Really Stagnant Inflation and even Genuine Deflation are part of the US economy now. Where is the hyperinflation?
! is the mathematical symbol for “not”, in case you were wondering.
!Inflation
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Category Archives: inflation
US Fed trying to counter deflation
The US Fed is trying to counter deflation risks by committing to low interest rates for longer. This is a good idea, but such a pity it’s so late. The real question is whether the Fed has sufficient credibility in this statement to counter the massive credibility they created around controlling inflation “no matter what”.
This is progress.
The ECB game
So you can now play at being in control of the EC. This game of monetary policy for the EU is relatively interesting and educational.
Critically, and potentially most informatively of all, the game measures success by inflation being within target and low volatility alone. No mention of economic stability or unemployment. Very much like the real thing.
Golden Stories
Gold has had a fantastic run, getting to within sight of $2,000 recently. Many see this as a clear indication of hyper inflationary pressures arising out of loose monetary policy. The informed recognise that you can’t have hyperinflation if all sensible measures of actual prices other than a particular, volatile commodity are showing very low inflation.
Some stories about gold today and recently:
- Krugman theorises on how the high gold price might be a result of a very low real yield and a particular “choke point” for the future gold price at some distant future point. It seems theoretically interesting, but I’m not quite ready to use this as a working theory.
- Gold now available via ATM in China (but also in Europe and the US)
- Gold down almost 16% from it’s $1,920 intra-day high a few days ago, including a $100 free-fall reflecting the relatively low liquidity of gold markets.
Now I don’t spend much time on gold as an investment, but these stories are certainly interesting.
I’ll leave you with one thought (for the OMG! Inflation! of my readers). If the gold price is a measure of “real prices” in the economy, but prices of actual goods and services are more or less unchanged in dollar terms, this means the price of these items in gold terms has plummeted massively. Do you really think that a scenario where all prices are half of what they were two years ago is workable? What should have to wages? What needs to happen to wages? What will likely actually happen to wages? Does any part of this scenario seem like a Good Thing?
Euro in Peril #1
The debate over the continued existence of the Euro has moved from a whacky fringe view to one, while still more unlikely than not, needs serious consideration.
What is clear is that Greece is struggling through the inability to devalue their currency and complication with defaulting while remaining part of the Euro. The Germans are very unhappy with the ECB’s bond-buying to keep Spanish and Italian bond yields down so as not to create a self-fulfilling solvency problem out of a liquidity problem.
Now, the top German official at the ECB, Juergen Stark, has resigned in protest at the ECB’s purchase of government bonds. In fairness, he is being replaced by a more pragmatic German, but the focus on the ECB’s mandate will not relent. Officially, the ECB’s objective is to manage inflation. I think the target is “a little below 2%”.
In fairness, one of the “further tasks” mentioned is financial stability, which one could argue is what the government bond purchases are doing. One might also argue, although I don’t think the ECB has done so yet, that by purchasing government bonds, increasing the money supply and lowering long-term borrowing costs, they are fighting deflation, which is within the “a little below 2%” objective. Since the ECB was talking about overly high inflation in recent years (what a mistake) it is a stretch for them to now argue that deflation is the answer.
It’s also clear that the European fiscal response has been overwhelmingly one of austerity – hardly the response to concerns about deflation, let alone unemployment and a stagnant economy.
It’s an aside to the main point of this post, but the ECB has struggled to keep to its inflation target for many years. This is largely due to their use of an inflation definition that it subject to too much volatility from exogenous shocks that cannot and should not be controlled through monetary policy.
The most current nail being carried towards the Euro’s coffin is UK Foreign Secretrary, William Hague, asking for Britain to have looser ties with Europe. There has been noise for Prime Minister David Cameron to hold an “in out” referendum on the European Union altogether.
It’s early days, but the anti-Euro noises are getting louder not softer.
Ignoring the facts take 2
Felicity Duncan from Moneyweb makes the story up as she goes in a recent story about whether to stay invested in the markets or not.
