Looking For Inflation In All The Wrong Places

Authored by John Rubino via DollarCollapse.com,

A policeman sees a drunk man searching for something under a streetlight and asks what the drunk has lost. He says he lost his keys and they both look under the streetlight together. After a few minutes the policeman asks if he is sure he lost them here, and the drunk replies, no, and that he lost them in the park. The policeman asks why he is searching here, and the drunk replies, “this is where the light is”.The Streetlight Effect

The drunk in the above story is an idiot, of course. But no more so than modern economists who can’t find inflation because they’re looking only at the part of the economy covered by their government’s Consumer Price Index.

But gradually, grudgingly, a handful of mainstream economists do seem to be figuring out that the soaring value of stocks, bonds, real estate, fine art, collectibles and cryptocurrencies is a legitimate sign of a depreciating currency and future instability.

Inflation, in other words. From yesterday’s Morningstar:

Lack of inflation is a global issue

(Morningstar) – The lack of inflation is a global issue. Unemployment is at cyclical lows in the US, Germany, and Japan, yet in each of these countries there is only small evidence that wages are picking up. No doubt globalisation and technology are common factors that have helped constrain wages across countries.

The de-synchronised nature of the recovery until now has also capped inflation in countries whose currencies have appreciated on cyclical outperformance. From here, however, common global uplift should help neutralise some of these inter-country effects, and allow domestic conditions to play out more powerfully.


Central banks have been puzzled by the lack of inflation, but have not stepped away from its management as the primary goal of policy.


However, they’ve responded to the way QE’s impact has been much stronger in financial markets than the real economy by making financial conditions a larger part of their thinking, even if they’ve not formalised this in policy frameworks.


With inflation projected to lift and financial markets strong, we expect central banks to continue to gradually tighten.


Year to date, bond yields have drifted lower and curves are flatter, while credit spreads have continued to tighten.


Valuations of fixed-income assets have moved further into expensive territory with few exceptions. Term premium is close to historic lows and credit spreads at post-GFC tights.


Given this backdrop, our process continues to suggest defensive positioning remains appropriate until better value is restored. We see higher inflation and/or a faster pace of policy tightening as possible triggers.

This acknowledgement that soaring asset prices are kind-of-sort-of inflation is definitely progress, though the struggle it took to get there was obviously considerable.

A single paragraph stating that asset bubbles constitute an especially destabilizing kind of inflation and therefore caution is advisable going forward would have made the point in a fraction of the time.

But it’s better than nothing. And who knows, maybe it’s the start of a trend.


marathonman Dragon HAwk Thu, 11/16/2017 - 12:44 Permalink

I keep hearing and reading over and over about the lack of inflation and I look at the cost of lunch at a fast food joint and over the last 10 years, it now costs $10 when it used to cost $5.  That's 100% inflation.  Divide that by 10 and that's (roughly) 10%/yr.  Healthcare and health insurance, way up.  Home taxes and house prices, way up with property values caused by the Fed's post-2008 money bomb.   College costs, way up probably 4X multiplier over 10 years. Not sure why they say they can't see the inflation.  On second thought I can see why.  They're lieing to us as the Peso-ize the dollar.

In reply to by Dragon HAwk

konadog Wed, 11/15/2017 - 17:31 Permalink

There is plenty of inflation. The CPI is a farce. 5% easily - probably more.But, but, your iPhone that costs $1000 is so much better than your old $50 rotary dial phone that your iPhone is "cheaper" today - so says the BLS.  Bullsiht.

BandGap Wed, 11/15/2017 - 17:43 Permalink

So the Fed makes policy to generate inflation and keeps this policy going hoping for that outcome.Banks take that money supposedly used to fuel inflation and essentially give it away at low interest so others buy things with it. But since the Fed doesn't consider these things in their evaluation of inflation they keep fueling it. And the banks keep taking it.This is a fucking scam. Simply put, the Fed is giving away money.

besnook Wed, 11/15/2017 - 17:44 Permalink

i'm going to take this opportunity to pat myself on the back for being the first economist to point this fact out a coupla years ago on zh.

tion Wed, 11/15/2017 - 17:50 Permalink

Vocabulary impacts cognition.  This is part of what makes the Orwellian rewriting of the meanings of words insidiously dangerous.  It is also why 'value' and 'price' should be separated.  Inaccurate conflation negatively impacts clarity of thought/expression.  JMO.

