Central Bank Inflation & Spending Recovery from the Deflationary Abyss

EconMatters's picture

By EconMatters



Cocoa Prices & Inflation


Everyone is currently worried about inflation with the central banks printing like there is no tomorrow. But the actual inflation numbers are much less than people think inflation is in their everyday lives.  


For example, Let`s look at Cocoa prices, literally at the bottom of their five year range at 2,227 per ton, well below the 3,800 per ton level established in March of 2011.



Rough Rice Prices & Inflation


If we take Rough Rice which closed at $16.34 per cwt. it is well below the highs of $22.65 and $19.02 per cwt. established in April 2008 and September 2011 respectively. Sure there is a general trend higher in Rough Rice if we go back to 2003, but how actively traded was the instrument back then from an overall investment standpoint? However, the bigger picture of the last five years shows no real signs of inflation for a major food staple in the world`s diet. 



Wheat Prices & Inflation


If we look at Wheat prices which closed at 756 cents per bushel or $7.56 per bushel these prices are also well below the highs of $13.00 per bushel and $9.65 per bushel established in February 2008 and April 2011 respectively. Again Wheat prices are much higher than 2003, but markets were so much smaller back then from a global and fund perspective. 



There are just a lot of investment dynamics that modern markets with ETFs opening up additional investment options, and electronic markets allowing for greater participation levels, plus the natural progression of inflation of assets over time that play a large role in these elevated prices during a 10-year time span. 


However, it should be noted that despite the price spikes, and inflation fears in the media and the investment community, Wheat prices for the most part have been pretty stable the last five years. Not exactly runaway inflation for a mass consumed food staple! 


Emerging Markets & Inflation


There is no doubt that there is food inflation in emerging markets with some of the cause due to central banks exporting some inflation pressures, but most of the food inflation these countries experience is due to inefficient food supply chain issues, and poor governmental policies regarding currencies and financial market structural issues.


Of course population factors in many of the emerging economies add their own set of price pressures as well. But these issues are nothing new and not a direct result of central bank monetary policies in the developed world for the most part. 


Higher Spending Levels & Inflation


In conclusion, for there to be runaway inflation in the developed economies that everyone fears right now it is going to take much more spending pressures by consumers along the entire supply chain of goods and services needed for everyday living. Not just a couple of areas like Healthcare or Education which exhibit definite higher inflation trends, and are actually mainly the result of government, corporate and insurance related subsidy issues. 


Fed Injected Liquidity Chases Stocks & Bonds Not New Clothes


There just isn`t the demand needed to push up spending levels to the point necessary for more capital chasing fewer and fewer goods and services. It is still skewed in the opposite direction, despite all the increase in monetary capital, but this capital isn`t chasing essential goods and services in the economy. 


The loose monetary capital is meant to fill the void and help offset the lack of actual consumer spending in the economy, and the nasty effects of the deflationary, deleveraging process. The one area where we experience inflation due to the central banks is in more capital chasing fewer investment opportunities, and thus prices rise in stocks and bonds as a result during this loose monetary policy period. 


But consumers are not so well off, or flush with cash, that they are massively consuming at the levels needed to cause major inflation pressures in the goods and services area of the economy. 


The Wealth Effect & Spending


The wealth effect will even be less than policy makers would like because not everyone is invested in 401k`s in the stock market, and investors don`t feel comfortable enough with their retirement levels to start cashing out major amounts, and putting this new found wealth back into the economy. Shoot investors are just now back to the level they were five and ten years ago. 


In addition, the problem is not all assets can be reflated as many companies have gone out of business with the tech and financial market collapses, that investment capital is forever lost, and completely deflationary in nature. You can`t get back to even if you were completely wiped out in an invested company, or you were wiped out so bad, that you pulled your money from the market. 


Other examples are small businesses that went bankrupt and lost all their built up equity in the business, or homeowners who lost their homes and all the money they invested over the years of home ownership. If you bought at the top of the housing market you are also caught in the deflationary trap. 


That is what makes re-pricing in assets such a nasty process, and very deflationary in nature. There is so much personal wealth that is forever lost, and nothing central banks do from a monetary perspective can ever bring this wealth back into circulation chasing goods and services in the economy.   


Banks have recapitalized their balance sheets; Consumers still have a long way to go!


Banks and financial institutions have enjoyed the fruits of the asset recapitalization in markets far greater than actual retail investors participating in financial markets over the last 10 years. Maybe if the Dow goes to 25,000 new investors will all be rich and pull this money and put it to use buying goods and services in the economy. 


But there just aren`t enough actual consumers of overall goods and services who are doing so well in their personal finances given that wages have been stagnant for seven years to increase the spending part of the curve so that there is more capital chasing fewer goods. 


The Underemployed & Unemployed Not Flush with Cash to Spend=Deflationary Pressures


As I said earlier, it is still a buyer`s market, i.e., please buy the goods and services that we bring to the market.  With the high number of the total unemployed or underemployed still putting substantial deflationary pressures on the demand for goods and services in the economy because they lack the financial resources we have a while to go before runaway inflation rears its unmanageable head in the developed economies of the world. 


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MrSteve's picture

Check out this chart of raw material prices since 1915 and decide if there has been "inflation".... or look at CRB Index on your favorite chart site.


