Commodity Price Inflation Is Inflation and Is Happening Now

Professor Paul Krugman assures us at some length in his latest column in the New York Times that we should not worry about inflation, and yet this article completely omits any mention of rising commodity prices – which are very obvious today, and a primary source of inflation.

If this was an undergraduate essay it might be failed for failing to mention such a clear and self evident cause of inflation. Oil prices, for example, have more than doubled since last December. Is this not inflationary?

Wrong sighted

Perhaps Professor Krugman is being myopic in looking back to the 1930s when fears of inflation proved unfounded. Indeed, in the 1930s commodity prices crashed and stayed low for years. They have not so far this year.

Is this not more of a repeat of the 1970s, and the oil price rises that forewarned of a serious and intractable problem with general price inflation? Is it right to compare our current condition with the 1930s when the symptoms are already so different?

This analysis also calls into question the prescription to our woes offered by the good professor. More spending and a bigger stimulus as he wants would make this problem worse not better.

The NYT article suggests that the banks are sitting on their new cash and ’so the Fed is not really printing money at all’. What a conspicuously nonsense statement to make.

Exploding money supply

We can already feel the impact of printed dollars in the economy in higher commodity prices. For where can speculators be getting their money but the banks? And let us not forget that higher commodity prices will translate into higher transportation costs – gas for cars and air fares – as well as increasing the cost of finished goods and energy bills.

And that newly printed money is still sat in the banks, and can be released to fuel further inflation as demand dictates. It can not be wished away at the will of the Fed and certainly will not turn out to be an illusion.

So any sane person ought to worry about inflation. Commodity price inflation is the primary source of inflation. That it has reappeared so quickly ought to alarm anybody. This did not happen in the 30s. It did in the 70s, and inflation came back with a vengeance.

Comments

[Donald Ingram:]

The MAIN reason for the steady rise in commodity prices, as in gold and silver, is the continuing dive of the U.S. Dollar. It is heading for the tank and is driving investors into solid assets that will retain their value and preserve wealth. Plain and simple. Look for the velocity to pick up as the dollar continues and begins to pick up it's own velocity to the basement!

Jun 07 06:58 PM

[Missing_Link:]

On Jun 07 11:24 AM ScottEX wrote:

> Hey Genius, where did you get your phd in Economics? It would be
> nice if the non-educated types would just read and not type. It
> really ruins these columns.

> [...] please keep
> the uneducated drivle out of this forum about economics, which clearly
> you know nothing about.


Hey ScottEX, when ranting at commenters you disagree with for being "uneducated," it helps to know how to spell the word "drivel" properly.

When you don't, it kind of makes you look like an ass.

Jun 07 09:06 PM

[Missing_Link:]

On Jun 07 03:35 PM backtoreality wrote:

> hedge funds, derivatives, repeal of glass-steegal, and "regulation
> is bad" policy of W and cheney is at the center of the problem.


Are you sure it didn't have anything to do with:

-Reagan's initiation of massive deficit spending
-Nixon's abandonment of the gold standard
-Clinton's regulations that created the subprime mortgage industry through the Community Redevelopment Act

or

-LBJ's creation of the massive Social Security and Medicare entitlements that now consume a whopping 44% of the federal budget?

Every president since Teddy Roosevelt has been incompetent at fiscal policy. Blaming Bush's faults alone is extremely myopic.

Jun 07 10:22 PM

[Missing_Link:]

Or even Jimmy Carter, for starting the Community Reinvestment Act that ultimately led to the subprime mortgage meltdown.

Every president in the 20th century has initiated more and more handouts, entitlements, and debts and gotten us father and farther from personal responsibility and sound economic fundamentals.

Obama is no different; he just takes it to more of an appallingly preposterous extreme.

Jun 07 10:35 PM

[cameroni:]

You rarely fail to give me a laugh "Missing Link"

From now on I am also going to also insist that all ranters must learn to correctly spell "drivel" before they get any attention.

