Business Insider

Peter Crabb: It's time to listen to markets and foreigners about rising U.S. inflation

You better listen when all your neighbors are telling you to turn down the music. Our neighbors are telling us we need to turn down the money.

Inflation expectations and actual prices are rising in the U.S., but policymakers seem unconcerned. In its most recent announcement, the Federal Open Market Committee said, “the Committee expects that inflation will remain subdued for some time.”

Despite their expectations, inflation, as measured by the consumer price index, is beginning to rise quickly. The CPI is the most widely followed measure of inflation. The index shows the cost of a basket of goods and services relative to the cost of the same items in the previous period.

With this measure, the U.S. Bureau of Labor Statistics tracks the goods and services a "normal"U.S. household regularly purchases. The index is calculated by holding this basket of goods constant while following price changes for each item. The percentage change in the index thus measures the inflation rate.

The CPI has risen each month this year except for March. For the three months ending in October, the CPI was rising at a 3.6 percent annual rate. Here in the West, the rate is somewhat slower but still well above last year’s rate. The CPI for urban consumers in Western cities with a population base the size of the Treasure Valley rose at an annual rate of 2.5 percent.

While U.S. policymakers believe there remains little risk of inflation, the bond, currency and gold markets suggest otherwise.

The U.S. Treasury market’s yield spread, or the difference in return on the 10-year and 2-year Treasury notes, is at 2.5 percent this week. This spread has grown 16 percent in the last three months while the dollar has lost nearly 6 percent of its value over the same period. At the same time gold has risen more than 20 percent.

Some officials are listening to the markets and realize what must be done. Federal Reserve Bank of Philadelphia President Charles Plosser was in Rochester, N.Y. this week speaking at an economic seminar and said that the Fed may have to stop all the easy money soon. Plosser said the Fed must take "appropriate steps to withdraw or restrict the massive amount of liquidity that we have made available to the economy."

European policymakers have a more specific timetable. According to reports in the European edition of The Wall Street Journal, The European Central Bank will announce this week that it will no longer lend the hundreds of billions in euro loans it made to banks over the past year. ECB President Jean-Claude Trichet said these loans must really be only temporary.

Mr. Trichet has also said that the weakening value of dollar, attributable in part to loose monetary policy at the Fed, is unacceptable. The Europeans would like to see the Fed move sooner rather than later.

In his trip to China this past month, President Obama heard from Chinese officials of the need to protect the value of the dollar and avoid a large run-up in the fiscal deficit. China is well aware of the global problems U.S. inflation will cause.

Inflation is rearing its ugly head in the Western states and throughout the country. The rest of world is saying U.S. policymakers need to act soon.

Peter R. Crabb is a professor of finance and economics at Northwest Nazarene University in Nampa. He earned his doctorate in international and financial economics from the University of Oregon.