Is a Change in the Trend of Consumer Price Inflation Looming?

Readers may recall our recent article “Inflation in the Nation”, where we commented on the recent jump in CPI to 2% annualized. As we noted, it is interesting that the economy's production structure has once again been markedly distorted by the Fed's inflationary policies, in particular, while capital goods production has revived strongly, consumer goods production has stagnated (see this chart for details). This would, ceteris paribus, favor an increase in consumer prices, or at least a shift in relative prices to the detriment of capital goods prices.

We also added a chart to a recent article by Bill Bonner, in which he discussed the growing gap between the MIT's 'Billion Prices Index' and CPI. Here is the most recent chart (unfortunately it only shows the situation up to the end of April, but the trend is clear even so):

 

Billion prices-index

The 'Billion Prices Index' (BPI) vs. CPI. There is now a growing gap between the two.

 

If we look at the history of the year-on-year change rates of the BPI vs. CPI, we can see that the former appears to lead the latter when divergences emerge (unfortunately the sample size is very small, so we have to take this information with a grain of salt).

 

Billion prices-index-change rate

The y/y change rates of BPI and CPI – last time a divergence was in evidence, BPI turned out to be the leading indicator.

 

The reason why we are discussing all this, is that Marty Feldstein recently uttered a warning in a WSJ editorial about growing 'price inflation' pressures, noting that the Federal Reserve appears to be 'behind the curve' (this is of course only natural – it always is, as it drives with its eyes firmly fixed on the rear-view mirror).

 

A Good Laugh at Feldstein's Expense?

A report published at Marketwatch, discusses Feldstein's warning. We certainly don't always agree with Mr. Feldstein's economic views, and we cannot say whether his prediction will turn out to be correct this time. However, something quite interesting happened after he issued his warning:

 

“Inflation is already rising faster than the Federal Reserve’s 2% target and presents a near-term challenge to the central bank, said legendary economist Martin Feldstein on Tuesday. Feldstein, now an economics professor at Harvard University, was in the running to replace Alan Greenspan for the top Fed spot in 2006.

In an op-ed in the Wall Street Journal, Feldstein said “the key to the future” is how the Fed will respond if prices continue above 2% annual target.

“A misinterpretation of labor-market slack, and a failure to create a positive real federal-funds rate, could put the economy on a path of rapidly rising inflation,” Feldstein wrote. Feldstein said the Fed’s rhetoric on inflation makes him worry that the central bank “may not react quickly and aggressively enough if inflation continues to rise above 2%.”

His views were greeted with some derision, like this tweet from Mark Thoma, a professor of economics at the University of Oregon.

(Surprise!!!) Warning: Inflation Is Running Above 2% – Martin Feldstein http://t.co/40ZQDkrOnc

 

We don't know anything about Mark Thoma, but it seems to us that his derisive tweet is symptomatic for the currently quite widespread consensus that 'inflation is not a problem'. In fact, if anything, most economists are worried about 'inflation being too low', or are even fretting over the alleged 'threat' of deflation.

As Janet Yellen's reply to a question by Marty Feldstein on occasion of a recent appearance of hers reveals, this is also the consensus view at the Fed:

 

“Feldstein pressed Federal Reserve Chairwoman Janet Yellen on how the central bank would respond to higher inflation during her appearance before the New York Economic Club in April.

The Fed chairwoman replied “the risk is greater that we should be worrying about inflation undershooting our goal and getting inflation up to 2%.”

She added that the Fed “absolutely will be committed to protecting inflation if it threatens to rise persistently above 2%.”

 

(emphasis added)

As our readers know, our thinking about inflation is quite different from the mainstream's. To us, the term inflation is the designation for an increase in the money supply. Rising consumer prices are just one of many possible effects of money supply inflation, and the question of if and when money supply inflation will lead to rising consumer prices mainly depends on contingent circumstances. The only thing that is absolutely certain is that money supply inflation leads to a 'price revolution' across the entire economic system, as it leads to massive distortions of relative prices (which is incidentally the main reason why capital goods production has boomed while consumer goods production has stagnated).

