Tons of talk and pixels being spilled over the imminent inflation threat.  It bears an eerie resemblance to what we heard from the likes of Jerry Bowyer and Art Laffer two years ago.  I’d fade it now, exactly as I suggested back then (here and here, the latter piece co-authored with Bonddad):

Exhibit A — The Chicago Fed National Activity Index (PDF)

When the CFNAI-MA3 value moves above +0.70 more than two years into an economic expansion, there is an increasing likelihood that a period of sustained increasing inflation has begun.

>

Current read of CFNAI-MA3:  +0.11, and that with three of the four subcomponents doing the heavy lifting while one — Consumption & Housing — remains mired near multi-year lows and shows no signs of recovering any time soon.  We might actually get a good call out of Bowyer or Laffer before we get to +0.70 on CFNAI-3MA — it’s gonna be a while.

Exhibit B — The Money Multiplier — all that heavy breathing about the flood of liquidity that was going to pour into the system.  Hyper-inflation!  Except not so much, apparently.  As David Rosenberg (who was spot-on in his assessment of the last bogus inflation scare) put it in his Monday note:

Fully 100% of both QEs by the Fed merely was new money printing that ended up sitting idly on commercial bank balance sheets. Money velocity and the money multiplier are stagnant at best.

>

Those who still think the credit spigots are going to open any moment now, consider this:  We know that consumer credit, ex-student loans, is still contracting.  And we know from National Federation of Independent Business that “the vast majority of small businesses (93 percent) reported that all their credit needs were met or that they were not interested in borrowing.”

Exhibit C — This remarkable chart that I’ve cribbed from Minyanville, though the original source is Bloomberg.  What happens if there’s no QE3?

>

(The chart above was really a stunner.)

Exhibits D and E

Two more reasons with a couple of homemade charts:  Inflation has a very high correlation to the labor market.  Indeed, the roots of inflation are generally found in higher labor costs.  We are just not seeing upward pressure on labor costs — there is simply still too much slack in the system and the Unemployment Rate is too high.  Unit Labor Costs and CPI sport a high +0.88 correlation:

>

>

Average Hourly Earnings and CPI have a +0.79 correlation:

The Fed is on the record with their assessment that any bout of inflation will be “transitory.”  I concur, as does this new Chicago Fed paper, and our old friend David Rosenberg (last week):

The key to the outlook for inflation is not commodities — it is the labour market.  We have a situation where wages in nominal terms are running at +1.7% on a year-over-year rate and productivity is running at +2.0%.  So we have unit labor costs fractionally deflating as they have been consistently since 2009 Q1.  Go back to the 1970s, and guess how many quarters unit labor costs deflated?  Try none.  By the end of the 1970s, unit labor costs had surged at nearly a 7% annual rate for the decade as a whole; not sub-zero as is the case today.

And the last word to Rosie (from Monday’s note):

And it remains a legitimate question as to how we end up with inflation as credit contracts. Not just in the consumer and housing sectors, but in the government sector too. The state and local government sectors have dramatically cut back on bond issuance this year and are cancelling capital projects in the process. We see on the front page of the weekend WSJ this headline ― Inflation Drives a Shift in Markets and right above it is Deadline Drama Over Budget. Not only is household credit contracting, but the same is happening at the government level. This is deflationary, not inflationary, and once commodities settle down ― they are volatile and self-correcting as we have seen in the past ― all this talk of inflation is going to subside pretty quickly.

Finally,  on a semi-related matter, the NY Times ran an interesting piece that follows up nicely on my recent post highlighting the growth in student loans.

Category: Commodities, Current Affairs, Cycles, Data Analysis, Economy, Inflation, Markets, Research, Wages & Income

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

47 Responses to “Fade the Inflation Hysteria”

  1. Chad says:

    Interesting. So, overall inflation will be low, but the consumer is still seeing inflation on items they have to buy (food and fuel). No wage growth, no lending for capital projects/expansion, and more expensive food and fuel. That doesn’t seem like a good sign going forward.

