In contrast, “bad” inflation can be viewed as rising prices resulting from supply shocks that aren’t necessarily indicative of economic strength in the U.S. This sort of inflation tends to show up in expenditure categories such as food, energy, motor fuel and apparel. Prices for these expenditures can, and do, rise with less of a tie to expected growth in the economy, and therefore such price rises tend to detract from incomes more than they’re likely to support them. Also included is rent, which tracks the health of the overall economy similar to “good” categories, but decreases disposable income without a coincident rise in asset wealth.

So what does this mean for today’s level of inflation? According to my team’s analysis, we’re currently seeing more “good” than “bad” inflation, as the figure below shows. In other words, inflation is in a healthy economic state of being vs. being an economic risk or headwind.

WHY U.S. INFLATION ISN’T ALL BAD

This balance, however, could shift quickly in a world of excessively easy money. As such, I was pleased to read the Fed’s most recent policy statement, which leaves the door open for an initial rate hike in December. After the October employment report, I believe the Fed is in a position to initially hike rates next month. The conditions that the Fed has said it was waiting to see before liftoff are actually in place; they’re just not being reflected in the headline inflation data because of the transitory nature of lower energy prices. In other words, headline measures are being distorted lower by declining energy and food prices, declines that aren’t reflective of any economic shortfall. In the end, inflation is a complex topic, but too many discussions of policy appear to miss this complexity and miss the fact that it’s primarily lower income households that are hurt by rising prices. The bottom line: The treatment of “inflation” as a simple headline number that needs to be pushed higher paints too simple a picture.

 

Rick Rieder, Managing Director, is BlackRock’s Chief Investment Officer of Fundamental Fixed Income, Co-head of Americas Fixed Income, and is a regular contributor to The Blog.

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