So, is there an 'inflation problem'? Indeed, there is.

 

TMS-2-LT-ann

The 'inflation problem' illustrated – click to enlarge.

 

However, central banks only react to inflation if and when it begins to impact CPI. Should Mr. Feldstein's forecast turn out to be correct, it will certainly surprise the socks off a great many people. It would also be anathema to the current bubble in financial assets, as this bubble is predicated on the idea of administered interest rates remaining at zero for as far as the eye can see.

 

Conclusion:

When warnings about inflation meet with ridicule, it may actually be a good time to take them seriously.

 

charts by MIT, St. Louis Fed

 

 
 

Emigrate While You Can... Learn More

 
 

 
 

Dear Readers!

You may have noticed that our so-called “semiannual” funding drive, which started sometime in the summer if memory serves, has seamlessly segued into the winter. In fact, the year is almost over! We assure you this is not merely evidence of our chutzpa; rather, it is indicative of the fact that ad income still needs to be supplemented in order to support upkeep of the site. Naturally, the traditional benefits that can be spontaneously triggered by donations to this site remain operative regardless of the season - ranging from a boost to general well-being/happiness (inter alia featuring improved sleep & appetite), children including you in their songs, up to the likely allotment of privileges in the afterlife, etc., etc., but the Christmas season is probably an especially propitious time to cross our palms with silver. A special thank you to all readers who have already chipped in, your generosity is greatly appreciated. Regardless of that, we are honored by everybody's readership and hope we have managed to add a little value to your life.

   

Bitcoin address: 1DRkVzUmkGaz9xAP81us86zzxh5VMEhNke

   
 

4 Responses to “Inflation Warnings Ridiculed”

  • Kreditanstalt:

    woodsbp: yes, PRICE inflation is an outcome of MONETARY inflation. I think we all agree on that. There has been for some time now a cascade of talking heads here in North America saying “there’s no (price) inflation”. Maybe these people don’t shop for necessities, or more likely are so wealthy that necessities are a vanishingly small portion of their shopping.

    Food is an interesting measure. Package sizes are shrinking. Weights of cereal packages are now as low as 250g a box but prices are not coming down commensurately with weight. Quality of ingredients seems to me to be deteriorating; a quantity of the fruit and nuts in cereals is being replaced with more flakes. We’ve seen meat prices up a good 10% this year alone. Coffee is also up similarly and they’re playing with weights in each can there too. 960g is now 920g, and so on. Sales are less frequent. Discounts for larger quantities gradually disappearing. Discounted nearing-sell-by-date items are snapped up more quickly than a couple of years ago, and more people shop at the discount warehouse type supermarket instead of the (expensive) chains like Safeway…

    Aren’t these examples of inflation (price inflation) too? I mean, come on, guys…! Prices are rising – in food alone – at something like 10%p.a…. They seriously need a better measuring stick.

  • Kreditanstalt:

    Someone should devise a workable measure of price inflation in NECESSITIES only. Stuff you HAVE TO buy: basic foods, energy, gas, taxes, utilities, &c., and nothing else.

    I’d guess nearly all of us could agree that price inflation in those items is far above either CPI or BPI…

    • zerobs:

      I am ecstatic that you put taxes in your list. Officials and other brain-dead people (read: economists) conveniently ignore taxes but the percentage increase in tax rates over the last decade has been staggering. Even if I were to take someone like like Paul Krugman seriously in regards to aggregate demand, the fact of the matter is taxation is killing demand faster than any Fed scheme is increasing it.

      I’ve seen sales taxes increase from 8% to 9.5%. That is a 20 PERCENT increase in sales taxes. Property taxes rising 50% over 10 years in some places means an annual 5% increase. That is inflation in taxes, and those percentages are more than double the CPI measurements.