  2. Petey Wheatstraw says:

    Inflation and deflation are money supply terms. What we’re seeing is the transfer of wealth and power to entrenched interests — more political than monetary. Yes, the monetary aspect is inflationary by definition. No, we won’t see hyperinflation (yet), or even classic wage/price inflation (again, yet), because the entire purpose of the policies put in place, to date, is not to ease the imbalances brought on by the credit crisis, but to further enrich and secure the positions of those at the very top, via constant and consistent wealth distribution to their demographic.

    Employment and wages aren’t declining because of an invisible force of free market capitalism. They’re declining as a result of policy.

  3. techy says:

    Doing some math, and it appears that GOP will take higher unemployment, deflation and big market corrections in return for the white house and both houses of congress.

    All they have to do right now is force contraction in government spending (both federal and states) which will start the market correction and pessimism leading to more spending contraction, leading to more pessimism.

    but the 2012 election is still very far, I wonder if they will play their hand too early(or in other words, can democrats make them play their hands early so that they can pin the blame for this downturn, just in time to go for more bigger stimulus and have a recovery by next July/August??)

    There are few caveats….GOP is right now owned by the crazies, not a winnable team. No viable candidate yet to challenge obama.

    I have few long positions(30%), but feeling a bit queasy since feels like there will be some market downturn atleast for next 4-8 months, due to all this political drama. I am thinking maybe going 100% cash again may not be a bad idea considering that maybe deflation will rear its head again??
    (i work full time in a job hence not much time to be nimble…usually i invest for the long term using covered calls to balance risk/profit)

  4. http://finviz.com/futures.ashx

    even ‘Animals’ have been ‘coming off’.. http://finviz.com/futures_charts.ashx?t=FC&p=h1

    and, ‘Dr. Copper’ http://finviz.com/futures_charts.ashx?t=HG&p=w1 has been having ‘problems’, N of ~4.45/lb. ..

    even, Argent, has weakened http://finviz.com/futures_charts.ashx?t=SI&p=h1 now ~40 1/2 ..

  5. VennData says:

    Inflation is always and everywhere a political problem.

    The removal of food and energy from core inflation isn’t because they go up, but because they are more volatile. The “So.. people don’t use food and energy!?” folks always and everywhere don’t know what they are talking about. It’s not a conspiracy, it’s the mathematics of delivering useful information to policy makers.

    When your political party is dependent upon the homeschooled innumerates, the “tax cut for the rich will bring in more taxes” (aka Laffer’s Supply Side economics) can also sound compelling. It just doesn’t work in the real world …nor does including food and energy in a snapshot of inflation, only over the long term does including food and energy make sense.

    If you don’t get that, stop talking about it until you do.

  6. Orange14 says:

    @Invictus – Thanks for the charts they are very useful. One further question which has been vexing me is the role of the housing collapse here. It has been the major driver behind the financial system failure and shows no signs of rebounding given the large supply of existing stock (and future stock given the foreclosure system hasn’t completed its work yet). Since housing is a large driver of jobs, how can we have inflation in the absence of a rebound? If one is to believe most of the macroeconomists out there we will stick with unemployment around the current levels for some time to come.

  7. MayorQuimby says:

    1. M1 Mult and anything showing low velocity/multipliers means inflation is QUICKER to cause pain. You have this perfectly backwards – there isn’t enough cash to be had essentially so higher prices sting immediately.

    2. Tansitory inflation is irrelevant. What IS relevant is that wages are flat and cost of living rising – so every penny of price increase results in DAMAGE via lower spending and savings.

    3. Margin compression is already baked in and getting worse. Revenues will begin to decline and miss.

    4. The Fed is printing into deflation but that money is being handed to the very people who already have money and the only thing rich people ever buy is to buy workers (rented to them, bidding up yield/taking it, making life more expensive via inflation). The Fed policies in place are the precise opposite of what is needed (strong dollar policy) and proof of this is getting increasingly and brutally easy to see.

