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Remembering the “War on Inflation”

01/19/2017

In June of 1981, I was backpacking the Chisos Mountains along the Mexican border.  In those days, there was no news in the backcountry.  Cell phones were still unknown.  However, when we got down, I learned the then-Fed Chairman Paul Volcker has raised interest rates to a record high of 20%.  I knew that made a recession inevitable, and, sure enough, we experienced the recession of 1981-2, when unemployment rose to 10%.  Volcker was pilloried in the press.  Farmers blocked C Street in Washington with their tractors in protest.

Volcker did this because inflation had reached 14.8%.

Tuesday, the latest CPI inflation numbers from December showed inflation had spiked up from nothing to an annualized 3.6%.  Suddenly, there is concern that Yellen will start raising interest rates recklessly.  Even President-Elect Trump has warned her not to be reckless.  That’s ridiculous!  Headline inflation is still only 2%.

It was only a year ago that we were worried about deflation, which is a much more difficult problem to control.  The slight “spike” we just saw reflects the increased fuel costs from gasoline and not much else.  There are those who expect four interest rate increases this year.  It ain’t going to happen!

Humorously, I have to note that Tuesday’s report speaks at some length about the widening difference between eating at home and eating in restaurants.  Of course, I will bring that up the next time my wife wants to go out for dinner . . .

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