Unanimity Syndrome

If there is one thing apparently no-one believes to be possible, it is a resurgence of consumer price inflation. Actually, we are not expecting it to happen either. If one compares various “inflation” data published by the government, it seems clear that the recent surge in headline inflation was largely an effect of the rally in oil prices from their early 2016 low. Since the rally in oil prices has stalled and may well be about to reverse, there seems to be no obvious reason to expect the increase in CPI to continue, or heaven forbid, to accelerate.

 

Buying an egg in Berlin, circa early 1923.

Photo credit: DPA

 

So-called “inflation expectations” – which really means expectations about the future rate of change of CPI – have certainly risen following the US election, in expectation of a Trumpian spending spree and the possibility that higher tariffs might be imposed. This is to say, they have surged in terms of certain market indicators, such as inflation breakevens and forwards. Moreover, bond yields have certainly risen as well – as we expected them to do, since oil price-related base effects were bound to boost CPI (as we mentioned several times in these pages).

However, that obviously doesn’t mean that anyone believes rising consumer price inflation to represent a great threat, least of all an imminent one. This was brought home to us again shortly after the recent Fed rate hike, when a friend mailed us the following chart which was recently published at Zerohedge. It depicts the public’s medium term inflation expectations according to a regular consumer survey conducted by the University of Michigan. Ponder it carefully (the chart annotations are by ZH):

 

According to the University of Michigan survey, the public’s medium term  inflation expectations have just hit a record low.

 

As we looked at this chart, we were struck by two thoughts. For one thing, it dawned on us that the public’s expectations are probably not too far from our own and those of virtually everyone we know or are in contact with. These views are not necessarily similarly extreme, but no-one thinks there is going to be a big “inflation problem” anytime soon.

For another thing, we began to wonder about the annotation added to the chart: if the chart depicts a “deflationary mindset”, the implication seems to be that prices should be expected to decline because of it. But if that is the case, one has to ask: What did this chart tell us in 1980?

From there it is only a small step to the realization that expecting such an “inflation problem” to develop is currently the ultimate contrarian stance. Clearly that doesn’t necessarily mean that it will actually happen, or that it will happen soon. But we have learned over the years that if a certain event or trend in the markets or the economy appears to be completely impossible to nearly everyone, it sometimes becomes the “new normal” within a few years.

As an illustrative example, think back to the situation in gold and commodities in the late 1990s. Who thought they could possibly make a comeback? We still remember the doubts people had that gold could remain above $300; or rise above $500 (the 1987 high); or rally above $850, and so forth. Even gold bulls were continually surprised. When the CRB index began to surge – before it became “common wisdom” that Chinese demand was going to drive it infinitely higher forever and ever – most discussions revolved around the imminent demise of the rally.

The recent surge in CPI is eerily reminiscent of that situation. Fed officials certainly don’t expect it to be anything but temporary. No mainstream analyst considers it a potential threat. We cannot really find a good reason why it should happen either. Of course, as we e.g. mentioned almost two years ago in “Ms. Yellen and Inflation” and on a few other occasions, the long-standing distortions of relative prices in the economy on account of monetary pumping are bound to eventually reverse.

 

What Inflation Really Is

We often talk about monetary inflation in these pages, as that is what inflation actually is. When economists began to refer to rising consumer goods prices as “inflation”, they confused one of the possible symptoms of inflation with the phenomenon as such. Today the public thinks of this chart when it hears the term inflation:

 

CPI, annual rate of change. It has reached 2.8% in February, which is certainly quite high by recent standards – click to enlarge.

 

As Ludwig von Mises remarked, this Orwellian shift in terminology was by no means harmless:

 

“First of all there is no longer any term available to signify what inflation used to signify. It is impossible to fight a policy which you cannot name. Statesmen and writers no longer have the opportunity of resorting to a terminology accepted and understood by the public when they want to question the expediency of issuing huge amounts of additional money. They must enter into a detailed analysis and description of this policy with full particulars and minute accounts whenever they want to refer to it, and they must repeat this bothersome procedure in every sentence in which they deal with the subject. As this policy has no name, it becomes self-understood and a matter of fact. It goes on luxuriantly.”

 

(emphasis added)

Ain’t that the truth. Here is a chart of the broad US money supply TMS-2, the “true” money supply:

 

Monetary inflation certainly does seem to “go on luxuriantly” – click to enlarge.

 

As we always stress, consumer price inflation is just one possible symptom of monetary inflation and not necessarily the most pernicious one. The distortion of relative prices engendered by monetary inflation and the associated falsification of economic calculation that leads invariably to over-consumption and malinvestment of scarce capital is of greater moment in our opinion. After all, this is what creates the business cycle, i.e., the boom-bust phenomenon.

