Monday, April 29, 2013

Is there really inflation?

The inflation vs. deflation debate rages on with enough evidence for both sides to make a case.  In recent months it would appear that inflation has taken the upper hand, at least on the surface.  Below the surface, however, deflationary undercurrents abound.

On this subject I received the following email: “There is huge inflation in stocks and bonds but that's ‘good inflation.’  There is inflation in everything in one’s life: food, cars, health care, college, cannot look at inflation from a monthly CPI/PPI perspective.

“Go back 10 yrs-20 yrs-30 yrs etc., and take any item – like a house that was 70K; now it is $350K.  Same deal with everything from gas to groceries to the shrinking quantities in boxes from soap to cereals.

“In the ‘60s and ‘70s stock deals were done in the millions, now it’s in the billions.  And every few months now prices are going up in the supermarket.”

All of these are salient points but one fact remains: with record levels of central bank liquidity, corporate cash and bank reserves, why is there no inflation in the classical sense (i.e. rising interest rates and spiraling wages)?  In fact just the opposite is true: interest rates are at record lows and wages are stagnant.  Moreover, the rate of change in consumer price increases is miniscule compared to what it would be in a truly hyper-inflationary environment of the kind we witnessed in the 1970s.

Much of the debate therefore hinges on how the term “deflation” is defined.  When we consider the monumental attempt among central banks at re-inflating the global economy we can see that it has taken non-stop and record levels of pump priming to merely achieve economic stasis.  True economic inflation is still a long way off.

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