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Is Inflation really a Problem?

EconMatters's picture




 

By EconMatters

 

 

Consumers only focus on Inflation, they ignore deflation areas

 

It seems that to exclusively focus on one side of the equation can be human nature at times, and with regard to inflation concerns humans never see the other side of the equation, i.e., areas where they are actually experiencing deflation in their lives.

 

The Housing Market

 

Let`s start with housing, the Case-Shiller 20-City Home Price Index shows quite clearly that after years of inflation, consumers are getting a large break on prices due to the deflationary effects in the housing industry over the last five years. 

 

Mortgage & Interest Rates 

 

How about interest rates, rates for getting financing either to finance a first purchase or refinance an existing loan have been a real boon to consumers, and rates generally have been coming down for twenty years. I am sure your parents or grandparents can tell stories of 18% mortgages; we are definitely experiencing deflation in financing costs around borrowing money.

 

Copper Prices

 

Next let us look at Copper prices for the last five years down over 2%, and that is after a price spike for the first quarter, wait for the first major selloff in markets and copper will be much cheaper, i.e., Copper prices can easily sell off 30 cents or more per pound when assets sell off over the annual summer selloff. 

 

The first quarter the last three years has been good for asset prices, but it is important to take the yearly average in prices to smooth out the fund inflow noise that look to make a quick buck on the first quarter ramp up in investment flows. 

 

But again Copper is a major component used for industrial & commercial economic projects and an inflation hedge, and it is exhibiting deflationary effects the last five years, especially when you factor in ‘real terms’ it is even more deflationary. 

 

Natural Gas Prices

 

Let us next take Natural Gas prices down over 40%  for the last ten years, but consumers don`t want to factor the areas where they are doing much better in regards to the “pernicious effects” of inflation.

Yes Natural Gas prices are another major economic input cost for many manufactured products from plastics to chemicals, and this major economic input commodity is in a major deflationary cycle.

 

Gasoline Prices

 

Now let us take everyone`s poster child for inflation gasoline prices; over the last five year`s they are up 20%, but this is misleading as we are at the highest point ever for this time of year, and gasoline like oil prices are quite volatile. 

 

For example, they were down 10% over a five year period in June of 2012, so again it is important to take the yearly average in gasoline and oil products. 

 

But even one of the worst categories for inflation, at the height of a recent influx of capital, is only averaging 4% annual inflation. 

 

Plus there are other factors at work here including the newly minted exporting of gasoline and petroleum products that has occurred as a trend the last three years in these markets that are making these numbers worse than they otherwise would be.

 

Just be patient folks gasoline prices will come down as high prices are actually deflationary for the product, and the old adage applies, there is no better cure for high prices than high prices for economic sensitive goods. 

 

Expect a pullback in gasoline prices for the second half of the year, and when we revisit these numbers I can envision a negative print for gasoline prices over the last five years.

 

Electronics have built in Deflationary Cycles

 

But we haven`t even gotten into electronics, televisions, computers, cell phones etc. there are many other areas which continually have deflationary product cycles that help cancel out the areas where we do have inflation effects, and even some areas that are indeed “pernicious”! 

 

I am not saying there is no inflation, clearly even the government numbers show over a 2% annual inflation rate.  But the exercise is meant to show that there are major deflationary pressures still at work in our economy, and they are worth taking notice of to balance some of the inflation rhetoric that seems built into our psyches. 

 

Wholesalers Probably Take Advantage of Inflation Fears

 

I think a lot of wholesalers, middlemen, retailers, etc. actually fatten margins because consumers believe inherently in the “pervasiveness” and “perniciousness” of inflation; why not tap into this and confirm their worst fears, and gain some pricing power along the way.

 

The input costs that I have presented over these two articles are actually quite deflationary, and I can keep going as there are so many examples of deflationary price pressures in many commodities. 

 

The fact that I can easily find so many examples should in itself say something regarding the inflationary environment in the economy. I literally just started pulling up charts and indexes, and was not cherry picking for results. 

