Slowing Growth or Inflation?

For this week’s Blogger’s Take, Barry Ritholtz posits: “Given the concerns raised by the Fed, what is really the bigger threat to the economy: Slowing Growth or Inflation?”
Here’s my answer:

Slowing growth is more important, by far. Through its history, the Fed has basically perfected the art of killing off growth. Stopping inflation? Eh…not so much. In fact, I would say that slowing growth is itself an inflation threat. Personally, I’d like to see the Federal Reserve much less federal, and far more reserved. Monetary policy is always and everywhere a human phenomenon.
As a general rule, $13 trillion economies don’t start or stop on a dime. Since 1990, when one quarter of GDP growth is above trend (3%), there’s a 60% chance that the following quarter will also be above trend. Conversely, when growth falls below trend, there’s a 64% chance that the following quarter will also be below trend.
In other words, once you’re stuck in slow growth, it’s hard to break out. During the last recession, we had 11 straight below-trend quarters. We finally broke out, but now the outlook is looking shaky. The last two quarters, and three of the last four, have been below trend.
Inflation, on the other hand, is—and has been—well contained. The 12-month core CPI has bounced between 1% and 3% for ten straight years. Not once has it left that range. And it’s been over 15 years since it hit 4%, which was during a period of below-trend growth. That’s not a coincidence.

Other bloggers weighing in include Rob May of Businesspundit.com, Abnormal Returns, Mike Shedlock of Mish’s Global Economic Trend Analysis and Russ Winter of Winter (Economic & Market) Watch.

Posted by on December 13th, 2006 at 8:23 pm


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