Jun 07 10:42 PM

[Bjarne Jensen:]

Let's see if I have this right: Realestate and wages are going down and prices are going up but it's not considered inflation? Oh yeh, it's stagflation. For those of you who didn't experience the 70s, I'm here to tell you that stagflation is much worse than inflation!!!

Jun 07 10:52 PM

[MarkitWacha:]

I think DBC is a reasonable hedge against inflation for a retail investor. It has precious metals, grains, and energy. That means you can buy it if you think inflation is going up.

Can anyone think of a more efficient hedge?

full disclosure: long DBC

Jun 08 12:32 AM

[Fighting Yoda:]

"Commodity price inflation is the primary source of inflation" - I don't know which school of economics this comes from. Inflation is not measured by commodity prices - measured by CPI - basket of goods. There is lot of controversies and conspiracies attached to the basket and the methodology - but that is the measure in our world stick to it. CPI i snot showing any inflation nor are any assets.

I had written a post detailing out my views on inflation actually deflation:
"Commodity price inflation is the primary source of inflation" - I don't know which school of economics this comes from. Inflation is not measured by commodity prices - measured by CPI - basket of goods. There is lot of controversies and conspiracies attached to the basket and the methodology - but that is the measure in our world stick to it.

The simple cause of inflation is: “Aggregate demand exceeding aggregate supply” I had written a post detailing out my views on inflation (actually deflation):
seekingalpha.com/artic...

Don't agree with Kurugman on most things but agree with his deflationery views.

Jun 08 03:05 AM

[Whippet:]

You pinpoint precisely why Krugman, a Keynesian, views inflation entirely differently from an Austrian, like myself. Keynesians view inflation as produced by "demand-pull" and "cost-push" effects, and the author of this article ironically falls into the same arguments. To a Keynesian, inflation is principally caused by 1) excess demand at the margin for a limited resource, or 2) supply shock at the margin for the same. Keynesians also believe that wage increases are a cause of inflation, as they drive prices up. Keynesians don't give a rip about money supply; in fact, they believe increasing it lubricates the economy. Austrians believe this is all bull$hit. Inflation is a function of money supply, and the velocity of money. mv = pq. Or, rearranged, p = mv/q. The only ways to make aggregate prices rise are to 1) increase the money supply, 2) increase velocity, and 3) lower the quantity of goods and services. Experience has taught us that q and v are relatively fixed; m is all that really matters. In normal days, the Keynesians and Austrians can box this out and explain the same phenomenon with two different sets of data. Today, things are vastly different- we have a classic Keynesian
"deflation" scenario and a classic Austrian "(hyper)inflation" scenario. Ceteris paribus, we will see which one wins.

As long as the sheeple believe that inflation is caused by an "increase in aggregate demand," they can be told to run on their hamster wheels ever harder and stockpile their Benjamins in 1% APY money market accounts. Commodity price shocks are neither here nor there as it pertains to inflation, from a Austrian point of view. We're concerned about the 2x to 3x jump in M1. But only a disingenuous Keynesian (i.e., our gubmint, both parties included) would argue that they are not INFLATIONARY.


On Jun 08 03:05 AM Fighting Yoda wrote:

> "Commodity price inflation is the primary source of inflation" -
> I don't know which school of economics this comes from. Inflation
> is not measured by commodity prices - measured by CPI - basket of
> goods. There is lot of controversies and conspiracies attached to
> the basket and the methodology - but that is the measure in our world
> stick to it. CPI i snot showing any inflation nor are any assets.
>
>
> I had written a post detailing out my views on inflation actually
> deflation:
> "Commodity price inflation is the primary source of inflation" -
> I don't know which school of economics this comes from. Inflation
> is not measured by commodity prices - measured by CPI - basket of
> goods. There is lot of controversies and conspiracies attached to
> the basket and the methodology - but that is the measure in our world
> stick to it.
>
> The simple cause of inflation is: “Aggregate demand exceeding aggregate
> supply” I had written a post detailing out my views on inflation
> (actually deflation):
> seekingalpha.com/artic...
>
>
> Don't agree with Kurugman on most things but agree with his deflationery
> views.
>
>
>

Jun 08 10:28 AM

[Fighting Yoda:]

Austrians believe in redeifinig Money = Money supply (M1) + Credit. As credit shrinks - money actually decreases.

