing in The Wall Street Journal, inflation, the devaluation of the dollar, and the state of the American economy – all are at the top of the news right now.  With high unemployment - nearly 15 million unemployedand about one in seven Americans unable to find full-time jobs, the economy is on people’s minds.  Now, there’s new news that inflation – under control for the last few years – is about to take off.  Is this true?  Is America about to be hit with inflation?  Let’s talk about it now …

QE2 is Set to Sail

QE2 is the key term.  What is it?  In this case, it doesn’t refer to a ship.  QE2 stands for “quantitative easing.”  That’s a fancy term for a monetary policy of easy money.  How does QE2 work?  The Fed buys U. S. Treasury Bonds and other assets, increasing its balance sheet.  More importantly, at the same time the Fed spends more money, it increases the money supply.  From economics, we know when there are more dollars chasing after goods and services, prices for goods and services go up.  That’s inflation.

Indeed, a stable money supply (that grows at about the same rate as GDP grows) helps to create a healthy economy.

Dollar Devaluation

QE2 is not the only policy that will tend to cause inflation.  Washington is also talking recently about the need for China to revalue their currency against the dollar.  In plain talk, devaluing the dollar means increasing the prices of goods Americans buy from other countries.  Once again, that translates into inflation.

Dollar devaluation is a policy that tends to drive prices higher and inflation.

Producer Price Index Jumps 4%

While U. S. producer prices went up 0.4% (seasonally-adjusted) in September, you see a different picture if you look at the last 12 months.  For the past 12 months ended in September, it rose 4%.  That’s appears to presage inflation as well.

Is America about to be hit with inflation?  It seems likely, especially since the Fed appears to be choosing inflation as a policy option.

Choosing the Good Life Blog by Gerard Francis Lameiro, Ph.D.

Bookmark and Share
This entry was posted in America's Future, Choosing the Good Life, Economic Growth, Inflation, Interest Rates. Bookmark the permalink. Comments are closed, but you can leave a trackback: Trackback URL.