If you’re looking for something to jolt you out of the doldrums albeit not in a good way, you need look no farther than Peter Bernholz’s op-ed on the possibility of hyperinflation (inflation at the rate of 50% or more per month) in the United States. I’ll reveal the ending: the answer is “No”. But it’s scary nonetheless.
However, it’s becoming a lot harder for the folks who’ve been saying that we have nothing to fear from inflation to do so with a straight face:
The Federal Reserve’s Open Market Committee meets today, and right on time. Yesterday’s producer price report showed that wholesale business prices rose 1.8% in November, or a 6.3% annual rate over the past three months and 2.4% over the past year.
The news hit markets with a jolt, because investors have become accustomed to the Fed’s assurances that it must keep interest rates at their current historic lows for an “extended period” because the only real economic risk is deflation. Investors reacted by sending bond prices down sharply, as they wondered if the Fed may have missed its bet and will have to change course sooner than it has advertised.
Fed Chairman Ben Bernanke is notoriously stubborn, at least when he’s easing money. And no doubt someone at the Fed will point out that if you remove food and energy from yesterday’s report, then producer prices rose by only 0.5%. However, this is the same “core” price rationalization the Fed used earlier this decade to keep monetary policy too easy for too long. Deflation was another siren song that the Fed used in 2003 and 2004 to build the credit mania that led to the bubble, the blowoff and recession.
Like $1100 gold and $70 oil amid weak global energy demand, the producer price report is a warning that the Fed should already have begun to move back to a noncrisis monetary stance.
As interest rates rise and they will inevitably rise since they’re currently at historic lows, the cost of all of the borrowing that the federal government is doing will necessarily rise, too.
Can a prolonged period of asset inflation (as opposed to monetary inflation) induce stagflation? That’s an honest question. I’d really like to know.
“Can a prolonged period of asset inflation (as opposed to monetary inflation) induce stagflation? That’s an honest question. I’d really like to know.”
I’m not a degreed economist. But I have some significant formal training, and it is a bit of a hobby. So with that caveat…..
1. I’m not sure I would say asset bubbles are “inflation.” Inflation implies a permanent devaluation in an asset, particularly currency, for well known monetary reasons. In contrast, asset bubbles are characterized by easy credit that allows the prices to be bid up, but it is a transitory phenomenon.
2. It seems to me that the term “stagflation” describes a situation where monetary ease promotes currency inflation at the same time demand issues create stagnation.
3. Hence, I’d say that stock market and housing assets declines might reduce wealth effect, attenuate demand, and be part of the “stag.” But they wouldn’t be part of the “flation.” Rather, as Dr. Friedman observes, inflation is always and everywhere a monetary phenomenon. If the two coincide, so be it. But I don’t see the causality of asset bubbles.
By the way. The inflation / deflation debate is in my mind so fundamental to economic debate, personal financial planning etc right now that I would direct you to a blogsite called “zerohedge” which routinely has a cerebral and balanced approach to the issue.
I will second reading zero hedge. If you are going to read that site you should read Sumner also. Interesting site. Also, inflation was 1.7% in June and -1.2% in July IIRC. Not sure we have a trend.
Steve
The reason for considering the PPI is that it’s a pretty fair predictor for CPI.
As someone who routinely negotiates contracts with prices indexed to CPI, I’m not nervous yet–everything’s been coming in under budget compared to forecast, and as steve points out, there’s no trend yet. I haven’t checked my numbers on this, but off the top of my head I believe that November is generally a high PPI month as people massage prices up a little ahead of the inevitable holiday season cuts and the price of oil goes up because of winter use in the northern states.
If DECEMBER shows a significant increase, that might be cause for concern–but then, this is a colder winter so far than the past few years, so the PPI increase might be an artifact of high oil prices, which tend to cause wholesale prices to go up. If it’s an artifact of oil prices, it’s more likely that retailers will squeeze their margins rather than increase prices, so it may not have a one-to-one impact on CPI.
Alex –
You are engaged in a high wire act, my friend. CPI or PPI aside, the important price of energy is of course tied to economic activity. What a period of uncertainty we have now.
Can I send you a case of Mylanta?
Drew,
I work in commercial real estate, so I’m well stocked. Thanks, though. It would be nice to have a clearer view of the years ahead. Believe me, I watch the inflation metrics like a hawk…