Read my other post:
seekingalpha.com/artic...


On Jun 08 10:28 AM Whippet wrote:

> You pinpoint precisely why Krugman, a Keynesian, views inflation
> entirely differently from an Austrian, like myself. Keynesians view
> inflation as produced by "demand-pull" and "cost-push" effects, and
> the author of this article ironically falls into the same arguments.
> To a Keynesian, inflation is principally caused by 1) excess demand
> at the margin for a limited resource, or 2) supply shock at the margin
> for the same. Keynesians also believe that wage increases are a cause
> of inflation, as they drive prices up. Keynesians don't give a rip
> about money supply; in fact, they believe increasing it lubricates
> the economy. Austrians believe this is all bull$hit. Inflation is
> a function of money supply, and the velocity of money. mv = pq. Or,
> rearranged, p = mv/q. The only ways to make aggregate prices rise
> are to 1) increase the money supply, 2) increase velocity, and 3)
> lower the quantity of goods and services. Experience has taught us
> that q and v are relatively fixed; m is all that really matters.
> In normal days, the Keynesians and Austrians can box this out and
> explain the same phenomenon with two different sets of data. Today,
> things are vastly different- we have a classic Keynesian
> "deflation" scenario and a classic Austrian "(hyper)inflation" scenario.
> Ceteris paribus, we will see which one wins.
>
> As long as the sheeple believe that inflation is caused by an "increase
> in aggregate demand," they can be told to run on their hamster wheels
> ever harder and stockpile their Benjamins in 1% APY money market
> accounts. Commodity price shocks are neither here nor there as it
> pertains to inflation, from a Austrian point of view. We're concerned
> about the 2x to 3x jump in M1. But only a disingenuous Keynesian
> (i.e., our gubmint, both parties included) would argue that they
> are not INFLATIONARY.

Jun 08 12:08 PM

[Whippet:]

You are correct- credit is part of the money supply, as a function of the velocity multiplier. The currently depressed velocity of money has largely covered the growth of M1, currently. Regardless of definitions, we both would agree that M1 is the base of M3- and is "multiplied" upward. Look at the money supply charts here:
www.shadowstats.com/al...
One can clearly see the M3 liquidity growth bubble pumped up by Greenspan's hot air in the chart. One can also clearly see that the GROWTH (first derivative) of M3 money supply has dropped precipitously, but the overall levels are still increasing. This flies in the face of arguments for the destruction of money in this bubble collapse. What was destroyed was PERCEIVED wealth, not actual wealth. A stock is not money, real estate is not money. There must be a buyer for every seller. The only way money is destroyed in these transactions is defaulted margin and mortgage debt that is realized. The gubmint has made sure that these losses 1) were filled in (bailouts, like AIG) or 2) will never be realized (mark to myth acc'tng.) The counterparty of last resort is the Fed, and just take a glance at their balance sheet recently... they monetized the debt into M1 currency.
The truly scary thing is that M1 growth EXCEEDS M3 growth right now, in our "stable price" environment. The overall levels of both have skyrocketed. Since I cannot envision a way in which the Fed will be either 1) willing or 2) able to soak up this M1 liquidity, this is critically dangerous.
There is no deflationary phenomenon occurring right now, except to a dyed-in-the-wool Keynesian. Quite the contrary.


On Jun 08 12:08 PM Fighting Yoda wrote:

> Austrians believe in redeifinig Money = Money supply (M1) + Credit.
> As credit shrinks - money actually decreases.
>
> Read my other post:
> seekingalpha.com/artic...
>

Jun 08 12:59 PM

[Fighting Yoda:]

True- "The truly scary thing is that M1 growth EXCEEDS M3 growth right now, in our "stable price" environment."
Not True- "The overall levels of both have skyrocketed." - even the SGS graphs indicateM3 has plummeted.

