Inflation

[kommonsents]

'admin' pid='22589' datel Wrote:

Good luck with that gold bet, I'm rather sceptic, I have to say. After four years of liquidity pumping by central banks left right and center, inflation still hasn't taken off at all:

• http://shareholdersunite.com/mybb/showth...p?tid=3648
• http://www.washingtonpost.com/blogs/wonk...ezra-klein
• http://jaredbernsteinblog.com/low-demand-low-inflation/

It will be interesting to see what happens in Japan, as they've taken 'stimulus' to new heights as we speak.

If we accept the "official" rates of inflation, you are correct, inflation is negligible.  However, the "official" rates of inflation do not include the necessities of living like food and energy.  These excluded items, while cheap in the western developed countries, often make up 50% or more of the income of people/families in developing countries, perhaps over 50% of the world's population.   Inflation for these people has been very high and is straining their ability to pay for basic necessities.

Perhaps it is precisely because of the increases in both costs of energy and food as well as the increased consumption of energy and protein that is soaking up all those printed fiat currencies.  If so, once that has reached a balance, or tipping point, inflation is likely to become rampant and excessive in most/all currencies.

[admin]

The CPI (consumer price index) does contain energy and food, it's the core inflation that doesn't, but both have been low for years despite of years of QE and record low interest rates.

It's also difficult to imagine QE leading to a spike in energy and food prices, but nothing else. Apart from that, higher food (and to a certain extent, energy) prices can be explained by real factors, like:

• The decline in agricultural land
• The rise in world population
• The rise of large numbers of people entering the middle classes, which shifts diets towards much less land use efficiency (for instance, to get the same amount of calories from meat you'll need 6x the amount of land to grow feedstock for cattle)

I don't think inflation is likely to take off as long as credit demand doesn't revive decisively (which is the main mechanism for QE to affect the real economy), and this isn't likely as long as there is so much slack in the economy. Household balance sheets are still smarting from the credit crisis and wages and employment are down significantly.

[admin]

Business Insider has an interesting article about the low inflation and the missed predictions of hyperinflation and also mentions some possible causes

In a recent post, Hale Stewart posits four ideas:

• Slack demand from China.
• The US oil boom (abundance produces the opposite of inflation).
• Slow growth (especially in Europe).
• The end of the commodity boom.
• Ongoing reduction of high household debt.

We think this overlooks the main reason, which is that there is plenty of slack in the economy and credit demand is tepid, due to the ongoing deleveraging process. When people are paying off debts, they tend to borrow and spend less, which reduces demand, creates slack in the economy, and then there is little reason for business to invest a lot in new capacity. Why should they build new plant, if they can't keep current capacity fully occupied?

So the deleveraging has increased private sector savings and decreased private sector investment, moving the private sector into a huge financial surplus (S-I). So much so, that to equate Savings and Investment, rates have to be steeply negative.

The corrolary was, of course, that the public sector (G-T) moved into steep deficit, but this was necessary to keep the economy from spiralling down like in the 1930s.