Friday, January 9, 2009

ECRI and Inflation Past and Present

The Economic Cycle Research Institute ("ECRI"; is a marvelous resource. It released its proprietary Future Inflation Gauge today:

(Reuters) - NEW YORK, Jan 9 (Reuters) - U.S. inflation pressures fell in December to a 50-year low, indicating policy-makers should
focus on economic growth, a research group said on Friday.

The Economic Cycle Research Institute's U.S. Future
Inflation Gauge (USFIG), designed to anticipate cyclical swings
in the rate of inflation, slipped to 85.5 in December from 86.7
in November.

The reading was the lowest since Aug. 1958, when it stood
at 85.3.

"It is notable that the USFIG was in a clear, cyclical downswing in mid-2008, when financial markets and monetary policy-makers alike were mistakenly concerned about the threat of inflation," said Lakshman Achuthan, managing director at ECRI, adding:

"With the USFIG now sliding to a half-century low, U.S. inflation pressures are in full retreat."

The gauge was pulled down by disinflationary moves in
commodity prices and job growth, which were partly offset by
inflationary moves in interest rates, Achuthan said.

I have reviewed the inflation rates for that era, using data provided at

The inflation rate for 1958 was 2.73%. This was despite a severe recession that year. The inflation rate was also 3.34% for 1957 and 1.01% for 1959. For 1960, the inflation rate was 1.46%.

The ECRI report neglects to point out that inflation was well above zero and there was no deflation in that era. It is disappointing that with Washington in full stimulus mode and the headlines screaming recession/depression, that the ECRI needs to bother commenting that "policy-makers should focus on economic growth". Policy-makers are focusing on economic growth. What they are not focusing on is financial stability of the U.S. Government as a whole.

There has to be a better way for this country to move away from endemic inflation without the worst economic downturn in 75 years. Governmental macro- and micro-management of this economy has been failing. Government does need to set consistent rules for the private market and let both success and failure happen as they will. What investors need to see is the price of credit default swaps on the U.S. Federal Government defaulting on its debts drop decisively.

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