It should be clear though that while an expansion of the money supply does not necessarily lead to a noteworthy rise in all prices (whether that happens depends not only on the supply of money, but also on the demand for money and the supply of and demand for goods and services), inflation of the money supply is a sine qua non precondition for an outbreak of “price inflation”. In other words, the policies reflected in the above chart have have definitely put the needed preconditions for an “inflation problem” into place.

We leave you with what Mises said about those who pretend to fight inflation by tackling its symptoms (evidently, he did not put much stock in the ability of central bankers to even comprehend the situation they are tasked with handling):

 

“The second mischief is that those engaged in futile and hopeless attempts to fight the inevitable consequences of inflation – the rise in prices – are disguising their endeavors as a fight against inflation. While merely fighting symptoms, they pretend to fight the root causes of the evil. Because they do not comprehend the causal relation between the increase in the quantity of money on the one hand and the rise in prices on the other, they practically make things worse.”

 

Conclusion

Perhaps it would not be the worst idea to at least place a side bet on a resurgence of price inflation. One should definitely give some thought to one’s response, if seemingly against all odds, it actually does happen.

 

Charts by: Zerohedge, St. Louis Federal Reserve Research

 

 

 

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: 12vB2LeWQNjWh59tyfWw23ySqJ9kTfJifA

   
 

5 Responses to “Price Inflation – The Ultimate Contrarian Bet”

  • BobcPDX:

    It’s actually pretty simple. I see the source of the inflation already, and it is the worst possible kind for assets: wage inflation. Minimum wages in most urban areas are soaring as hourly employees clamor for a bigger slice of the pie. Rents are soaring, pushing people to demand relief in the form of higher hourly rates. And it’s rippling upward. I used to be able to bring interns into my company around $15/hour, but with minimum wages approaching that level, I have to increase their incoming rate, and that practice ripples through my entire wage schedule. For any company with significant payroll expense, this will be a drag on the earnings in the PE ratio for years, and it will likely also pressure interest rates higher.

  • Kafka:

    When our Economic Worldly Philosophers wrote of the price of widgets, they completely ignored how you measure a widget, both in quantity and quality, or they assumed widgets were static.
    We all know the 2 easiest tricks to mask inflation at the consumer level. Trick the consumer by changing how much is in the box, or change the size/shape of the box. Even something a simple as a steel washer (for a bolt) is now so thin, it is approaching the thickness of tin foil.
    And changing quality over time, subtly, glacially, plucks money out of the consumers pocket.
    My best gauge for real inflation, is the Big Mac meal. In the late 1960’s you got change back from a dollar. In 2017 it can’t be said the ingredients have increased in quantity or quality, but depending on where you live the same Big Mac meal ( I can’t eat that stuff anymore) is from $7 to $8.50 (change back from a $10).
    Aggregate inflation is 800%. And it doesn’t matter what a government economist wants to tell me about utility, the first black and white TV’s gave their contemporaries the same thrill/value as an HD TV today.

  • trojan1:

    Australia’s inflation is like magic… The RBA says inflation is 2% however, every core expense I have go up 10% to 15% each year… It’s magic!

  • jks:

    I don’t care what statistics or charts say, the price inflation that’s hurting me most is rent price inflation. In Idaho, which is surely not a real estate bubble state, I would say that rent prices are increasing at about 10% per year and the rental market is extremely tight. If you can find a place, you have to accept a 1yr minimum lease or pound sand.
    Rents are high everywhere. Since rent is the biggest item on the budget for me, and I move often, this form of price inflation is a real smack down.

Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • Venezuela – An Economic Catastrophe in Charts
      The Final Stage of a Crack-Up Boom For economists the dire downward spiral of Venezuela's economy holds the same fascination black holes hold for physicists. Both illustrate what happens amid the most extreme conditions imaginable. It is thought that this may potentially provide clues of a more general nature. The remnants of massive imploded stars are inanimate and many light years distant; regardless of how violent conditions in their vicinity are, they cannot touch us. Unfortunately,...
  • The Degrading Facts of a Fake Money Hole in the Head
      Squishy Fact Finding Mission Today we begin with the facts.  But not just the facts; the facts of the facts.  We want to better understand just what it is that is provoking today’s ludicrous world. To clarify, we are not after the cold hard facts; those with no opinions, like the commutative property of addition. Rather, we are after the warm squishy facts; the type of facts that depend on what the meaning of ‘is’ is.   Fact-related pleas... [PT]   The facts,...
  • Thirteen Reckonings Hanging in the Balance
      A Fake Money World The NASDAQ slipped below 8,000 this week. But you can table your reservations.  The record bull market in U.S. stocks is still on. With a little imagination, and the assistance of crude chart projections, DOW 40,000 could be eclipsed by the end of the decade.  Remember, anything and everything’s possible with enough fake money.   Driven by a handful of big cap tech companies, the Nasdaq Composite has made new highs – but the broad market (here shown in...
  • Jayant Bhandari - The US Dollar vs. Other Currencies and Gold
      Maurice Jackson Speaks with Jayant Bhandari About Emerging Market Currencies, the Trade War, US Foreign Policy and More Maurice Jackson of Proven & Probable has recently conducted a new interview with our friend and occasional contributor to this site, Jayant Bhandari, who is inter alia the host of the annual Capitalism and Morality seminar.   Maurice Jackson (left) and Jayant Bhandari (right)   A wide range of topics is discussed, from the strong US dollar and...
  • Gold-Silver Ratio Message - Precious Metals Supply and Demand
      Fundamental Developments Last week the price of gold fell three bucks, and that of silver fell a quarter of a buck. But let us take a look at the supply and demand fundamentals of both metals. Also, we have an interesting development in the gold-silver ratio, a topic we have not addressed in a while. First, here is the chart of the prices of gold and silver.   Gold and silver priced in USD   Next, this is a graph of the gold price measured in silver, otherwise...
  • US Equities – Approaching an Inflection Point
      A Lengthy Non-Confirmation As we have frequently pointed out in recent months, since beginning to rise from the lows of the sharp but brief downturn after the late January blow-off high, the US stock market is bereft of uniformity. Instead, an uncommonly lengthy non-confirmation between the the strongest indexes and the broad market has been established. The chart below illustrates the situation – it compares the performance of the DJIA (still no new high since January, although...
  • September – The Most Dangerous Month to Invest
      The Biggest Crashes in History Happened in September and October In the last installment of Seasonal Insights we wrote about the media sector – an industry that typically tends to perform very poorly in the month of August. Upon receiving positive feedback, we decided to build on this topic. This week we are are discussing several international markets that tend to be weak during September and will look at what drives this recurring pattern.   Mark Twain, a renowned...
  • Honest Work for Dishonest Pay
      Misadventures and Mishaps Over the past decade, in the wake of the 2008-09 debt crisis, the impossible has happened.  The sickness of too much debt has been seemingly cured with massive dosages of even more debt.  This, no doubt, is evidence that there are wonders and miracles above and beyond 24-hour home deliveries of Taco Bell via Door Dash.   The global debtberg: at the end of 2017, it had grown to USD 237 trillion. Obviously this is by now a slightly dated figure, as debt...
  • Gold-Silver Ratio Hits 10-Year High - Precious Metals Supply and Demand
      Fundamental Developments The price of gold dropped five bucks, and that of silver 40 cents last week. But let’s take a look at the supply and demand fundamentals of both metals. Also, we continue to follow the development in the gold-silver ratio.   One can buy a lot of silver for one's gold these days. Silver has become extraordinarily cheap, but keep in mind that it was even cheaper vs. gold in the early 1990s (see the section on silver further below for the details)....
  • Corporate Credit – A Chasm Between Risk Perceptions and Actual Risk
      Shifts in Credit-Land: Repatriation Hurts Small Corporate Borrowers A recent Bloomberg article informs us that US companies with large cash hoards (such as AAPL and ORCL) were sizable players in corporate debt markets, supplying plenty of funds to borrowers in need of US dollars. Ever since US tax cuts have prompted repatriation flows, a “$300 billion-per-year hole” has been left in the market, as Bloomberg puts it. The chart below depicts the situation as of the end of August (not...
  • Dubious Prophecies & Perverse Incentives - Precious Metals Supply and Demand
      Suspect Predictions, Ill Wishes and Worthwhile Targets of Scorn This price of gold fell three bucks, and the price of silver fell ten cents last week. Perhaps because of the ongoing $150 price drop so far since April, we saw some doozy email subjects and article headlines this week.   Panic on the inflation Titanic. [PT]   One notable one, from the man who confidently asserted we will have hyperinflation by the end of the year — in 2009 — now says that the...
  • Gold and Gold Stocks – Small Rays of Light in the Vale of Tears
      A Rebound Gets Underway – Will It Have Legs? Ever since the gold indexes have broken below the shelf of support that has held them aloft since late 2016 (around 165-170 points in the HUI Index), the sector was not much to write home about, to put it mildly. Precious metals stocks will continue to battle the headwinds of institutional tax loss selling until the end of October, to be followed by the not-quite-as-strong headwinds of individual tax loss selling in the final weeks of the...

Support Acting Man

Item Guides

Austrian Theory and Investment

j9TJzzN

The Review Insider

Archive

Dog Blow

350x200

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

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]

 

Mish Talk

 
Buy Silver Now!
 
Buy Gold Now!
 

Oilprice.com