Deflation vs Inflation is a Trilllion dollar debate - experts are on both sides of it - Peter Schiff, Marcc Faber, lot of Wall Street - believe in inflation.
Fed (at least is fighting deflation), Krugman, Mish Shedlock, Gary Shilling, David Rosenberg - Deflation.

Debate is unsettled, time will tell. Outcome will depend on how policy and events unfold. That is why you play the game.


On Jun 08 12:59 PM Whippet wrote:

> You are correct- credit is part of the money supply, as a function
> of the velocity multiplier. The currently depressed velocity of money
> has largely covered the growth of M1, currently. Regardless of definitions,
> we both would agree that M1 is the base of M3- and is "multiplied"
> upward. Look at the money supply charts here:
> www.shadowstats.com/al...
> One can clearly see the M3 liquidity growth bubble pumped up by Greenspan's
> hot air in the chart. One can also clearly see that the GROWTH (first
> derivative) of M3 money supply has dropped precipitously, but the
> overall levels are still increasing. This flies in the face of arguments
> for the destruction of money in this bubble collapse. What was destroyed
> was PERCEIVED wealth, not actual wealth. A stock is not money, real
> estate is not money. There must be a buyer for every seller. The
> only way money is destroyed in these transactions is defaulted margin
> and mortgage debt that is realized. The gubmint has made sure that
> these losses 1) were filled in (bailouts, like AIG) or 2) will never
> be realized (mark to myth acc'tng.) The counterparty of last resort
> is the Fed, and just take a glance at their balance sheet recently...
> they monetized the debt into M1 currency.
> The truly scary thing is that M1 growth EXCEEDS M3 growth right now,
> in our "stable price" environment. The overall levels of both have
> skyrocketed. Since I cannot envision a way in which the Fed will
> be either 1) willing or 2) able to soak up this M1 liquidity, this
> is critically dangerous.
> There is no deflationary phenomenon occurring right now, except to
> a dyed-in-the-wool Keynesian. Quite the contrary.

Jun 08 06:21 PM

[Whippet:]

You may want to look at the chart again (link below)- what has plummeted has been the GROWTH of M3. M3 is still growing 7% YOY as of right now. At the peak of the crisis, M3 LEVELED OFF. M3 has increased 50% since January 1, 2007. This is an extremely critical point, and is not widely understood. I have not seen any evidence of money supply destruction; seriously, please point me to it if you have a source.
And I'm arguing with you because I usually agree with your posts.

www.shadowstats.com/al...


On Jun 08 06:21 PM Fighting Yoda wrote:

> True- "The truly scary thing is that M1 growth EXCEEDS M3 growth
> right now, in our "stable price" environment."
> Not True- "The overall levels of both have skyrocketed." - even the
> SGS graphs indicateM3 has plummeted.
>
> Deflation vs Inflation is a Trilllion dollar debate - experts are
> on both sides of it - Peter Schiff, Marcc Faber, lot of Wall Street
> - believe in inflation.
> Fed (at least is fighting deflation), Krugman, Mish Shedlock, Gary
> Shilling, David Rosenberg - Deflation.
>
> Debate is unsettled, time will tell. Outcome will depend on how policy
> and events unfold. That is why you play the game.

Jun 09 01:14 PM

[Fighting Yoda:]

Fed June 5:
U.S. consumers paid down more debt than they took on in April for the seventh time in the past nine months, the Federal Reserve reported Friday. Consumer credit fell by $15.7 billion, or 7.4% at an annual rate, to $2.52 trillion. It was the second largest decline in outstanding debt on record, exceeded by March's $16.6 billion drop.
Revolving credit, such as credit cards, fell by $8.6 billion, or an 11% annual rate, to $930.9 billion. Non revolving debt, such as auto loans, fell $7.1 billion, or 5.3% annualized, to $1.59 trillion.
The figures do not include debt backed by real estate, such as mortgages or home equity lines. Debt can decline if consumers pay down debt or if banks write off debt.