      If they say “taxes are the PRICE we pay for civilization”, then that price needs to be measured in the price inflation indexes instead of ignored.

    • woodsbp:

      Kreditanstalt, just ask those who do their weekly family shopping what food (incd. potable water) they are buying, and for how many persons. Clearly there will be both regional and national differences, but just report these as is, and avoid aggregating stuff into a meaningless mean. All you have mentioned seem sensible, but ‘taxes’ would pose a difficulty as they may be proportions of income or consumption expenditure. In Ireland we have a 25% VAT rate on many goods! Its 13% on many services. Then we have Excise duties! Then we have income tax! Then we have a Property Tax – paid out of earned income. And soon we will have Potable Water charges, again paid out of earned income. Is it any wonder our economy is headed downhill. Bye, bye demand!

      Funny thing though. Private motor vehicles, have a 100% of import price (or near enough) Registration Tax imposed when the vehicle is first registered for public use. And new motor sales are UP on a year-on-year basis! Whilst retail is still declining.

      Anyhow, PT has mentioned one item that both he and I can agree on – the definition of Inflation (increase in money supply). The unit of currency is a basic or fundamental unit (it is dimensionless). The problem appears to be that you have both regulated and un-regulated entities emitting money (in all forms). That’s a sure path to the debasement of your currency. Prices however, are a derived unit, with the dimensions of units of currency per specified unit of good or service. The good or service may be a singular item, a specific number of items or a weight or a volume. In some instances units of time may also be used. I attempted to explain this difference to some economists, and why using prices as a measure of inflation was unreliable, their eyes simply glazed over. However, when I allowed that inflation was an increase in money supply – I was promptly corrected: “Its an increase in price. Silly!”

      Economic Moral: DO NOT expect economists to deal in any meaningful manner with either of the above. Its below their pay-grades.

      Brian.

Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • Strange Moves in Gold, Federal Reserve Policy and Fundamentals
      Counterintuitive Moves Something odd happened late in the day in Wednesday's trading session, which prompted a number of people to mail in comments or ask a question or two. Since we have discussed this issue previously, we decided this was a good opportunity to briefly elaborate on the topic again in these pages. A strong ADP jobs report for March was released on Wednesday, and the gold price dutifully declined ahead of it already, while the stock market surged concurrently. Later in...
  • Gold – An Overview of Macroeconomic Price Drivers
      Fundamental Analysis of Gold As we often point out in these pages, even though gold is currently not the generally used medium of exchange, its monetary characteristics continue to be the main basis for its valuation. Thus, analysis of the gold market requires a different approach from that employed in the analysis of industrial commodities (or more generally, goods that are primarily bought and sold for their use value). Gold's extremely high stock-to-flow ratio and the main source of...
  • Doomsday Device
      Disappearing Credit All across the banking world – from commercial loans to leases and real estate – credit is collapsing. Ambrose Evans-Pritchard writing for British newspaper The Telegraph:   Credit strategists are increasingly disturbed by a sudden and rare contraction of U.S. bank lending, fearing a synchronized slowdown in the U.S. and China this year that could catch euphoric markets badly off guard. Data from the U.S. Federal Reserve shows that the $2 trillion market...
  • The Balance of Gold and Silver – Precious Metals Supply and Demand
      Orders of Preference Last week, we discussed the growing stress in the credit markets. We noted this is a reason to buy gold, and likely the reason why gold buying has ticked up since just before Christmas. Many people live in countries where another paper scrip is declared to be money — to picture the absurdity, just imagine a king declaring that the tide must roll back and not get his feet wet when his throne is placed on the beach — not real money like the US...
  • The American Empire and Economic Collapse
      Dashed Hopes Despite widespread optimism among libertarians, classical liberals, non-interventionists, progressive peaceniks and everybody else opposed to the US Empire that some of its murderous reins may finally be pulled in with the election of Donald Trump, it appears that these hopes have now been dashed.   Liberty... some of it is still above water, but definitely not as much as there could or should be.*   While the hope for a less meddlesome US foreign policy...
  • Pulling Levers to Steer the Machine
      Ticks on a Dog A brief comment on Fed chief Janet Yellen’s revealing speech at the University of Michigan. Bloomberg:   “Before, we had to press down on the gas pedal trying to give the economy all of the oomph that we possibly could,” Yellen said Monday in Ann Arbor, Michigan. The Fed is now trying to “give it some gas, but not so much that we’re pushing down hard on the accelerator.” […] “The appropriate stance of policy now is closer to, let me call it...
  • Credit Contraction Episodes
      Approaching a Tipping Point Taking the path of least resistance doesn’t always lead to places worth going.  In fact, it often leads to places that are better to avoid.  Repeatedly skipping work to sleep in and living off credit cards will eventually lead to the poorhouse.   Sometimes the path of least resistance turns out to be problematic   The same holds true for monetary policy.  In particular, cheap credit policies that favor short-term expediency have the...
  • The Empire Needs an Emperor
      Unknown (sort of) Head of State BUENOS AIRES – Type Swiss President “Doris Leuthard” into Google. You will get about 450,000 results. Do the same with Donald Trump, and the number is closer to 396 million. That’s 87,900% more references. The world’s press is as fascinated by President Trump as it is indifferent to President Leuthard.   Doris Leuthard, President and energy minister of Switzerland. She has won her second presidential term this year. It basically...
  • Mea Culpa – Precious Metals Supply and Demand
      Input Data Errors Dear Readers, I owe you an apology. I made a mistake. I am writing this letter in the first person, because I made the mistake. Let me explain what happened.   The wrong stuff went into the funnel in the upper left-hand corner...   I wrote software to calculate the gold basis and co-basis (and of course silver too). The app does not just calculate the near contract. It calculates the basis for many contracts out in the distance, so I can see the...
  • The Cost of a Trump Presidency
      Opportunity Cost Rears its Head Last Thursday’s wanton attack on a Syrian air field by the US and its bellicose actions toward North Korea have brought the real cost of candidate Trump’s landslide victory last November to the forefront.   It didn't take long for Donald Trump to drop his non-interventionist mask. The decision was likely driven by Machiavellian considerations with respect to domestic conditions, but that doesn't make it any better.   Unlike...
  • India – Is Kashmir Gone?
      Everything Gets Worse  (Part XII) -  Pakistan vs. India After 70 years of so-called independence, one has to be a professional victim not to look within oneself for the reasons for starvation, unnatural deaths, utter backwardness, drudgery, disease, and misery in India. Intellectual capital accumulated in the West over the last 2,500 years — available for free in real-time via the internet — can be downloaded by a passionate learner. In the age of modern technology, another mostly...
  • French Election – Bad Dream Intrusion
      The “Nightmare Option” The French presidential election was temporarily relegated to the back-pages following the US strike on Syria, but a few days ago, the Economist Magazine returned to the topic, noting that a potential “nightmare option” has suddenly come into view. In recent months certainty had increased that once the election moved into its second round, it would be plain sailing for whichever establishment candidate Ms. Le Pen was going to face. That certainty has been...

Austrian Theory and Investment

Support Acting Man

Own physical gold and silver outside a bank

Archive

j9TJzzN

350x200

Realtime Charts

 

Gold in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Gold in EUR:

[Most Recent Quotes from www.kitco.com]

 


 

Silver in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Platinum in USD:

[Most Recent Quotes from www.kitco.com]

 


 

USD - Index:

[Most Recent USD from www.kitco.com]

 

THE GOLD CARTEL: Government Intervention on Gold, the Mega Bubble in Paper and What This Means for Your Future

 
Buy Silver Now!
 
Buy Gold Now!
 

Oilprice.com