While inflation in goods prices is non-existent due to the global economic slowdown, services, which account for 58 percent of the CPI and which are labor intensive, aren't behaving in the expected way, given that the economy has been at crawl-speed for over a year.
One can test Greenspan's hypothesis by taking energy prices out of services. Services excluding energy rose an annualized 4.5 percent in the second quarter, the biggest increase in over six years. On a year-over-year basis, services ex-energy appeared to be stabilizing in the second half of last year and first quarter of this year at 3.5 percent. But then they started to accelerate in the second quarter, hitting a six-year high of 3.7 percent in June.
Most economists and traders are as complacent about inflation as Greenspan. Why worry about inflation when growth is well below potential, unemployment is rising and energy prices are falling? It's true that inflation lags the economic cycle. It's also true that policy makers are more worried about recession than inflation; they can always raise rates quickly if and when the economy takes off.
What's not true is that inflation is turning down. The core CPI rose 2.7 percent in the year ended June, up from 1.9 percent in 1999 and 2.6 percent in 2000. The Cleveland Fed's median CPI, which throws out the outliers rather than eliminating food and energy, rose 3.6 percent in June, the fastest pace in a decade. In short, Greenspan told us nothing new about the economy and Fed policy today, and what he did tell us wasn't that accurate.
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