Seeking Alpha

Inflation: The 5 Factors All Investors Need To Understand

by: Jason Tillberg

November's inflation figures continue to decelerate.

Upon review of all the main factors that contribute to inflation, each one suggests lower inflationary conditions ahead.

These factors are complicated and warrant a deeper explanation for investors to better understand inflation.

The inflation figures for November showed a slightly lower year over year percent change Vs. the previous month, however, it showed that the trend is still deceleration. I expect this trend to continue.

Inflation grew 2.21% year over year in November. It peaked this past year in July at 2.89% and has been slowing since. I am of the opinion that inflation is heading lower and I would not be surprised to see negative rates of inflation in 2019.

Predicting inflation begins with understanding the factors that go into what the rate in inflation will be in the first place. This article aims to provide some light into those factors to help you make a better judgement yourself about the future of inflation.

Inflation is simply the measurement of how much your currency will buy relative to a previous time period. In most cases, we measure inflation on an annual basis.

For wage earners, the goals is that for every $100 you earn, you want to be able to buy more goods and services in the following year. If inflation is 2% and you were able to get a 3% raise, then you'll have an additional $1 in purchasing power and a slight improvement in your standard of living.

For investors, your goal is to, at a minimum, meet the rate of inflation for your investment return. The only way to earn a real return on your investment is if it provides additional purchasing power at the end of the day.

There are 5 major factors that go into what the rate of inflation will be and I'll go through each one. After, I'll summarize up why each one is suggesting deflation may be on the way.

Credit Growth

Credit is debt. When you take out a loan, you're in debt to someone. Credit, debt, loans, these terms are all rather interchangeable.

For the sake of inflation, it's a function of total debt growth per capita. It doesn't matter if its an individuals debt, a corporations debt, a school districts debt or the Federal government's debt.

So what the inflation watcher needs most be concerned with is the aggregate debt growth. They also much take into consideration the total population of the people this debt falls under.

The above chart shows "all sectors" debts and loans. It only goes out to the Q4 of 2017, not sure why it's not being updated, but the chart will serve to give justice to this principle.

We're close to $70 trillion now in aggregate debt in the U.S..

In the chart below, I show the year over year percent change in aggregate debt per capita and the rate of inflation using the CPI index.

The main reason these two lines are not equal to one another is because there are great efforts made to reduce the cost of producing something. From investment and good engineering, productivity is increased and that brings about a reduction in the cost to make something.

That brings us to our next contributing factor to inflation.


Productivity is simply measured in output per hour. How much work can you get done in 1 hour and at what cost? One is always economizing their current situation and trying to find ways to reduce the cost to make or do something. That's the result mainly of free market capitalism, which involves competition.

Here is a chart of the year over year rate of productivity since 1948.

Taking this rate and adding it to the rate of inflation, we can see how the two lines become closer adjoined.

If you notice, in the mid 1980's and again, although less so, in the 90's and early to mid 2000's, credit growth was still higher than the rate of inflation + productivity.

I think I know why.

While productivity is home grown and honest. There is another way to reduce the cost of something and that is by having substantially cheaper foreign labor do it for us.

Currency and Trade

Having a strong dollar allows U.S. consumer to purchase foreign made goods and services at relatively lower costs. In some cases, the cost of foreign labor is so low, every effort is make to get those workers to produce the products we buy.

American's have traded improving productivity at home with simply outsourcing it overseas and saving huge amounts of money and time.

Here is the inflation index of apparel.

In 1990, 50% of clothes bought in the U.S. were made in the U.S.. By 2000, just 28% were made in the U.S.. Then by 2013, just 2% of clothes bought in the U.S. were made in the U.S..

This has put a lid on the cost of clothing. I can go to Walmart and get a pair of sneakers for $10 today thanks to trade with China.

Here is a chart showing the net trade balance of goods and services as a percent of GDP.

We started to really import more stuff than we exported in the 1980's and again in the 1990's into the 2000s. We're still in a huge hole with trade.

This in turn, has facilitated the ability to create a lot of new debt and not have the inflationary impact if normally would have.

This is a huge factor in what had contributed to both to both the 1990's stock market bubble and even more so, the housing bubble in the 2000's.

If we were to see a return to balanced trade, that would be very inflationary and it would be met with lower living standards for sure.

Demand and Scarcity

Demand and supply will play a role in the cost of commodities in particular.

In a slowing economy, demand for houses and cars may fall and that will result in lower prices.

The CRB Commodity index is a good reference to the cost of commodities as it's an index that makes up 28 commodities.

The cost of oil could make a big difference in the cost of gas for cars and heat for homes. Also, tires for your car as each new car tire uses about 7 gallons of oil.


Confidence is the final frontier of inflation. Economist Martin Armstrong introduced me to this concept. It's the confidence in the Government that will make or break a country's currency. Once confidence goes, the ability to issue debt goes. If a country can't issue debt, it resorts to the printing press. Once that happens, it's game over and you get a hyperinflation.

This falls under one of those things "what's been will be again, nothing new under the sun." At some point, the confidence goes.

Where We Stand Today

Loan demand is getting weak. New home sales are slowing, new car sales are slowing and demand for loans in both mortgages and auto's is showing weakness.

This suggests that we are in for lower rates of aggregate loan growth.

Vehicle sales are holding their own, but these sales figures could be in for some regression to the mean. By that I mean we could very well see lower car sales in the months and quarters ahead.

The net percent of banks reporting stronger demand over the previous quarter for auto loans continues to show weaker demand. With interest rates rising, this may soon get worse.

New home sales are decelerating as well.

Demand for construction loans for commercial real estate development purposes is especially showing weakness.

These are just some factors to consider with respect to the current state of loan demand growth.

Weaker loan demand means weaker inflation coming from the monetary side of things.

Productivity is strong and I am seeing that after we get the figures for the 4th quarter, we're could very well have the best 2 year rate of productivity growth since the recovery of the great recession.

High productivity is knocking down the monetary inflation from debt growth.

The dollar is still very strong and out trade deficit is still very high. This means we continue to import deflation from our less expensive labor partners.

Commodities are moving lower. Oil in particular is now lower in price from a year ago.

The CRB index is now lower than a year ago and looks like it has a very good chance of being lower throughout 2019 Vs. 2018.

Confidence in the U.S. dollar and the U.S. in general, relative to the rest of the world is still strong. This is reflected in the President's approval rating and the strength of the dollar. Under a condition of declining confidence in the U.S., we would likely see rising gold and silver prices.


Invest accordingly to a coming year where there is very little to suggest we will see higher inflation ahead. Real wages are likely to be very strong in the coming year suggesting the consumer will be helped by the lower costs of goods and services that would come about with lower inflation.

The one investment that stands out in my judgement that should be good is the iShares 20+ year treasury bond fund (NASDAQ:TLT). Lower inflation should produce lower interest rates on longer dated bond securities. This will make existing bonds that have longer maturities become more valuable as they have fixed higher yields.

Watch for the Fed to lower rates at some point in 2019 so to entice borrowing again.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.