Not really dead

Based on misleading data, inflation seems to be almost non-existent.

One should not dismiss the likelihood of higher inflation appearing before long. The Consumer Price Index suggests that inflationary price increases are running at low levels and gold prices, which usually move up with inflation, have been falling.

One should wait a minute before coming to any conclusion on this subject.

First, consider hedonic pricing. If quality improves or if included are more changes, then the reported prices should be lowered to register those factors.

For instance, if a computer is faster, or if the pad on the auto’s driver’s side is thicker or heated, that means that the price does not reflect that; as a matter of fact, one is getting “more bang for the buck”.

Not long ago, the Bureau of Labor Statistics reported car prices actually declined, despite the fact that listed prices rose about 5%. The explanation forthcoming was that car doors now had extra padding worth, it was stated, several hundred dollars!

The the CPI ignores the fantastic inflation in house price over the past year. They are not included in the price indices, only rents, which sluggishly move up with house prices. Also excluded are repair changes or the sharp rise in insurance premiums.

Some forecasters therefore assume that inflationary pressures are minimal. Yet underlying trends belie that.

Also, inflationary fires are being stoked. Money velocity, the speed at which money turns over, and the money multiplier from money being printed, will stop falling and reverse direction.

After all, David Stockman, Reagan’s principal economic adviser wrote, “The U.S. is printing money at the astounding rate of $600 million per hour”, and as that enters the economic stream, it will have a profound effect on material prices and labour.

Reflecting economic uncertainty, corporations have been reluctant to begin a program of capital spending. When that changes, it will entail inflationary pressures.

Corporations are resorting to temporary workers rather than hiring full-time ones at higher rates. Soon the supply of temporary workers will end. Too, job openings now are rising at double-digit rates and firing are at record lows. Hence, the labour component of the CPI will show a large increase.

Commodity prices have taken a big hit as speculators have anticipated that inflation will remain dormant.

Given the above-mentioned trends, commodity prices will soon turn higher. A reappearance of inflation will soon to follow.

 

Bruce Whitestone

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