 

Sure I can find many areas that are inflationary, but if inflation was really as “Pernicious” and “Pervasive” as everyone seems to believe these days, I shouldn`t be able to find so many counterexamples to their argument so effortlessly.  

 

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Mon, 02/11/2013 - 16:43 | 3234592 Panafrican Funk...
Panafrican Funktron Robot's picture

http://research.stlouisfed.org/fred2/series/BASENS?cid=124

Playing "hide the pickle" via cherry picking USD price data doesn't hide the fact that the reserve base went from $850 billion in early February of 2008, to $2820 billion in early February of 2013.  That's right good friends, the amount of USD in total increased 331% in 5 years.

Deflation?  There is only one de- that applies here.  Devaluation.  Economatters once again misses the entire fucking boat on this one.

Mon, 02/11/2013 - 16:49 | 3234612 Panafrican Funk...
Panafrican Funktron Robot's picture

Something else noteworthy.  Guess how long it took for the prior 331% increase?  20 years.

Mon, 02/11/2013 - 16:44 | 3234594 Panafrican Funk...
Panafrican Funktron Robot's picture

Also, fuck you for referring to anyone as a consumer.  We're human beings, asshole.  

Mon, 02/11/2013 - 15:08 | 3234190 Herkimer Jerkimer
Herkimer Jerkimer's picture

'

'

'

Wonderful.

 

More contradictory evidence to contradict the last contradictory evidence of whatever whoever was trying to disprove for their own reasons.

 

Play yer bets!

 

•J•
V-V

Mon, 02/11/2013 - 14:50 | 3234111 joego1
joego1's picture

Costs more to live from day to day around these parts. House prices stagnent, pay not going up, the economy is dead. Life is good if your not hung up on money though.

Mon, 02/11/2013 - 13:53 | 3233888 Aaron Burr
Aaron Burr's picture

The inflation I am seeing is in smaller packaging sizes at the grocery, smaller portions at restruants, and a fucking name brand washing machine that lasted all of 6 years. And the worst part is I think they are watering down my margaritas at the shithole bar I am a fixture at--now THAT hurts!!

Mon, 02/11/2013 - 13:37 | 3233828 JimS
JimS's picture

EconMatters: another person I'd love to spend an hour or so, in a locked, closed room, with my father's Gurkha knife. Obviously a 1%'er, who has never had to worry about eating or filling the vehicle with fuel.

Mon, 02/11/2013 - 13:45 | 3233862 Market Analyst
Market Analyst's picture

Obviously a 1%'er, who has never had to worry about eating or filling the vehicle with fuel.

 

Gee illegal immigrants have no problem eating or filling their vehicle with fuel, is that the zero hedge audience a bunch of unemployed, lazy whiners?

Go out and make a living: But anyone who thinks with a country full of fat people that Americans are starving unless you are the 1% needs to get a clue:)

Mon, 02/11/2013 - 13:54 | 3233890 Vooter
Vooter's picture

"Go out and make a living."

I have a perfectly good job, and have no problem paying my bills. What does that have to do with whether or not there's rampant inflation in the U.S.?

Mon, 02/11/2013 - 13:20 | 3233763 Market Analyst
Market Analyst's picture

The piddy paddy parade is hilarious, maybe you losers should address the real problem: You need an actual job to keep up with the cost of 2% inflation. Stay focused on the issue at hand, all the author is illustrating is that despite aggressive policies by central banks since the financial crisis in 2008, inflation is actually not rampant in the overall economy.

The money supply has always been increasing, even during tightening periods, but we have eras of much higher inflation with much lower printing by the fed, this is what to take away from the article.

I guess zero hedge needs translators or ADD specialists to synthesize the meaning of the material on the site.

 

If your this dumb, no shit life is hard for you!

Mon, 02/11/2013 - 16:46 | 3234602 Panafrican Funk...
Panafrican Funktron Robot's picture

"The money supply has always been increasing"

Really?  At this rate?

http://research.stlouisfed.org/fred2/series/BASENS?cid=124

Notice the 331% spike in the past 5 years.  Yeah, that's totally fucking normal.

