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Is Inflation Finally Here?
This article originally appeared in The Daily Capitalist.
Inflation is occurring but it is not what you think it is.
There were a number of articles Thursday commenting on the producer price index (PPI) numbers saying that "inflation" is upon us because prices are rising. I think we are on the verge of experiencing true inflation, but the PPI is mostly revealing supply and demand factors rather than price inflation.
The month-over-month increase of 1.1% is high (13.2% annualized) but it is a result of food and oil prices increasing internationally because of demand, temporary supply shortages, and OPEC manipulation. This shows up in the year-over-year index as well, at 4.1%. But again, the core Y-o-Y is 1.4%. Monthly core prices are up only 0.2%.
The Consumer Price Index for December mirrored the PPI:
The CPI in December jumped 0.5 percent, following a modest 0.1 percent rise the month before. Analysts had projected a 0.4 percent boost for the latest month. Excluding food and energy, CPI inflation came in at 0.1 percent, equaling the rise for November and matching expectations.
By major components, energy jumped 4.6 percent, following a 0.2 percent rise in November. Gasoline spiked a monthly 8.5 percent, following a 0.7 percent increase the prior month. Food price inflation actually slowed to 0.1 percent from 0.2 percent in November.
As in recent months, shelter helped keep the core rate soft. The index for shelter rose 0.1 percent for the third month in a row. The rent index rose 0.2 percent while the index for owners' equivalent rent increased 0.1 percent. Motor vehicles also helped the core. The index for new vehicles was unchanged in December while the used cars and trucks index fell 0.1 percent, its fourth consecutive decline. Also falling in December were the indexes for recreation, communication, and household furnishings and operations.
So where is the price inflation everyone is talking about? In a true inflation all prices go up. Here we are seeing supply and demand issues and many commentators confuse the two. Inflation, again, is an increase in the supply of money, and one of the impacts of inflation, among others, is price increases.
So are we also experiencing inflation? I believe we are and the core PPI increase of 1.4% is an example of price inflation when you consider real estate price and rent declines, and things like retail "deflation" found in small packaging, both considerable headwinds against price inflation.
Since inflation is the expansion of money supply, is that increasing?
Money supply continues to expand. As Michael Pollaro shows in his True (Austrian) Money Supply data (see The Contrarian Take), money supply has been increasing and is likely to increase further this year. In his December Money Watch he argues for higher money supply growth in 2011:
First, the recent surge in TMS2 – up an annualized 10% the past six months and 15.2% the past three – should be supportive of higher twelve-month rate of change increases over the coming months.
Second, the full impact of the Federal Reserve’s QE II asset purchase program was not felt in the money supply aggregates. Coming as it did mid-month, plus what appears to be a larger than projected draw-down in the Federal Reserve’s Agency portfolio, QE II yielded an annualized impact of just $600 billion in November instead of the projected $900 billion.
Third, and most important, private banking institutions are not only continuing to print money, but appear to be doing so at an accelerating rate. In fact, Uncovered Money Substitutes, i.e., bank deposit liabilities not covered by bank reserves, the issuance of which is the result of the banking systems’ efforts to lever up its loans and investments on top of what is currently a mountain of excess reserves, is growing at a year over year rate of 19.9%, a post credit crisis high.
This is the reason I part with the deflationists on inflation versus deflation. You have to look at money supply growth to determine what is happening. It is growing, but will it explode in 2011?
While Pollaro also makes a good argument (above) for credit expansion through banks buying securities, I believe it will take bank credit (loans) to make explosive money growth and dramatic price inflation happen.
Pollaro believes that loan volume, and thus money growth through credit expansion, is increasing. I too have been following bank loans and they have been growing, but the activity is primarily at the large banks. I believe that bank loan expansion has been rather modest. Pollaro looks at the chart of total loans and leases of all commercial banks (LOANS), based on a scale of percentage change from a year ago, and gets a chart that shows an apparent dramatic increase in loans:
While true, I prefer what I believe is a more realistic view of the same chart (LOANS) but measured by the volume of loans being made. And that view shows loan volume continues to be weak:
Pollaro also notes, correctly, that bank excess reserves (EXCRESNS) have been declining, something I have also pointed out. But as I see it, the decrease has been modest. The economic assumption behind the decrease is that this vast hoard of money the Fed "printed" has been sitting in banks vaults and not being lent out. I put "printed" in quotes because the Fed didn't really "print" money. Remember this isn't money base (currency), but rather an extension of credit the Fed made to banks during the early stages of the collapse to provide liquidity to the system, and it was created out of thin air, or by a keystroke, if you will. Bankers woke up the next morning and saw the Fed credited their accounts at the Fed with almost limitless credit. Banks create more money through credit expansion because the rules only require them to keep 10% or less on reserve (multiplier effect). The Fed's dilemma was and still is that banks didn't lend and thus expand the money supply as they wished. They believe, falsely, that money supply expansion will create economic growth.