    5. We’ve essentially hit debt saturation so any injected credit will default out of the system the same way air leaves a balloon with a hole in it. The Fed not only IS failng – but WILL fail at reflation because bad debts and excessive leverage were never allowed to contract naturally. But they will eventually.

  8. [...] an increase in commodity prices. It’s a lot more complex than that. Barry Ritholz has a nice post illustrating many of the other pieces of the inflation puzzle. Many signs like the turnover of [...]

  9. krice2001 says:

    Techy,
    I too work a full time job, as you say, and have “not much time to be nimble”. I’m also at just 28.5% long equities right now. I’m concerned with the battle over the debt ceiling. I can see the diehards in the House actually getting to the point of holding out and not raising the debt ceiling. I’m not savvy enough to predict all the ramifications but I do understand it would be bad. I’m not sure what I’d move my investments to in the scenario.

    The other fear I have is that the GOP may perceive they have a win-win, 1st they can stay on principle of shrinking government and successfully extract significant cuts in government spending as a “price” for raising the debt ceiling. The second preceived win comes if the economy then flattens or turns down again (as many dollars are pulled out of the economy) and this can be used to grow public unease and raise displeasure with the current administration – raising GOP prospects at least at the Presidential level?

    Call me cynical. I honestly don’t know what the best economic policy is, but I can see the calculus above as a tempting one, that could derail the slow recovery that we’re experiencing.

  10. b_thunder says:

    Invictus, or anyone else for that matter, please look at “chart C” and tell me: what is so beneficial when we are forced to pay more for just about anything? What Is So Beneficial in higher prices, especially when 90% of the workforce do not get raises or get their salaries cut? (Unless you’re a speculator in the futures markets or an oil sheikh)

    I’m asking this question because I do not see any other possible positives that came out of QE2: mortgage rates are higher, labor participation is lower, avg wages are the same (i’m sure the median is lower, but avg. is affected by the top earners), foodstamps recipients are at all-time high.

    As far as charts D and E – the labor costs – I would encourage you to look at another statistics: how many jobs GE cut in the USA, and how many it has created abroad over last 10 years. It seems to me that by and large the purely “domestic” labor market no longer exists. And internationally, wages have been going through the roof!

  11. SurvivalAndProsperity.com says:

    Nice catch with that Times piece about student loan debt. Off the radar of many. “Student loan debt outpaced credit card debt for the first time last year and is likely to top a trillion dollars this year…”

  12. Petey Wheatstraw says:

    techy:

    Politically, the outlier here is a Progressive Democratic challenger to Obama. Obama has proven himself a Corporatist warmonger. That’s not the kind of “change” he was elected to enact (or perpetuate/magnify). The Republicans have already made their intentions clear, and I don’t think a majority of Americans like where they want to take us (then again, I might be being too generous with my assessment of the intelligence of the American electorate). I think there’s a huge portion of the electorate waiting for a more balanced option.

    We will see.

    As for tanking the economy for political gain, I wish they’d go ahead and do it (that is, worse than they already have). The backlash would be epic. QE (and the distortions it creates in the economy) is a greater bubble than the RE bubble (which was greater than the dotcom bubble). Won’t take much to stick a pin in this one.

  13. curbyourrisk says:

    Mayor….

    “M1 Mult and anything showing low velocity/multipliers means inflation is QUICKER to cause pain. You have this perfectly backwards – there isn’t enough cash to be had essentially so higher prices sting immediately.”

    I have to disgree here, as I have in the past. Any time you see the M1 Multiplier, or the veolicty, below 1….it is extremely deflationary. Why are we seeing rising prices in the face of this??? STAGFLATION. Real assets going down in value, things you need going higher. This is not an infaltionary event due to the lack of supply and demand issue, but a political (governmental) effect due to the manipulation of the currency. Any hyperinflationary event would also indicate a failure of the government, and not an extended event due to supply and demand constraints. As I see it here at work, nothing is moving….and that is all about supply and demand. Everyone at work is predicting a big second half because our customers need to build their inventory again, I am constatnly reminding them that there is 2 parts to that equation and without any pick up in demand, there is simply no need to increase their own supply.

