Boring nerds for a boring economy
I do not think we have inflation in the true sense of the word, at least not the kind which can be controlled by interest rate increases, and I think bernanke knows this now.Inflation is generally believed to be too much money and easy credit chasing after a limited supply of goods and services. Demand outpacing supply. This may have been true of the housing market, but thats over with obviously, yet we still have inflation.There is a ton of money out there, and it is not being lent out cheaply to consumers, or in any great quantities. The banks are borrowing a ton of it from the Fed cheaply, but we are not seeing it in the real economy, which is cash starved.In a true inflationary environment, factories and businesses expand rapidly, competing for labour, and wages increase putting more money in the hands of consumer, allowing prices to increase because the consumer can afford it and is spending more, and because labour costs have increased so they need to charge higher prices to cover the increases.Real income however has been declining, savings are almost nothing, so the consumer is cash starved, and when credit is tight or too expensive, as it is now, they start buying less, they have no choice. That should be deflationary.But for necessities, like energy, food, insurance, health care, these prices will increase regardless of Fed policy or the consumers cash situation. The reason is that these are necessities, and there is not much competition in these industries. FTC did a study in the 60's and showed that when the 4 top industry companies control 40% of the market share or more, then prices would rise 25% or more. This is what we are seeing increasingly more across the board. The competition within an industry is more about reducing costs than pricing. With pricing it is all about follow the leader. The other factor is the value of the USD. When the dollar is weak, other countries are willing to buy food and energy at higher prices, since when converted to their own currency, it has not increased much. This may be what we are seeing in some of the food price increases, since if food can be exported at a higher price than the dometic price, it will either be exported or the domestic price will increase.The bad news for 2008, is that the core inflation outlook is looking poor. China has appreciated it's currency almost 15% over the past couple of years, wage growth is over 20%, energy prices have resulted in higher material and production costs, not to mention shipping and distribution costs, and they have implemented a new labour standard which if enforced, will result in significant increase in labour costs. Word is the manufacturers will pass on these costs to the retailers, who will be reducing the size of orders and will be in a tough position to hold back the increases. How much they pass on the the consumer will depend on Wal-Mart and Target, another example of follow the leader pricing practices. My bet is core will be king no more, especially in the 2nd half of 2008.Todays inflation is the worst type of inflation, much worse than the 70's to early 80's. In the 70's to early 80's we had high inflation, but it was honestly reported, so wage growth was strong, health care relatively cheap, and savings were earning a decent interest rate helping to offset inflationary effect.Today, our government lies about inflation, as you pointed out, wink wink. So banks can offer low interest rates in deposits, discouraging savings and encouraging consumption, credit was cheap (the money is created out of nothing, so what if the interest rates they receive are lower than inflation), wage inflation which tracks official inflation in normal times was suppressed, as were COLA's for those living on fixed incomes. There has been an increase in labour supply due to legal and illegal immigration and 2 family income households. Most households in the 70's got by with one wage earner and the wife could help out in a pinch by working if additional income was needed during tough times, but she is already working in good times today. Outsourcing some domestic services to places like India, is also a factor. All working to suppress wages.Things could get pretty ugly. The consumer does not seem to have much wiggle room here. The fleas might have killed the dog.
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