Thus an indication that banks have started lending again will support the argument that we are headed for price inflation.
Lending is starting to loosen up, and is expanding the money supply. But bank lending is far from rapidly expanding. Latest Fed numbers show loan activity still contracting--for the third straight quarter. The big banks just broke even on their lending activity (i.e., loans made and loans retired were equal). Activity is still shrinking at the small banks. I still see substantial problems in the economy that would not lead me to conclude that businesses will start borrowing again as in a normal post-recession recovery, nor do I see banks lowering loan underwriting standards to accommodate marginal borrowers who need the money to stay afloat. Look for steady improvements but nothing dramatic in 2011 on this front.
I think quantitative easing (mostly QE I) has been the major factor in money supply expansion (see Pollaro's True Money Supply's data), and that QE II will further increase money supply this year. It is likely that because of long-term problems underlying our capital structure that economic growth will remain stagnant. As unemployment continue to remain high, the Fed is likely to engage in more quantitative easing in 2011, as the Administration pressures them to "do more."
This is why I think the deflationists and the hyper-inflationists are wrong. This is why we will have stagflation.
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I'm trying to picture you with a personality.
That is funny.
**In a true inflation all prices go up.**
In all my years this is the first time I've seen anyone say this.
Isn't the classic definition of inflation an increase in the money supply which results in a substantial and continuing rise in the GENERAL price level? I might add some price or wage increases may not be seen in graphs or charts for some time (especially wages).
Mr. B:
You are absolutely correct. While prices do not rise evenly, eventually all prices rise. As the banksters get the first new money to their customers, they bid away goods and labor at at the old prices: in essence they are getting something for nothing. The poor bastards at the end of the economic chain just see rising prices. Price increases are just one of the effects of "inflation" (i.e., a rise in money supply not accompanied by a rise in production). It gets worse and price and time distortions cause malinvestment which results in the inevitable bust.
Inflation is when the value of a currency decreases and the result is the price goes up on everything. We are having an epic battle between a deflationary economic environment and the Fed's highly inflationary money printing. In the end, if the Fed stops printing, deflation will rule the day.
Which is why they have an inflation target. They can never let a dollar buy more or the game would be over.
Inflation is a rise in the general level of prices. This does not mean all prices are rising, or that prices rise proportionately or evenly.
What he said. Inflation doesn't do away with the effects of supply and demand, and the general economic clusterfuck we're in will affect both.
Inflation is an Ice Cream sandwich. mmm yummy.
This is true. And poets have been curiously silent on the subject of cheese.
And bastards.
I once made a child over cheese and with wine
She told me to take her and make her all mine
I did this with Cabernet, Gouda, and thrusts
My seed I did spill - yet not on her bust
The bastard she bore was part wine and part cheese
The child was certainly part her and part me
It cost me a pretty penny, a farthing, an ounce
That baby that passion o'er temperance did trounce
Niiiiiiiiiiiiiiiiiiice! Very impressive!
Thank you, and thanks for the idea :-)
It's to early to decide what the overall outcome is.
There are places in the economy that have deflation. Housing, car prices,...
But in consumption goods we have inflation.
In my opinion:
What influences the day to day life the most wins the draw.
That means: Food, Energy and clothing are prime.
Cars, houses: Luxery.
AND:
The luxery goods are the once that are mostly still made/constructed in the US/EU.
So de deflation over there creates a deflation in wages.
Less money to spend on the prime goods. => Extra inflation.
So Prime goods = Double inflation.
Luxery goods = Deflation.
With double inflation I mean that the inflation is twice as high as the deflation in the goods produced. So inflation wins.
Just my 2 Silver Ounces
HAVE A GREAT WEEKEND, GET LAID, GET DRUNK AND GET LAID AGAIN!!
SAYONARA BITCHEZ!
luxury...
l-u-x-u-r-y.
luxury.
One tequila, two tequila, three tequila, floor.
it's simple, really.
Domestic deflation, asset inflation. Rich get richer, poor get poorer.
The fundamentals of life remain constant, over time.
Will stagflation cause riots too is the real question. I guess stagflation is just another indicator of "recovery."
Here! All!! About!!! It!!!!
Food Riot(s) a Buy Indicator! The Recovery is HERE!!!!
Oil... Riots.... BUY! BUY!! BUY!!! ala' Cramer Bitches!
look inside yourself, and you'll realize the truth...
there IS no inflation