Mon, 02/11/2013 - 13:36 | 3233827 Vooter
Vooter's picture

"all the author is illustrating is that despite aggressive policies by central banks since the financial crisis in 2008, inflation is actually not rampant in the overall economy."

But he HASN'T illustrated that. LOL...what are you, a fucking idiot?

Mon, 02/11/2013 - 13:33 | 3233815 Vooter
Vooter's picture

"If your this dumb, no shit life is hard for you!"

It's "you're"...

Mon, 02/11/2013 - 13:04 | 3233717 Vooter
Vooter's picture

"But we haven`t even gotten into electronics, televisions, computers, cell phones etc. there are many other areas which continually have deflationary product cycles that help cancel out the areas where we do have inflation effects."

Hey, asshole, I buy a TV about once every TEN YEARS, and a new computer maybe every five. But the next time I go to the grocery store to buy some fucking COPPER, I'll make sure to check the price. And hey, will gas prices be coming down to the $1.00 a gallon or so that I paid in 1980? Will they? Or will they be "coming down" to an oh-so-affordable $3.00? That'll sure be helpful for the people who now have to pay THIRTEEN DOLLARS to cross the George Washington Bridge...

Mon, 02/11/2013 - 12:45 | 3233652 MrBoompi
MrBoompi's picture

Yes, who needs to eat, or drive to work?  And what good is lower prices for homes and lower interest rates when people can't afford it anyway?  The housing market is great for HEDGE FUNDS and the rest of the rentier class.  These people are the only ones who's income is keeping abreast of inflation, or better. 

Sure, why would the financial elite worry about inflation?  Have they ever?  For the rest of us, inflation is a horrible tax that is our burden to bear until wages catch up, and that ain't happening near quick enough.

Mon, 02/11/2013 - 12:40 | 3233636 adr
adr's picture

Yes when my parents bought a starter home in 1977 in a middle class neighborhood, interest rates were 17%. But the home cost $38k. The same home today is $130k. At the time my father was making $30k as a sales rep. There were actually more $30k jobs in 1977 than there are now. Gas, electricity, food, clothing, taxes, all took a much smaller chunk out of his paycheck. I'd rather have 10% interest on $38k than 5% on $130k. Property taxes were about $200 on that house in 1977, today it is $2400.

In 2005 I paid $1.18 per mcf for natural gas. There was a $5 base charge and $.28 in delivery and tax charges per mcf. To heat a hot water heater cost about $8 a month total. In 2013 I am paying $3.37 per mcf, there is a $25 monthly base charge, and $1.65 in delivery and taxes per mcf. The bill to heat a water heater for a month is now about $32. Even if nat gas went down to $1.18 again, the fees associated with obtaining the gas are still substantially higher. Even if there is no inflation in the commodity there sure is massive inflation in the service cost.

Sure a good 42" LCD TV cost $1800 in 2008 and now you can buy a good 42" LCD for $700. That hardly makes up for having to spend 200% more for items you buy every day.

By the way, if you bought a $20 toaster that cost $7 to manufacture a few years ago, but paid $15 for a toaster in 2013 that cost $2 to manufacture, you didn't save money. You paid the same dollar value over manufacturing cost, but got a far worse product.

Mon, 02/11/2013 - 13:37 | 3233831 Matt
Matt's picture

Housing prices are tightly tied to credit conditions. If you increase the amortization or decrease the interest rate, house prices rise. This is why all misguided programs to try to make housing more affordable inevitably fail; the unintended consequences are generally the opposite of what the central planners intend.

When interest rates rise, housing prices will fall accordingly (with a bit of lag time) so until interest rates are closer to historic norm, housing still has more downside overall.

Mon, 02/11/2013 - 13:32 | 3233810 otto skorzeny
otto skorzeny's picture

back then you didn't have iCrap to eat

Mon, 02/11/2013 - 13:30 | 3233808 Positive Dennis
Positive Dennis's picture

I appreciate the toaster comment. The old toaster I bought 15 years ago worked fine, but when we moved we gave it to a family member and bought a new one. It lasted 18 months. We just bought a new one.