Inflation is beginning to increase around the world, and just about the only thing that economists can agree on is that the current ultra-low interest rates policies popular in much of the world are going to lead to relatively high inflation over the next few years
Ms Duncan has entirely missed the critical point differentiating economists’ views. Some below we’re in a liquidity trap where we only wish we had inflation (but don’t have) and need more fiscal stimulus to promote demand and a return to full employment, others are worried that low interest rates and quantitative easing will result in market distortions, the inflation of another bubble and won’t fix unemployment (which they think is structural).
Moreover, inflation expectations are not climbing and are not high (unless you call 1.7% on a five year view “high”)
Breakeven inflation
So Ms Duncan simply showcases the state of the economic debate we’re in. There are multiple views, but much of discussion is happening independent of the facts.
Compounding wisdom from a surprising source
I really struggled when Health Minister Aaron Motsoaledi announced (many sources, but here is one) that private healthcare costs have increased by 121% over the last decade.
He continued: “Over the past decade, private hospital costs have increased by 121%, while over the same period, specialist costs have increased by 120%.”
Anyone who measures growth over long periods without using compound annual rates can’t be taken seriously. Abusing numbers for shock value is a sure sign of a weak argument or a lack of appreciation for long-term issues.
121% over nine years (2001 to 2009) equates to an average cumulative annual growth rate of 9.2%. Now medical price inflation of 9.2% is high given inflation over the period and modest real growth in GDP and salaries. But 9.2% tells a very different story to a layperson than 121%. The 9.2% is more useful, more comparable to inflation, more easily able to be understood. 121% is more shocking.
I was really encouraged to read this in a story, quoting Matlala from HASA:
He pointed out that while the green paper said private healthcare costs had increased 121% between 2001 and 2009, this should be contextualised against the backdrop of contributions to public healthcare increasing by more than 100% over the same period.
“Even the price of bread has increased 111% over the decade… We have to face up to the fact that the cost of living has gone up, including healthcare,” Matlala said.
Finally, someone quoted acknowledging that the 121% figure is utterly misleading.
Incidentally, 111% over 9 years is equivalent to an 8.7% annually compounded growth rate, just 0.6% per annum below healthcare cost increases.
Why “recession” still shouldn’t be the only worry word
The US probably won’t go into recession again in the next two years. And by that I mean it’s more likely that they won’t than that they will. Larry Summers and Goldman Sachs both now estimate a one-in-three chance of a double-dip recession.
But as I mentioned before, the definition of “recession” isn’t as important as it’s made out to be. It has a definition, let’s not try to redefine it otherwise we’ll end up with no clear definition at all. But just because a country isn’t in a recession doesn’t make it all rosy.
Continued growth below potential increase the output gap, generally leads to a stagnation or decline in employment and makes citizens feel poorer. Recession or no, this is what the guys I listen to are forecasting for the US.
And no, nobody with any remaining credibility is predicting hyperinflation for the US anytime soon. (There are so many sources, but this from the Federal Reserve Bank of Cleveland.)
| Percent change from previous month | ||||||
| Jan | Feb | Mar | Apr | May | Jun | |
| CPI | 0.4 | 0.5 | 0.5 | 0.4 | 0.2 | -0.2 |
| CPI less food and energy | 0.2 | 0.2 | 0.1 | 0.2 | 0.3 | 0.3 |
| 16% trimmed-mean CPI | 0.2 | 0.3 | 0.2 | 0.3 | 0.2 | 0.1 |
| Median CPI | 0.2 | 0.2 | 0.1 | 0.2 | 0.2 | 0.1 |
| Percent change, past 12 months | ||||||
| Jan | Feb | Mar | Apr | May | Jun | |
| CPI* | 1.6 | 2.1 | 2.7 | 3.2 | 3.6 | 3.6 |
| CPI less food and energy* | 1.0 | 1.1 | 1.2 | 1.3 | 1.5 | 1.6 |
| 16% trimmed-mean CPI | 1.0 | 1.2 | 1.5 | 1.7 | 1.9 | 2.0 |
| Median CPI | 0.8 | 1.0 | 1.2 | 1.4 | 1.5 | 1.6 |
| Note: All data are seasonally adjusted. *Calculated using nonseasonally adjusted indexes. |
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