Veteran economist Steve Hanke has declared that the United States no longer has an inflation problem. Speaking in an interview with CNBC’s Street Signs Asia, Hanke, who is a professor of applied economics at Johns Hopkins University, stated that one of the reasons for this is the contraction of the money supply, which has been decreasing by 4% on a year-over-year basis. Hanke went on to emphasize that this contraction is unprecedented since 1938, and that changes in the money supply directly influence changes in the price index and inflation.
These statements come as the U.S. inflation rate for June was reported to be lower than expected at 3%, marking the smallest year-on-year increase in two years. The core consumer price index, which excludes volatile food and energy prices, rose by 4.8% compared to the previous year, and 0.2% on a monthly basis.
This latest data could potentially impact the Federal Reserve’s decision-making regarding interest rates. If the U.S. producer price index, scheduled for release later today, also shows a decline in prices, it may further influence the Fed’s choice to end the rate hiking cycle soon.
Traders are currently predicting a 92.4% chance that the Fed will keep rates unchanged at its July meeting, according to the CME FedWatch tool.
Hanke further explained that historically, when inflation was high, the producer price index would rise first, followed by the consumer price index, and finally the core index. However, he argues that the situation has now reversed, with producer and consumer price indexes falling, while the core index lags behind. Hanke believes that as long as the Federal Reserve continues with quantitative tightening, all indexes will continue to decline.
While central bank policymakers typically focus on core inflation, which is still above the Fed’s 2% annual target, Hanke suggests that if the Fed maintains its current approach, it could reach the 2% range rapidly.
In conclusion, Hanke dismisses the notion that the Federal Reserve is facing a major challenge or a prolonged fight against inflation. He believes that the situation is not as difficult as it is often portrayed, stating, “Things aren’t sticky.”
CNBC’s Jeff Cox contributed to this article.