The original article's point about interest rates being deflationary is valid. However this can not last.

Mon, 02/11/2013 - 12:21 | 3233554 Lordflin
Lordflin's picture

Well, now we have gone 'though the looking glass...'

Mon, 02/11/2013 - 12:18 | 3233541 Shankopotomus
Shankopotomus's picture

Since i wasn't getting much of anything interest wise for my money at the local bank I took some of it out of the local bank and used it to finance a house for one of my kids 2 months ago at the local banks going interest rate of 3.75%. Now I'm getting the 3.75% in interest (it's gonna stay in the family along with the principle, because I'm not going to touch it), the bank isn't,  saved  $4,000 in closing costs, which they would have gotten but didn't, and they don't have my money any more for practically nothing interest wise to loan out at 8%. In other words screw the local bank, and their financing.

Mon, 02/11/2013 - 12:17 | 3233534 Orwell was right
Orwell was right's picture

Pure bullshit!!!    One more "let them eat iPads" article.   The claim that inflation is being somehow held down by the ever decreasing cost of electronics and non-necessary goods....is nonesense.

Printing more money without underlying economic strength causes inflation.   To measure inflation without taking into account "necessary" goods required to sustain life is statistical smoke-and-mirrors.  

Basing all of the above on a world economy geared towards maximizing fiat based profit for a few oligarchs at a huge cost to everyone else, is not only morally wrong, but will eventually lead to revolution...(we hope).

Mon, 02/11/2013 - 11:46 | 3233368 ItsDanger
ItsDanger's picture

Housing is very regional.  Your analysis is too macro-based.

Mon, 02/11/2013 - 11:38 | 3233328 Shankopotomus
Shankopotomus's picture

 And just before mortgage interest rates went up to 18% we could (I used to be in the construction business back then) build a  1200 sq. ft house for $22,000, make a  $2,500 profit off of it,  buy a brand new pickup with that $2,500 profit, and only paid 19 cents for the gas I put in it to get to the next job, so what's your point.

Mon, 02/11/2013 - 11:29 | 3233273 Stuck on Zero
Stuck on Zero's picture

The flip side of all of this is generally decreasing incomes. Except for the top 1% the middle income folks have been losing ground for 25 years. 

 

Mon, 02/11/2013 - 11:25 | 3233255 shovelhead
shovelhead's picture

Inflation? Hah.

Look at the prices on Aston Martins, Cohibas, Beluga caviar etc.

All falling like a stone.

No inflation here.

Mon, 02/11/2013 - 11:59 | 3233429 cynicalskeptic
cynicalskeptic's picture

DEFLATION is occurring on all the things you really DON'T need - 

you don't need an expensive car

you don't need to own a house - especially a big McMansion

you don't need a big flat screen TV

you don't need expensive designer clothes and accessories

you don't need the latest and best whatever

However you also have deflation in your wages - tehy are going DOWN in real buying power

you also ahve deflation in the returns on your savings - if you have any - zero interest rates on regular savings

 

This reduction in earnings is a problem because you have  INFLATION in the prices of the things you  DO need:

Food prices are going up rapidly (overtly or covertly in the form opf smaller sizes and lower quality) you DO need to eat

Energy prices are going up (albeit with some short term exceptions like natural gas from fracing, a short term anomaly)  You DO need to stay warm and DO need to get to work (providing you still have a job)  Electricity prices are high and going higher.

Basic transportation costs are increasing rapidly - You DO need to get to work (if still employed) and mass transit fares are rising rapidly.  The costs of owning a car - tolls and gas as well as maintenance - are going up even if the price of a new car is going down (that matters little if you can;t afford a new car - but keeping an old one running is not cheap)

TAXES, especially at the local and state level are rising rapidly.  Higher sales taxes, property taxes and income taxes are higher.  And you DO need to pay taxes - try NOT doing so.

 

One can argue that an education is not 'necessary' but most believe some form of education beyond high school is needed to be employable today.  The cost of education is increasing - and rapidly.

