Goldilocks Inflation

Prices rise to absorb the amount of money available. Ask any tourist.

Inflation is bad, right? When prices rise, that's a bad thing, right? And when prices fall (deflation) that's a good thing, right?

Well, maybe.

   When prices rise too far, too fast, that's called runaway inflation, and that can break many family and national budgets.
   When prices plummet during serious deflation, that's a symptom of economic depression, and nobody wants that.

   So which is it? When inflation slows down and shows signs of going negative -- to deflation status -- it could mean an economy is heading for trouble. On the whole, then, it's probably better to have a little inflation, to show that the economy is healthy and growing, but not so fast as to put some folks in the poorhouse.
  In other words, not too slow or not too fast, but just right -- a Goldilocks inflation.

   But how slow is too slow, and how fast is too fast, and how much is just right? As the king said, "Is a puzzlement."

   In America, the Federal Reserve Board has taken on the job of monitoring the money supply, and thus controlling overall prices. The Fed's target rate of inflation is about 2 percent. But over the past year, it's been closer to 1 percent, and that's why the Fed has been pumping more money into the economy, increasing the money supply and thereby supporting inflation and growth. Prices rise to absorb the amount of money available.
   However, the U.S. economy has not yet fully recovered from the Great Recession of the last decade, despite monetary stimulus by the Fed and fiscal stimulus by the Administration.
   And in Europe, the inflation rate is declining, a sign of trouble ahead. In October, inflation throughout the nations that use the euro as a common currency was annualized at 0.7 percent, down from 1.1 percent in September. A year ago, it was 2.5 percent. For all EU nations, the rate was 0.9 percent in October, down from 1.3 percent in September. A year ago, the annual inflation rate was 2.6 percent.
   Four nations recorded negative rates (declining prices), according to Eurostat, the statistics agency of the EU, and three were flat. The lowest annual rates were in Greece ( -1.9 percent), Bulgaria ( -1.1 percent), and Cyprus ( - 0.5 percent).  Rates in Ireland, Spain and Latvia were flat, and the highest inflation rates for October were in the United Kingdom and Estonia, both at 2.2 percent, Eurostat said.
   What does this mean? Match it with overall growth, as measured by GDP, a calculation of the value of all goods and services produced in an economic area. In the euro area, GDP was up by just 0.1 percent in the third quarter, and throughout the EU by 0.2 percent.  And the U.S. growth rate wasn't much better. Eurostat reported that U.S. growth was 0.7 percent from the second quarter, and 1.6 percent from a year ago, while the U.S. Commerce Department claimed a growth rate of 2.8 percent in seasonally adjusted annualized data (whatever that means), but experts are now forecasting that GDP growth for the final three months of this year will fade to 1.9 percent.
   In Japan, meanwhile, the third-largest world economy, GDP growth slowed to 0.5 percent in the July-September period, down from a 0.9 percent pace in the second quarter.
   And in China, the world's second largest economy, things are still booming, with a 2.2 percent jump in the third quarter from 1.8 percent in the second quarter. However, on a yearly basis, that's down -- to 7.4 percent from 7.6 percent in the second quarter and 8.1 percent in the first three months of the year.
   All things considered, though, that's too fast to last, government leaders in China are looking to modify their economic strategies even more. For a long time, Chinese officials have been incorporating capitalist ideas and practices into a communist economic strategy, and that's continuing.

   Worldwide, then, government officials are looking for a Goldilocks economy, influenced by monetary policy and inflation -- not too slow, and not too fast, but just right.