    I see a long (3-5) year messy, sideways move. The government will continue to LIE and manipulate their way into showing strength. The koolaide drinkers will believe it…and continue to argue that the economy is politically sensitive. As for some of the other posters here….stop arguing politcal policy and figure out a way to FIX things. There is no right or left way to fix a problem. There is only a right and wrong way.

  14. Patrick Neid says:

    Generally most post bubble environments are deflationary on a macro level. However this debate is moot to the average person on the street.

    At the street level higher prices are raging in the things they use daily–food and gas. They don’t care about charts, definitions of inflation and such. On an anecdotal level, despite the bursting of the housing bubble, materials for building a house have continued to go through the roof. Material costs are up near 50-75% over the last five years where I am. Steel, lumber, plywood, concrete etc.

    In fact it is this disconnect between main street and the government/wall street that causes a whole host of other problems–”Who are you going to believe? Me or your lying eyes”.

    Further complicating matters–no one can agree on the simple definition of inflation:

    http://en.wikipedia.org/wiki/Inflation

  15. GeorgeBurnsWasRight says:

    Invictus (since I can’t ask Rosenberg)-

    It seems to me that Exhibit C contradicts the conclusion that “Fully 100% of both QEs by the Fed merely was new money printing that ended up sitting idly on commercial bank balance sheets.”

    Any comments (including an explanation of why the two items don’t contradict each other)?

    Thanks.

  16. Petey Wheatstraw says:

    curbyourrisk Says:

    “….stop arguing politcal policy and figure out a way to FIX things. There is no right or left way to fix a problem. There is only a right and wrong way.”
    ________________

    Politics is policy. It’s all policy, and it’s heavily weighted towards right wing corporatism/fascism. There is no left left. We have suffered decline as a nation as as individuals, economically, due to politics.

    Do you think there’s any way out of this other than politically? Isn’t a fiat monetary system controlled by a central bank the ultimate expression of a politically based and politically controlled economy?

    Want to fix it? Go back to the Eisenhower/Kennedy era and reinstitute all of their economic/tax/labor/trade laws and policies. Rein in the Military/Industrial complex. Stop backstopping the wealthy and remove the corporate shield. Break up the media conglomerates.

    That should fix it.

  17. Petey Wheatstraw says:

    Oh, yeah,

    Holding our national wealth in an elemental and relatively scarce commodity (gold being the best fit) as it was for most of the 20th century, keeps the political class from complete control of the economy.

  18. RW says:

    It’s been very profitable to fade inflation (formally defined) the past decade because, in the absence of upwards inclining real wages, a rise in overall price level was never sustainable and still isn’t. However the inflation panics in response to price shocks as well as currency doubts have presented excellent trading opportunities.

  19. machinehead says:

    Regarding Exhibit A, the Chicago Fed National Activity Index … I’d want to look into its longer history before accepting at face value the assertion that periods of sustained inflation are signaled when the index is over 0.70.

    Just as one, admittedly isolated, example — the CFNAI appears to have last approached the threshold of 0.7 in autumn 2005. By the time $147/barrel crude oil, runaway grain prices, and record commodity prices arrived in July 2008, the CFNAI was at -2.5 and falling!

    All one can say regarding the ‘CFNAI 0.7 rule’ is, Do not attempt to trade commodities with it!

  20. MayorQuimby says:

    “I have to disgree here, as I have in the past. Any time you see the M1 Multiplier, or the veolicty, below 1….it is extremely deflationary. Why are we seeing rising prices in the face of this??? STAGFLATION. Real assets going down in value, things you need going higher. This is not an infaltionary event due to the lack of supply and demand issue, but a political (governmental) effect due to the manipulation of the currency. Any hyperinflationary event would also indicate a failure of the government, and not an extended event due to supply and demand constraints. As I see it here at work, nothing is moving….and that is all about supply and demand. Everyone at work is predicting a big second half because our customers need to build their inventory again, I am constatnly reminding them that there is 2 parts to that equation and without any pick up in demand, there is simply no need to increase their own supply.”