One can argue that access to credit is 'necessary' for businesses - that has become very costly for smaller businesses providing they can get access to it at all (many cannot) - this is particularly bizzare given that the 'cost' of money to lenders is near 0 given the rates paid on savings and the 'free' money lent out by government to banks.

 

a good explanation of what's happening is provided here - Deflation precedes hyperinflation

https://www.kitcomm.com/showthread.php?t=93752

Mon, 02/11/2013 - 13:29 | 3233800 Matt
Matt's picture

That is quite a rant in reply to an obviously sarcastic post.

Mon, 02/11/2013 - 11:14 | 3233210 bbaez
bbaez's picture

Unfortunatley it does not appear to be in error

Mon, 02/11/2013 - 11:04 | 3233168 slightlyskeptical
slightlyskeptical's picture

Like always the excess money the fed prints will be destroyed.  Most likely through a big market/metals drop as that is where the excess money has been stashed. You need demand for higher inflation over time and demand is off hiding in a hay stack somewhere.

If the money was put into the hands of those who will spend it we would have a completely different story. But alas, that is not where it is going. That will be Benanke's legacy - fighting the wrong battle.

Mon, 02/11/2013 - 11:03 | 3233138 BlueCheeseBandit
BlueCheeseBandit's picture

US is exporting inflation right now thru currency pegs (see China). When Asia finally snaps and lets its currencies appreciate against USD—a healthy move for countries that need more consumption—all those dollars their central banks are hoarding no longer have to be hoarded. Watch out.

And yet, with all that we STILL have inflation. Official CPI 2.4%. Real CPI (using pre-1980 method that doesn't arbitrarily exclude food and fuel, which are highly inflation sensitive) is around 10%: http://www.shadowstats.com/alternate_data/inflation-charts

This article isn't a mere difference of opinion (which helps investment), it's horseshit with selective sampling.

Reconsider posting EconMatters articles please.

Mon, 02/11/2013 - 11:28 | 3233269 e1618978
e1618978's picture

http://www.bls.gov/cpi/

http://bpp.mit.edu/usa/

Looks more like 1.7% and dropping

Tue, 02/12/2013 - 10:05 | 3236354 BlueCheeseBandit
BlueCheeseBandit's picture

According to government and academics? Yeah I'll take my chances on an inflation strategy, thanks.

Mon, 02/11/2013 - 11:09 | 3233134 razorthin
razorthin's picture

Food (real food, not red slime substituted), Energy (what my utility REALLY charges for nat gas & electricity), Education, Housing (still levered at 3x annual income), Medicine, Taxes...you know, those things they don't count.  Yes it is a problem, you arse!  Fukk the semantics, assuming you believe the bogus metrics.  Let us substitute "inflation" with dollar destruction, shall we!

God, you pompous know-it-alls make me hot!

Mon, 02/11/2013 - 12:25 | 3233578 e1618978
e1618978's picture

House prices at 300% of median income is normal/non-bubble pricing.

Mon, 02/11/2013 - 12:58 | 3233697 skipjack
skipjack's picture

Uhhh...no.  Housing was at a 1x-2x yearly income until the 80s, when it started rising.  Housing has a long way to fall yet before it's back to the mean relative to incomes.

Mon, 02/11/2013 - 13:08 | 3233727 Vooter
Vooter's picture

I think he was being sarcastic...

Mon, 02/11/2013 - 10:55 | 3233114 pazmaker
pazmaker's picture

I'm not an economist and I don't claim or pretend to be one...so throw your semantics around anyway you like..inflation deflation etc.   All I know is the government keeps more of the money I earn through income taxes sales taxes property taxes etc...probably more then 50% of what is rightfully mine.

 

I pay more money now then I did 4 years ago when i go to the grocery store and buy the same products,  same for clothing and gasoline and electricity for my house. 

 

So call it what you but it is more expensive to live now days and salaries have not kept up with price increases.

Mon, 02/11/2013 - 10:52 | 3233109 Stud Duck
Stud Duck's picture

No inflation, just check in increase in the prices for fertilizers for crops. I had over $550 per acre in planting corn last year, seed, fertilizers are 3-4 time what they were in 10 years ago.