On Jun 09 01:14 PM Whippet wrote:

> You may want to look at the chart again (link below)- what has plummeted
> has been the GROWTH of M3. M3 is still growing 7% YOY as of right
> now. At the peak of the crisis, M3 LEVELED OFF. M3 has increased
> 50% since January 1, 2007. This is an extremely critical point, and
> is not widely understood. I have not seen any evidence of money supply
> destruction; seriously, please point me to it if you have a source.
>
> And I'm arguing with you because I usually agree with your posts.
>
>
> www.shadowstats.com/al...

Jun 09 07:53 PM

[Fighting Yoda:]

Fed June 5:
U.S. consumers paid down more debt than they took on in April for the seventh time in the past nine months, the Federal Reserve reported Friday. Consumer credit fell by $15.7 billion, or 7.4% at an annual rate, to $2.52 trillion. It was the second largest decline in outstanding debt on record, exceeded by March's $16.6 billion drop.
Revolving credit, such as credit cards, fell by $8.6 billion, or an 11% annual rate, to $930.9 billion. Non revolving debt, such as auto loans, fell $7.1 billion, or 5.3% annualized, to $1.59 trillion.
The figures do not include debt backed by real estate, such as mortgages or home equity lines. Debt can decline if consumers pay down debt or if banks write off debt.



On Jun 09 01:14 PM Whippet wrote:

> You may want to look at the chart again (link below)- what has plummeted
> has been the GROWTH of M3. M3 is still growing 7% YOY as of right
> now. At the peak of the crisis, M3 LEVELED OFF. M3 has increased
> 50% since January 1, 2007. This is an extremely critical point, and
> is not widely understood. I have not seen any evidence of money supply
> destruction; seriously, please point me to it if you have a source.
>
> And I'm arguing with you because I usually agree with your posts.
>
>
> www.shadowstats.com/al...

Jun 09 07:53 PM

[ScottEX:]

A, I am an Ass. B. I spell drivle with six letters as and when they appear, got a problem with that?

"hedge funds, derivatives, repeal of glass-steegal, and "regulation
> is bad" policy of W and cheney is at the center of the problem."

100% Agree. Facism doesn't work.

Inflation people, look at today's WSJ. More firms cut pay, apple halves iphone, small firms revise pricing.

A recent study of the five commodity bull markets going back to the 70s and compared the run up in the CRB to the surge in CPI. Historically there is a 37% pass through. In the most recent cycle, 2002-2007 the pass through was only 18%.

During that cycle the US received billions in dollars from the Chinese through repression of the Yuan, which our out of control greedy pigs on Wall Street converted into trillions of derivatives paper. I'm proud of the regulation in my great free country. Let's not confuse democracy and regulation. Without it what we have is a sick monkies gone mad orgey. Had Bush and in his cronies not been so diehard in deregulating WS, the credit bubble could have been averted.

During the bubble-leveraged (unregulated derivates orgy) economy of 2002-2007 unemployment went as low 4.4% and industry capacity utilization ran at 83%. Today CAPU rates are 69% and unemployment is pushing 10%.

If anybody here is seeing commodity driven inflation I would like to be on what you are on.

Let's face it, the republicans squandered quite irresponsibly an advantage the US has that all countries would enjoy, being the world's central bank. The political and economic clout the US derives from the world's central banks holding 70% of their reserves in USD is enormous. You can thank Regan and Bush for blowing that. I don't think it's going to be completely devastating but I do see the rest of the world reducing their holding to something like half that in the nearish term. But who knows what the communists in China are really thinking.

Unfortunately, with all the writing clearly on the wall, the US is missing the opportunity to really fix up it's banking system. See Cohen-Lewis in last weekends New York Times.

Anyways, I hate republicans, sorry, look what they've done to the world economy. And for any good reason, unless you count greed as one of them, I count 0.









