Why Today Is Different From the Inflationary 1970s 33 comments
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WASHINGTON (Reuters) - Soaring gasoline prices helped drive up overall U.S. consumer prices during May by the fastest rate in six months, but core prices remained tame, a government report today showed. But 12-month core prices advanced 2.3% as expected (see chart above).
Note that core CPI inflation (less food and energy, data here) has been below 3% now for 149 consecutive months, since January of 1996 (shaded area above). Also notice that there is a huge difference between the inflationary 1970s and today - in the inflationary 1970s (fueled by excessive money creation) ALL prices were rising simultaneously at double-digits rates, EVEN the non-energy and non-food items of the CPI. Today, except for energy and food prices, core inflation is contained, low and stable, as is growth in the monetary base, suggesting that the concern about inflation is well... inflated.
Also, compared to a recent peak close to 3% during 2006, the core inflation rate is lower today, and has been generally declining since late 2007.
Rising energy prices alone cannot cause inflationary increases in all goods and services, as the situation today suggests, with core inflation remaining low and stable despite rising energy prices. Keep in mind also that during the double-digit inflation in the U.S. during the 1970s, fueled by expansionary monetary policy, the German central bank demonstrated much greater monetary restraint, and inflation in Germany never exceeded 8% in any year during the 1970s and averaged only 5% during that decade (despite experiencing the same increase in world oil prices as the U.S.).
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This article has 33 comments:
1. The dollar has fallen against all major currencies.
2. The price of oil and its products has at least doubled in the past year.
3. The price of food has nearly doubled in the past two years.
All three phenomena are another way of saying "the US dollar is suffering from inflation".
dshort.com/inflation/i...
We don't yet have wage inflation, which creates an inflationary spiral. But the level of consumer suffering is indeed approaching the '70s.
yes, i said shelter...
one of the great ironies of declining housing prices is that only new buyers benefit but there are far fewer of them today than in the recent past when teaser interest rates and no money down mortgages drew millions into the market. many are now permanent exiles from the market, either having or will having lost their homes to foreclosure or becoming walkaways because the economics now work against them. notwithstanding recent declines, houses are still too expensive for many entering the workforce....partly because of anemic wage growth and loss of many higher-paying jobs to outsourcing but also due to more stringent lending standards which have eliminated many would be homeowners from the market. the bottom line is that declining home prices have helped the few but hurt the many. look for more downside. housing prices are still too high.
given the choice between rising nonwage inflation only or rising wage and nonwage inflation i'll take the latter. it might not be what the fed would like to see, but since when did the fed ever give a damn about the man on the street?
a personal note:
i sold my overpriced house in july 2007. i subsenquently rented an apartment on a 7 month lease but i moved when they tried to increase my rent by about 7 percent when the lease expired. the lease on my new apartment expires in august and i was just informed that my new rent will cost me 15% more. i have lived there a year. i'll move, of course, as much to deny them the privelege of screwing me as any rent i might save. don't count on experiences like mine to be reflected in the consumer price index. the feds like their numbers massaged.
Nevertheless, your point is well-taken; "owner's equivalent rent" occupies an absurdly large portion of the CPI relative to either real rents or the actual price of a house. No one seriously doubts that it understates price increases except perhaps our author; the only real controversy is one of degree. If real prices are rising by 5% a year, we're probably ok (the long bond is rapidly approaching that level). If they're rising by 12% a year, we're in big trouble because the bond and oil vigilantes simply don't have enough market power to force the issue that far.
I.E. the Core CPI.
However...if you're like me: If you regularly buy fuel, use transportation, need hospital services, eat food at home, pay tuition, require medical care, eat out, drink booze, and pay rent...
DONT TELL ME THAT THERE IS NO INFLATION!
It might be time to go back to school or at least down to the end of the street.
Get real, you are being suckered.
Give me a break, G Bush and a unfiied republician congress during his first term expanded spending more than any administration in history, perhaps more than all combined. Give your comment on that, remember the quote from Bush "I want the prescription bill on my desk now". One thing mr pres- you didn't fund the bill- you passed the cost to our kids. You talk about Obama. I would rather have 'tax and spend' than "tax cut and spend". The latter passes the cost of social programs to our kids. It is the republican way
This has been a credit card administration.
Gold crashing as well as real estate. We are deflating as Japan did during the 1990s and we did in the 1930s. When debt is removed (what is happening now) its called deflation.
Most of these people dont beleive the government and are looking for a man on horseback (a Hitler).
Jakester is right. The rest of these people must be given an F. I'm sure none of them are in your classes.
On the other hand, high inflation made it easier to pay off fixed rate mortgages. A 6% fixed mortgage looks cheap when salaries are rising to keep up with inflation.
An ordinary insured S&L account payed 5%, certificates of deposit (CDs) payed more and money market mutual funds payed much more.
