jk Turns Hawkish on Inflation

I have been the inflation dove around ThreeSources. I still consider a core CPI in the low "twos" to be manageable, but I think we are getting beyond that and am willing to concede that long term headline inflation cannot be ignored.

Brian Wesbury has an excellent guest editorial in the WSJ today. The First Trust Advisors Chief Economist and frequent Kudlow guest is a smart guy and a cool head. He's pretty slow to call for falling skies, but he has some serious 1970s-ish concerns about where we are now.

One would think that the odds of a repeat [of 1970s inflation] were low, and for 20 years, after Ronald Reagan and his Fed Chairman Paul Volcker had the courage to get inflation under control with tight money and tax cuts, this was true. Unfortunately, the lessons seem to be fading. Today, the U.S. (and through it the world) faces its greatest threat from inflation in 30 years. And as in the past, this threat is being met with denial and political expediency.

Today's problems began seven years ago in 2001, when the Federal Reserve overreacted to the deflationary mistake it made in the late 1990s. The Fed vigorously pumped money into the economy in order to drive interest rates down rapidly.

Though I am still not calling for Bernanke's head on a pike, any fair observer would have to suggest that he is no Volcker. And I've seen the guys running for President -- neither is Ronald Reagan.

A good economist should be smart and lucky, and Wesbury may be both. The day his column runs, the WSJ news pages report a 27-year record rise in the PPI last month.

I think the FOMC's taking back 25 bps and suggesting another before year end would send a strong signal and leave us with what no sane person would call "tight money."

I'd suggest the Wesbury piece to even ThreeSourcers who do not get animated about monetary policy (odd eggs that you are). It's very readable and accessible.

Economics and Markets Posted by jk at August 19, 2008 11:27 AM