On Jun 07 10:22 PM Missing_Link wrote:

> On Jun 07 03:35 PM backtoreality wrote:

Jun 09 11:21 PM

[Whippet:]

You're right- only time will tell in the end. But the numbers you quote should turn up in the future M3 reports (funny how the Fed stopped calculating M3 several years ago, huh?) I have seen nothing as of yet. I would argue the debt has been displaced in the aggregate, from consumers and corporations to the Fed balance sheet. Not destroyed.


On Jun 09 07:53 PM Fighting Yoda wrote:

> Fed June 5:
> U.S. consumers paid down more debt than they took on in April for
> the seventh time in the past nine months, the Federal Reserve reported
> Friday. Consumer credit fell by $15.7 billion, or 7.4% at an annual
> rate, to $2.52 trillion. It was the second largest decline in outstanding
> debt on record, exceeded by March's $16.6 billion drop.
> Revolving credit, such as credit cards, fell by $8.6 billion, or
> an 11% annual rate, to $930.9 billion. Non revolving debt, such as
> auto loans, fell $7.1 billion, or 5.3% annualized, to $1.59 trillion.
>
> The figures do not include debt backed by real estate, such as mortgages
> or home equity lines. Debt can decline if consumers pay down debt
> or if banks write off debt.
>

Jun 10 09:25 AM

[Mad Hedge F...:]

But up is up. First of all, let me warn you that reading this paragraph is a complete waste of time. Still interested? There is chatter about that the Fed is considering raising interest rates at its next meeting. After all, where can they go from zero, but up? The bond market is certainly telling us that rates should go higher, with yields on ten year Treasuries jumping from 2.45% to 3.95% since March. This is the usual kind of gibberish you get from financial journalists, who deep into a summer with no real news, resort to making stuff up out of thin air. US industrial capacity utilization is terrible and still falling, while unemployment is still rising at a record pace. Sure, commodity prices have doubled this year. But this is happening because investors are looking for an alternative to the sick dollar, not because there is huge underlying demand by end users. This is one of the reasons why I have recently become cautious about all of my long positions. So I can say with complete confidence that the chances of an interest rate hike are less than zero for the foreseeable future. This discussion did have the one benefit that it did enable me to fill this space in my newsletter.

Jun 10 11:04 AM

[ScottEX:]

Mad Hedge Fund Trader... Here is some great summer journalism here.. Roasting the Pig...

www.youtube.com/watch?...


On Jun 10 11:04 AM Mad Hedge Fund Trader wrote:

> But up is up. First of all, let me warn you that reading this paragraph
> is a complete waste of time. Still interested? There is chatter about
> that the Fed is considering raising interest rates at its next meeting.
> After all, where can they go from zero, but up? The bond market is
> certainly telling us that rates should go higher, with yields on
> ten year Treasuries jumping from 2.45% to 3.95% since March. This
> is the usual kind of gibberish you get from financial journalists,
> who deep into a summer with no real news, resort to making stuff
> up out of thin air. US industrial capacity utilization is terrible
> and still falling, while unemployment is still rising at a record
> pace. Sure, commodity prices have doubled this year. But this is
> happening because investors are looking for an alternative to the
> sick dollar, not because there is huge underlying demand by end users.
> This is one of the reasons why I have recently become cautious about
> all of my long positions. So I can say with complete confidence that
> the chances of an interest rate hike are less than zero for the foreseeable
> future. This discussion did have the one benefit that it did enable
> me to fill this space in my newsletter.

Jun 10 06:47 PM

[Fighting Yoda:]

Fed balance sheet does not spur demand, that is where the problem lies - liquidity trap.


On Jun 10 09:25 AM Whippet wrote:

> You're right- only time will tell in the end. But the numbers you
> quote should turn up in the future M3 reports (funny how the Fed
> stopped calculating M3 several years ago, huh?) I have seen nothing
> as of yet. I would argue the debt has been displaced in the aggregate,
> from consumers and corporations to the Fed balance sheet. Not destroyed.
>

Jun 11 01:52 AM