Commodity Price Inflation Is Inflation and Is Happening Now

Includes: DBC, DIA, QQQ, SPY, UDN, UUP
by: Peter Cooper

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.