hooligan2009 Wed, 11/15/2017 - 17:50 Permalink

intervention by purchasing assets in financial markets causes upwards distortions (inflation) in the prices of assets in financial markets.financial repression = setting interest rates below inflation (1% fed funds v 4% in the Urban CPI) by inflating asset prices, the central bank fvours one sector of the country (borrowers and those in debt) over another (those trying to save for retirement or who want to buy assets).what would the ten year treasury rate of interest rate be if "the market" determined the compensation for inflation (of 2% below the current CPI Urban of 4%), the credit risk premium (for a AA+ borrower (say 0.5%) and the term premium (say, a normal yield curve gap between tens and 90 day t/bills of 3%)?????i make the fair value market price of around 5.5%given the current ten year treasury yield of around 2.5% and a duration of around 9 years, inbroad terms the financial repression engaged in by the Fed has resulted in price infltion for bonds of around 22.5% (call it 25%).house prices are over priced by more than this - by around one third- and have infflated away any benefit from lower mortgage rates (the US is a socialist country in housing markets with the activities of the FHA, funny and fruadie - fannie and freddie).is it better to have a 4% morrtgage on a house that is overvalued by 25% or a 7% mortgage on a house that is 25% cheaper?hmm.. 250,000 mortgage at 6% (current market rate) = 15.0500 in interest (plus say 10,000 in princple repayments ) a year compared to a 175,000 mortgage at 7.5% = 13,125 interestnote the 7.5% mortgage rate in a market detemrined (not intervened by farudie and funny/FHA) to reflect the ability to pay off a pool of onvestors in mix of a AA/AAA tranches that would be able to borrow at just 1-1.5% above the ten year treasry yield.bleh!  

govtsucks Wed, 11/15/2017 - 17:52 Permalink

When the BLS calculates inflation, do they take into account the fact that every food package has shrunk by 20%? That's 25% inflation right there.

The Ingenious … Wed, 11/15/2017 - 18:17 Permalink

A policeman sees a drunk man searching for something under a streetlight and cracks him over the head with his flashlight."What the fuck did you do that for?" asks the drunk."No special reason," says the policeman. "It just felt right."

Jay Wed, 11/15/2017 - 19:35 Permalink

The biggest item on my budget is rent and it's increasing about 10% / year. The second biggest item is health insurance which is going up even more.

MagicMoney Wed, 11/15/2017 - 20:37 Permalink

The term inflation is a reality in the old sense the increase of money supply. The definition changed to a different semantic to mean increases in prices. That makes no sense that prices inflate. They can scale up or increase but not that. Of course, rising asset prices are a result of inflation. If prices rise for that how could mainstream economist not call that inflation versus general price increases? Makes no sense. I think the reason for comes from central banking. They know with the instruments they use influence asset prices much sensitively. Afterall money creation follows a process from the top down or from the most connected to the least connected. I don't have the opinion that as money supply being neutral either because you can't simply by aggregates determine if rising prices are from inflation or not. Economist didn't see rising prices prior to the Great Depression. Milton Friedman didn't see any. Doesn't mean it didn't exist just because you didn't notice.The path of rising prices forms a predictable path. Asset prices rise reliably then underneath the asset owners are the working class, retired, and disabled. The government, of course, comes before all else in the most case. In Brazil the government there was expanding in spending. The problem with a mainstream economist is they think they can make the economy heat up in unison like it is a gas peddle.I am of the opinion that if economist wants rising prices they are going to need to print much more money. The problem with that is rising prices is a lagging indicator of inflation. They won't see it coming. Similar to the situation in the UK where Brexit devalued the pound and the central bank doubled down with expansionary policy. Basically asking for rising prices.

Let it Go Wed, 11/15/2017 - 23:30 Permalink

The ECB and other central banks often claim deflation drives or allows their QE policy to remain and is central to their ability to stimulate. The moment inflation begins to take root or becomes apparent much of their flexibility in policy is lost. The 2% inflation target central banks have deemed optimum is not valid.In the past, I have put forth the idea that inflation could rule the day even if central banks are unable to keep the wheels on the bus and the economy collapses. This powerful force also known as stagflation can devastate those improperly invested. The article below explores the basis of this theory. http://brucewilds.blogspot.com/2016/03/inflation-or-deflation-debate-continues.html