It cost over $120 per acre to fertilize grassland to support the cow heard, the cow takes 4 acres to keep her going, and that is without drought,

If you city boys had a clue on what the farmers cost to produce were, you might not gripe as much when you go buy your food.

No I do not mean those Starbucks coffees you pay $5 for, the stuff you really need to survive.

The shortage of corn is now being reported on, but with another drought this summer looking more probable, you city boys might have another look at the prospect of "sticking up" while the prices are where they are at now!

Mon, 02/11/2013 - 13:22 | 3233771 Kayman
Kayman's picture

 Stud Duck

And replacement parts are going up. And the quality, usually offshore Chinese crap, like Cat "Classic" doesn't have the same lifespan.  And government fees and permits, all going up.

My insurance has gone up so high, I self insure capital assets.  And the bullshit about low interest rates on borrowed money. Apparently, EconMatters is ignorant about bank fees.

A friend of mine built a slaughterhouse; can't run it because he hasn't got the government permit yet. It's been 4 months now. Silly boy. 

Mon, 02/11/2013 - 11:10 | 3233192 DOT
DOT's picture

CSAs -get em while you can.

Mon, 02/11/2013 - 10:47 | 3233082 Market Analyst
Market Analyst's picture

All the zero hedge inflation fanboys curled up in the fetal position with gold bars underneath their beds is too much entertainment, you just prove the author`s point: You believe what you want to believe like Bigfoot, despite the evidence.

Mon, 02/11/2013 - 13:10 | 3233735 Vooter
Vooter's picture

"You believe what you want to believe like Bigfoot, despite the evidence."

LOL...who am I supposed to believe--this asshole, or the money leaving my bank account at an ever-increasing rate? It's really not that complicated...

Mon, 02/11/2013 - 11:52 | 3233395 NidStyles
NidStyles's picture

Sorry I prefer real evidence and using definitions rather than some blief that something is real.

 

Inflation is defined specifically as the increase in the money supply. The Fed is still printing $85 Billion a month. That means there is still Inflation. You can choose to be in denial and based your understanding of the world on beliefs, but I will stick to the truth and defined rationalism.

 

Mon, 02/11/2013 - 12:51 | 3233669 Jack Sheet
Jack Sheet's picture

Right on, what the guy above is saying is that you print trillions of new units of a currency and its value increases, like pouring cold water into a  espresso..

/sarc off

Mon, 02/11/2013 - 10:44 | 3233062 One World Mafia
One World Mafia's picture

With the money the Fed has injected into banks, including foreign banks, how high can they theoretically take the stock market if those banks were to inject all that $$$ into the stock market?

Mon, 02/11/2013 - 10:33 | 3233006 socalbeach
socalbeach's picture

B.S. article.

Even using the government's understated CPI gives a compounded price inflation rate of 2.4% ((231/170)^ (1/13)) since year 2000.  The real figure is probably closer to 5%/year. That's what I would estimate the current price inflation rate is, and with zero interest rates that means you're losing almost 5%/year in purchasing power. 

http://research.stlouisfed.org/fredgraph.png?g=fsz

The reason the author can find some prices that are falling is because the price inflation rate isn't extreme yet, so there are still some prices that are falling, but they are outnumbered by stuff that's rising in price.

Mon, 02/11/2013 - 13:23 | 3233775 Matt
Matt's picture

5 percent if you use 1990's CPI, or closer to 10% based on original 1980 CPI:

http://www.shadowstats.com/alternate_data/inflation-charts

Mon, 02/11/2013 - 10:28 | 3232972 Oldwood
Oldwood's picture

There is no inflation except for;

gold/silver

food

fuel

automobiles

insurance

healthcare

raw materials

Weapons/ammo

GOVERNMENT

Other than PMs, everything we don't already own and must have or or forced to have. But of course these simply reflect market forces and are not actually inflation.

We are so screwed

Mon, 02/11/2013 - 12:10 | 3233495 Jreb
Jreb's picture

"Weapons/Ammo"

 

Some might argue this industry is in a government induced bubble.

If this one blows we will have problems. Everywhwere.

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