Inflation: Too Early to Worry?

The real worry right now should be deflation, as we have not yet beaten back all of the ill deflationary effects of the financial crisis. Nevertheless, a growing number of market participants see inflation as a longer term worry. With unemployment high, a cost-wage push will not be part of that equation. Nevertheless, increases in food, oil and commodity prices could create problems down the line as this Bloomberg News video on milk prices attests – they are talking about a doubling in milk prices in 2010.

And, remember, before 2007, $70 was an unheard of, recession-inducing price for a barrel of oil. Yet, in the midst of a deep, deep global recession, we have $70 oil. What does that tell you about likely prices in a recovery? Is it too early to worry about inflation?

Comments

[Shocksink:]

Oil $70 is inflation adjusted!

Jun 22 10:18 AM

[Shocksink:]

Oil at $70 is inflation adjusted.

Jun 22 10:19 AM

[conceptwizard:]

All of this flap about the Fed driving the economy into hyperinflation because it is creating money on its books reflects a fundamental misconception about how our money and banking system actually works. In monetizing the government’s debt, the Fed is just doing what banks do every day. All money is created by banks on their books, as many authorities have attested. The Fed is just stepping in where the commercial banking system has failed.

So why don’t Fed officials just say that is what they are up to and put our minds at ease? Probably because they can’t without exposing the whole banking game. The curtain would be thrown back and we the people would know that our money system is sleight of hand. The banks never had all that money they supposedly lent to us. We’ve been paying interest for something they created out of thin air! Indeed, their credit money is less substantial than air, which at least has some molecules bouncing around in it. Bank credit exists only in cyberspace.

The true path to economic recovery – the path from an economy strangled in debt to one blooming in prosperity – is to reclaim money and credit as public resources, transforming money from private master to public servant.

Jun 22 10:29 AM

[sheridan:]

Is there any other outcome besides inflation?
The Country cannot service its total debt and has no way to do so in the future, even with an imaginary 100% tax rate.
So Gov't can default- never going to happen when you own a printing press or Gov't can inflate their way out of it.
I cannot come up with any other solution.
The rein of the dollar is over- it's just going to take some time for transition (10-20 years). Asia has all the money and all the people- don't underestimate what has just happened in this Country- Soros has it right. Doesn't mean the US won't be a nice place to live long term- still have all the food, all the water and democratic government but the run is over. I'm taking lessons in Mandarin.
P

Jun 22 10:50 AM

[I need more...:]

All the Asian export economies, which will suffer worse than non-export countries, are toast.
www.philstockworld.com...


On Jun 22 10:50 AM sheridan wrote:

> Is there any other outcome besides inflation?
> The Country cannot service its total debt and has no way to do so
> in the future, even with an imaginary 100% tax rate.
> So Gov't can default- never going to happen when you own a printing
> press or Gov't can inflate their way out of it.
> I cannot come up with any other solution.
> The rein of the dollar is over- it's just going to take some time
> for transition (10-20 years). Asia has all the money and all the
> people- don't underestimate what has just happened in this Country-
> Soros has it right. Doesn't mean the US won't be a nice place to
> live long term- still have all the food, all the water and democratic
> government but the run is over. I'm taking lessons in Mandarin.<br/>P

Jun 22 11:54 AM

[Moon Kil Woong:]

The Fed's and Treasury are learning that it's hard to do QE when no one wants your bonds. Furthermore, to complicate things it's hard to do QE when the fastest thing easing is your currency. Sure inflation might not be on the horizon, in Euro terms. That still doesn't help much in dollarland.

Jun 22 12:28 PM

[user396040:]

I think it is way too early for inflation - we will likely get it in 2012 or 2013. But worrying about it now, is like worrying about supply chain bottlenecks due the capacity constraints that will emerge in the automobile industry due to pent up demand. It is waaay off in the future and very speculative. The immediate problem is overwhelmingly slack demand and enormous excess production capacity and the danger that deflation will set in. As I have pointed out in other posts, deflation sounds relatively benign(who can argue with lower prices) but, because wages are sticky on the down side, deflation is almost always accompanied by higher and higher unemployment as sticky wages make labor more and more expensive in real dollar terms. This is the real danger we are facing now - not inflation.

Jun 22 05:56 PM

[prudentinve...:]

Inflation has been much higher than reported for many years, and is now accelerating even more. Just save your supermarket receipts and compare them year to year, or compare your utility bills, your property taxes, dentist bills, college tuition, highway tolls, etc.