Who is cooking the numbers, us or them?
The majority of all consumer goods sold today in the US is manufactured abroad, not in the US. The low cost of consumer prices reflects therefore the high productivity of foreign economies, not the productivity of the US economy. Secondly, these foreign made consumer goods have not yet been properly paid for (persistent trade deficits). We pay for these consumer goods not with our own goods and services but with financial assets (like US Treasuries). However, financial assets represent claims on future production of US goods. That is, consumer goods in the US are being paid for with promises of future US production of goods. The deception is in the fact that this future US production will never materialize, at least not at today's low prices (indicated by the looming bankruptcy of Ford and GM). In order to arrive at a correct figure of the consumer price index, one has therefore to take into account the growth of the total amount of US financial assets held by foreign creditors. This sum (many trillions of Dollars) represents the unpaid cost of imported consumer goods.
Looking at the second meaning of the word inflation, namely the growth of the money supply, then we experienced during the past 25 years an almost hyperinflationary growth of the money supply. That growth is visible in stock market charts, in the cost or real estate in New York City and in the level of yearly bonuses paid to people working on Wall Street.
To sum up, the past 25 years were indeed a paradise for consumers and people working on Wall Street. The price for these excesses has not been paid yet. But we can not avoid it in form of either a global depression or hyperinflation depending on how the central banks decide to rebalance the system.
There are no free lunches. This wisdom hold true not only in daily life, but also in macro economics as well as in financial engineering.
You are taking food and energy out of core inflation to give the impression that things aren't is bad as they seem. This is a futile exercise. You need to complete the opposite analysis and state the inflation rate of food and energy, the two most important commodity classes. Frankly, your comparison to the 1970's is useless since we weren't competing for these commodities with BRIC at that time.
People need a place to live and to eat; they need to buy gas, and they need to buy food, soap, healthcare, and medicine. They also need to purchase electricity, heat, and water. Almost all other purchases are optional. They can put off purchases of new clothes, furniture, electronics, new cars, and anything else they "don't really NEED".
The reason inflation is so low in the non-commodity sectors at this time is due to heavy discounting as retailers try to convert their inventory to cash as quickly as possible. There are record number of restaurants, retail stores, and other business closing their doors. Discretionary purchasing power continues to shrink. Tne total net worth of Americans and American corporations is taking a big hit.
This is payback for government and corporate mismanagement and American's appetite for quick profits, conspicuous consumption, greed, and lack of patience.
There is no need for you to make assumptions and analyses that have nothing to do with reality. The real problems are right in front of your eyes.
What they need to do next is to calculate 70's and 80's inflation using the current "new and improved" index". We could prove that inflation was really only 2.5% back then and that stagflation never occurred!!
OK so maybe you're right, the real value of a blue chip higher education has deflated.
people, we have to ask you to step away from the table. the public treasury is not bottomless. we cannot increase the amount paid out, just because people are poor. a certain amount of poverty acts as an incentive to the general population. we cannot send paychecks out to stimulate the economy, just because we like business to grow a little longer.
sometimes, business will not grow. ever hear of farmers letting their fields go fallow? you have to let them replenish themselves.
whenever you vote for more public spending you are robbing peter to pay paul. even if you are not using a gun, it's still a crime.
the question of whether government has spent money irresponsibly and dragged us into an unnecessary war is not a question i want answered with more irresponsible spending. the argument i hear is that we have billions to spend on military bombs, planes and tanks, but we have people starving right here. actually, we don't have billions to spend on war, some idiot borrowed the money and now we have to pay it back, not spend more.
we have been very fortunate, living off of cheap labor from foreigners for many years. now, they are raising the cost of living. some of you think that we should spend until we can no longer borrow and then go bankrupt. it worked for you on your credit cards, it worked on your mortgages, so it should work for the whole country, right?
you may think everyone else is to blame and the world owes you for all the suffering you've done. you weren't born rich, you didn't hit the lottery, no one died and left you money, oprah didn't give you anything, you didn't own a house when they appreciated, you didn't own gold when it appreciated, you didn't own tech stocks when they appreciated either. that's tough! tough luck, maybe god does not want you to have wealth.
maybe god wants you to live as a poor person, to suffer and to experience the depth of his compassion. maybe god wants you to get a job and give all your money away. god does not want you to take money away from other people to do his work. he can do that himself. just take care of yourself and your family. try to make your little corner of the world a better place in which to live. don't throw trash out your window. don't waste our precious resources, even if you can afford to do so. ask your neighbors if they need anything when you are going to the store. be of good cheer.
And maybe even an explanation of how the world's inflation has been running at 5-7% for past several years and the USD has been devaluing and the US's inflation is still 2-3% under the world's inflation level. Now that's real magic!!!!