Double standards aside, those who now condemn the Bernanke Fed for failing to raise interest rates ad infinitum would have to condemn such lowering of rates by the Greenspan Fed in 1996-1999 as wildly inflationary. Yet the consumer price index excluding energy fell from 3 percent in 1995 to 2 percent in 1999.
That same CPI ex-energy was up 2.6 percent over the past year -- not the lowest it has ever been, but close. That 2.6 percent is lower than in 1995 or 2001, for example, and the total CPI including energy rose just 0.2 percent in June. Yet the Wall Street Journal editorial nonetheless bemoans "the inflationary pressures ... now showing up with a vengeance in the consumer price ... indices."
That editorial rebukes the Fed for drifting "back to the era of the Phillips Curve," which blamed inflation on "wage push" resulting from low unemployment. Yet the same editorial enthusiastically embraced the Phillips Curve, fretting that "unit labor costs are now 3.2 percent higher than a year ago; that's the fastest increase since 2000, when monetary policy was considerably tighter than it is now."
The increase in unit labor costs was indeed faster in 2000, which soon proved to be a better omen of a dangerous squeeze on profit margins than of inflation. The Fed's policy was unquestionably tighter in 2000. But please do not forget what happened to stock prices and industrial production in late 2000 and 2001 before emulating the Fed's policy in 2000. And recall that the resulting recession, in turn, provoked the Fed to overcompensate, belatedly, with a 1 percent interest rate.
The Phillips Curve notion that increases in unit labor costs predict or cause higher inflation was debunked in studies from the Federal Reserve Banks of Richmond (Yash Mehra), Dallas (Kenneth Emery and Chich-Ping Chang) and Cleveland. The latter paper, by Gregory Hess and Mark Schweitzer, found "little systematic evidence that ... unit labor costs are helpful for predicting inflation."
A March 2005 study for the Bureau of Labor Statistics by Anirvan Banerji found that "upturns in unit labor cost growth actually lag upturns in CPI inflation 80 percent of the time."
The Fed is right this time, for a change. I regret to say that their toughest critics, including many of my oldest and best friends, are wrong. |