Budget Blues: Its the Deflation, Stupid!

With budget day upon us, and the Tories crowing about an economy on the mend, it is worth pondering the state of our neighbor to the south, where our economic fate is determined.

For months, we have heard about the inflationary cataclysm to come. With fundamentalist zeal, the financial sector in particular, already in receipt of their multi-billion bag of slag, have been telling of the horrors to come if government largess is not reined in. Economist Tim Duy, by way of Mark Thoma's blog this morning, has some somewhat different news:

My attention this morning was drawn to the inflation numbers in the January Personal Income and Spending release, specifically the recent downward trend in core PCE inflation:

Coupled with a sizable output gap that yields very high human cost in the form of high rates of labor underutilization - and forecasts that such underutilization will persist for years - would lead one to believe that policymakers still have work left ahead of them. Policymakers, however, do not appear to agree, and instead focus on the fact that output is growing again, even if the 5.9% pace in the final quarter of last year was inflated by inventory correction. Indeed, with the recovery taking hold, there is no imperative for more action. Fiscal policy looks hamstrung by deficit concerns, while monetary policy is poised to turn contractionary as asset purchase programs are wound down.

For the time being, it would appear that fiscal tightening will not be followed by similar monetary policy. At least the BofC understands that there is no inflationary risk. Output is well below capacity and will remain so for years to come. Rates on government debt continue at historically low levels, falling sharply over the past week.

This is not about economics. It is about old time religion.