The clever notion of "hedonistic adjustment" allows inflation to be understated, because it considers technological progress to be deflationary, i.e. if you can buy a big-screen color TV for the same price as a small B&W TV in the 70's, it is counted as a reduction in the cost of living. This is specious in itself; and more so when you consider that there is no corresponding "declining quality adjustment". Nowadays, you buy a pair of (imported) shoes for $80 and they fall apart after a year. Thirty years ago you could buy (US-made) shoes also for $80 and they lasted five years. Statistics will show zero inflation in shoes (both are $80), but in reality, the price of shoes has effectively risen by a factor of five (up 400%), because you have to buy five pairs instead of one.

Jun 22 06:35 PM

[Ergo:]

Seriously, anyone managing a household budget knows that inflation is ongoing. We recently surveyed our rising expenses and found we can't reasonably cut much at all. Groceries, insurance, utilities, phones, internet, clothing, gas, mortgage and taxes are all mandatory for busy professionals - and so is living in a city where we can find work. Thus, lower prices on luxury cars or giant TVs does nothing to help a family budget. Now, when living expenses AND taxes rise, does anyone not see the trouble ahead? Or will gov't job creations make up for it?

Jun 22 07:26 PM

[cameroni:]

Thanks for that Edward.

Unemployment and wages really are the wild card in the inflationary future many or us predict. It is not too early to worry about inflation but if we do experience a 1930's style wage crash due to high and persistent unemployment then we will all have to reassess our positions.

Both inflation and hyperinflation can occur simultaneously with high unemployment. But there is a tipping point to keep in mind. Once we enter the wage destruction spiral prices for domestically produced goods and services will drop across the board. I don't entirely rule out this possibility. We are in a waiting game right now.

While asset prices decline and food and fuel prices rise we have still to see if real employment levels will carry the day or change the course of our history. Right now it is 50/50.

Stimulus and bailouts have the potential to vaporize the currency while boosting the greater economy yet employment losses threaten to reverse all the benefits of stimulus poured into the system.

(But hey, lets face the truth, the banking stimulus packages are no more than authorizations to lend. If they don't lend then there won't be the suspect inflationary pressures. Just smoke and mirrors. Watch what they do is my byword.)

As I have said before, we really appear to be at risk of an inflationary depression based on the facts as we know them. And that is a worst case scenario. Most of us would prefer one event or the other but both is just too much to bear.

Jun 23 01:03 AM

[I need more...:]

Wow, where do you live? I live in affluent Austin, rated third city least affected by downturn, and everything is way cheaper. Food, clothes cut in half, huge sales on everything, property taxes down, etc. Gas of course fluctuates, but I can't think of anything else that is more expensive.



On Jun 22 06:35 PM prudentinvestor wrote:

> Inflation has been much higher than reported for many years, and
> is now accelerating even more. Just save your supermarket receipts
> and compare them year to year, or compare your utility bills, your
> property taxes, dentist bills, college tuition, highway tolls, etc.
>
>
> The clever notion of "hedonistic adjustment" allows inflation to
> be understated, because it considers technological progress to be
> deflationary, i.e. if you can buy a big-screen color TV for the same
> price as a small B&amp;W TV in the 70's, it is counted as a reduction
> in the cost of living. This is specious in itself; and more so when
> you consider that there is no corresponding "declining quality adjustment".
> Nowadays, you buy a pair of (imported) shoes for $80 and they fall
> apart after a year. Thirty years ago you could buy (US-made) shoes
> also for $80 and they lasted five years. Statistics will show zero
> inflation in shoes (both are $80), but in reality, the price of shoes
> has effectively risen by a factor of five (up 400%), because you
> have to buy five pairs instead of one.

Jun 23 08:55 AM

[Arthur Cutten:]

Some Common Fallacies About Inflation and Deflation

jessescrossroadscafe.b...

Jun 23 10:51 AM

[Tony Daltorio:]

Have you ever left the basement of your home?

Asian economies, led by China, are now much reliant on internal demand growth than demand from overleveraged Americans.


On Jun 22 11:54 AM I need more cowbell wrote:

> All the Asian export economies, which will suffer worse than non-export
> countries, are toast.
> www.philstockworld.com...
>

Jun 23 03:41 PM