For the last year, I've been convinced that inflation is back and getting worse. I can feel it in my everyday life. My favorite pizza guy raised his price for a slice by 20% last month. My kids' tuitions climbed 8% this year. Heating oil and electricity are more expensive. Breakfast cereal. Books. You name it, it costs more.
Yet for the last year, Alan Greenspan and the other members of the Federal Reserve's interest-setting body, the Federal Open Market Committee, have been telling me not just that there isn't any inflation, but that there really isn't any danger of inflation.
Well, I've finally figured out why they're wrong. It's not because government statisticians have cooked the books to keep inflation numbers low (although they have), or that the Fed governors are part of a conspiracy to cut the inflation-indexed payments going to retirees (although they may be), or that these folks are so out of touch with the real economy that they can't see what the rest of us feel in our everyday lives (although that's quite probably true).
No, the real problem is that the Fed is worried about the wrong kind of inflation.You see, the kind of inflation that the Fed cares about -- and tries to fight -- is the short-term, cyclical kind. Prices jumped by 13% in 1979, for example, after a 9% increase in 1978, as members of the Organization of the Petroleum Exporting Countries (OPEC) ratcheted up the price of oil. So the Fed, under then-chairman Paul Volcker, drove U.S. interest rates up to 14.7% on three-month Treasury bills in 1981, throwing the country into a recession that did indeed put an end to double-digit inflation. By 1982, inflation was down to 3.87%.