Most descriptions of inflation are baffle-gab, reality-cramping explanations showing more confusion and mis-direction than understanding. Start with a purchasing power comparison of one currency with another and you'll be better informed than any talking head.

Kayman's picture

I used to trade nails 35 years ago.  Ex: Japan 12penny nails were $12 per Cwt. I bought a 50 pound box last week at $164/CWT. Same product, no changes.  And there is no inflation....

pashley1411's picture

Like others, I have a problem with the article, because inflation is found from entities with pricing power (government and government-supported oligarpies and cartels), and not in goods in the competitive market (i.e., cocoa).    So government salaries, and pensions, have rip-roaring inflation, same with health care where socialized, education, militiary and defense "services". 

Meanwhile, commodities-and-other-poor-smucks-who-make-something get crushed, comparing commodities prices makes no more economic sense in 21st century America than it did in 1960's Soviet Union.

sodbuster's picture

Do you have a chart that can show a packaged food product that is the same or higher priced, but contains 10% or more less product?

beentheredonethat's picture

"Inflation is everywhere and always a monetary phenomena" Milton freidman.
So many other wise educated people confuse economic activity ( jobs, wealth etc) with monetary issues.
You can have all of us selling apples and pencils on the street and hyperinflation, see Zimbabwe. Nothing to do with wealh effects or other nonsense.
Oh, and just because cocoa is flat (which I spend .00001 of my income on,)doesn't mean my taxes are not going up (8% a yr in last 5 years). Which is not even measured in CPI. Crazy since gov is now 40 % of all the spending in the country.
Zh just because its the weekend don't lower the article standards. I will have to start reading the NYT.

Jack Sheet's picture

This article is high grade bullshit (like the previous ones from this author)

Real price inflation is running at 6-10% annually


There are other surveys yielding similar results on Peter Schiff's channel and at Casey Research but I am too damn tired to copy the links.

BlueCheeseBandit's picture

This is why I'm keen on buying NIB.

Racer's picture

Petrol, flour, water, electricity, bread, butter, cheese, all up in price and even soap has gone up 100% in the last few months

cynicalskeptic's picture

Hell, a package of BACON is over $7.50 now - up from under $4.00 not too long ago.   You're gonna see even higher meat proces as many farmers and ranchers cut numbers of hogs and cows with higher feed prices.   I'm srtill gagging at $70 rib roasts - more than double what they were.   Heating oil is obscene.     You've got deflation in the things you DON'T need but when it comes to the things you DO need - prices keep going up.

And the 'sneaky' inflation via smaller amounts is everywhere.  Looks like someone took a bite out of my bar of Dial soap - a big scoop is missing from the back.


MisterMousePotato's picture

Round Table pizza coupons in the paper: A year? Year and a half? ago. Was $9.99 for a large one-topping pizza (great deal). This week's paper? $12.99.

Longing for the old America's picture

Try showing gasoline, grocery end products and healthcare prices instead of cherry-picking just a few things that haven't skyrocketed yet.

True inflation is already in the double-digits and is clearly evident to anybody that pays their own bills.




FreeMktFisherMN's picture

and EconMatters, too, does not recognize that inflation is the increase in money supply. Rising prices are a result of that, but to examine all the pernicious effects of inflation, one has to understand that legitimate savings is foregone consumption, i.e., excess capital that wasn't spent. Fiat injections try to replace that, and what happens is all the malinvestment as businesses get into these hopeless endeavors that were not warranted because the supply was not there. Demand is practically infinite, but the problem is those 'demanders' don't have supply/purchasing power to trade for the new homes being built or whatever sectors the newly printed fiat is pouring into. Eventually the bubble bursts as people liquidate.

But regarding the price increase effect of inflation, I would just look at the price of commodities-things that don't change over time- and it is easily evident how they've risen. But beyond even that, one has to factor in the concept of opportunity cost when assessing the effects of inflation. Sometimes we become more productive in extracting nat gas or crude, and prices should be falling, but thanks to the inflation, prices are not falling at all actually increasing. And even if they are 'stable' prices, that STILL IS INFLATION because the prices should have fallen and the productivity increase should have benefitted those people as they now have more purchasing power. So even if say something is only up 1% YoY, it might well have been that it should have fallen 3 to 4%, and therefore the inflation's effect is a lot worse than just going up by 1% accounting-wise. 


And the other thing to note with inflation is that all these USDs we export to Asia do not 'disappear' when they get there. Hence the whole 'it's their loss' for taking our USD for their goods is foolish, because they get all that leverage, and they have been holding off letting themselves reap the benefits of their foregoing consumption. They are poised (and Japan, too, as its elderly look to cash out US debt notes to pay for retirement) to send a tsunami of US fiat back to our shores. 

philipat's picture

"Inflation is ALWAYS a Monetary phenomenon"

cynicalskeptic's picture

Anyone else get the feeling that the US is planning to implode the dollar - it's the only way to escape the massive debt owed by the US.  

Gonna be a lot of po'd people here in the US and all over the world when the AAA rated dollar debt they hold turns out to be worthless.  and you thought a few million in T-Bills would guarantee a comfortable retirement?

There's a reason China is reducing US debt holdings.