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March 22, 1991
Interest rates had a tough start, but by week's end are back down to the top of the FebruaryMarch range. The early trouble came from strong inflation and housing reports.
Housing Starts jumped by 16.4% from January and were joined by a healthy rise in new building permits.
The Consumer Price Index "core" rate jumped .7% in February. By this stage of a recession, everyone would have hoped for more progress against inflation.
Inflation is as poorly understood as ever.
The monetarists declare that if you maintain steady, low growth in the money supply, you will have a steady, low rate of inflation. It's a nice theory, but we don't know how to define the money supply.
Commodities people oil, gold, orange juice, pork bellies have an inflation focus on imbalances between supply and demand for key goods. Bad freezes and droughts are hard for the Fed to fix.
Bankers and other selfabusive ascetics say that inflation comes from a lack of discipline. If people could be made to save, repair old clothes, go to garage sales, and never buy anything new, inflation would be licked.
Anticaplitalists are always on the lookout for evil "speculators" who ratchet up the price of things. Anybody who buys something in hope that the value will increase over time should go to jail, and inflation will stop.
There is a school of inflation metaphysics: the belief that inflation is a spiritual problem. For example, remember Gerry Ford's WIN buttons (Whip Inflation Now!)? Pin this garlic on your lapel, and inflation will go away.
We only know this for sure: no matter what fun house mirror you go to, inflation is always a reflection of national income. If incomes grow too fast, so do prices. If incomes don't grow, neither can prices. We don't know how to fine tune the national income through taxes and government spending.
We have only one reliable and very crude tool with which to adjust national income: sooner or later the Fed has to cause a lot of people to lose their jobs.
Right now, it looks like the Fed hasn't thrown enough people out of work. The Gulf War camouflage for a stingy Fed is gone, and the politicians probably aren't going to let the Fed throw more people out of work.
If the economy begins a new growth phase with inflation over 5% at the start, the bond market is going to look like the road to Basra. The next employment and inflation data are due on April 5. No pain, no gain.
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