    Curb- I agree entirely. What I stated is not at odds with this.

  21. Jim67545 says:

    The inflation measures include things, housing cost, that obscures the pictures and things, flat wages, that seem to be good in terms of inflation but are actually bad.
    Three points: 1. The USA is much less the center of the universe than the last time we had inflation problems. Back then most of the BRICs and 3rd world was almost pre-industrial. Not so now. Commodities, etc. are no longer a USA consumption story. 2. The dollar is losing its role as the world’s currency. Commodies are much more likely to inflate now as the dollar deflates. 3. One deflationary force has been ignored: China (and the rest of the 3rd world like Vietnam, Mexico.) The things we consumed over the past 20 years has progressively gotten cheaper as sourcing has moved off shore. The off-shoring has lost momentum as we approach 100%. So, this depressing impact on prices is dwindling.
    I believe inflation will be more of a problem than this piece implies because we, as a nation, have less control of the situation than we have had.

  22. AHodge says:

    yes
    many prices going up– but not ratified by wages and compensation, especially service comp–will tend to peter out.
    money=credit only in the delusional minds of over half our academic bench.

  23. Bokolis says:

    This would jibe with no inflation on things that are typically procured with credit (houses, cars, bigass TVs). The cost of education is always increasing, as the student loan racket is as healthy as ever.

    But, inflation on the things that matter to me- food, gas and, if I may be a smartass, taxes- things that aren’t typically put on credit, seems as healthy as ever.

  24. MayorQuimby says:

    Simple explanation:

    1. Take two guys (smart). Hand one $100K and the other nothing.

    IF the first guy is smart – he’ll buy a house and business and get the second guy to work for him.

    Capitalism.

    So – what happens? The first guy essentially purchased the second guy.

    Bernanke is doing this with each burst of cheap liquidity.

    STEP TWO

    When the first guy can’t pay the rent – just LEND him money (buy his future).

    This is what happened in the early 2000s.

    Now – the first guy is EVEN RICHER (seemingly) because he can now RAISE THE RENT without giving the second guy the means to pay it.

    THIRD MALICIOUS STEP (end game)

    When it all collapses and the first guy can no longer maintain the value of his “assets” – just DILUTE THE CURRENCY so he nominally is made whole.

    FOURTH STEP

    COMPLETE COLLAPSE as reality sets in and the whole failed experiment is eventually brought to a rest.

    That’s next.

  25. number2son says:

    Golly, I don’t know much about that high-falutin economic mumbo-jumbo. But what I do know is I’m now paying close to $100 to fill may car with gas. So why doesn’t it make me feel better to read there’s no such thing as inflation?

  26. KentWillard says:

    Invictus, please show people that most of QE1 and QE2 goes back to the Fed as excess reserves and thus does not increase bank deposits, loans, or money supply. Which is why M2 has been increasing at its long term rate (M1 had a blip during the crisis when money moved from time deposits to demand accounts) in spite of QE2.

    The Fed’s payment of interest on excess reserves began when the crisis began, and made this possible. It gave the banks a safety outlet to prevent them from loaning at too low a rate or too loosely. It also gave the banks a large profit that required no risk or capital.

  27. DeDude says:

    Those who were convinced that the Fed pouring money into the system would cause inflation forgot that it is not the money but the money flow (velocity x money stock) that creates inflation. All the Fed has done is to compensate for slowing of current money velocity, by adding more to the money stock. The idea that money will acquire such sudden acceleration that the Fed will not be able to take out money fast enough (reverse compensating) – seems to be more of an ideological conviction than based in any facts of how and when money accelerates. To accelerate the money you have to get it away from the rich (who slow it by stashing it away) and into the pockets of the consumer class people that spend it as soon as they get it (making it flow faster) – how likely is that in the current political climate?

  28. curbyourrisk says:

    Petey: You political slip is showing.

    What we need to do is bring back Capitalism…Real capitalsim…not this oligarchy bullshit that is going now. Again…you speak of politics. When we hold economic talks at work…RULE #1…leave the politicss at the door. The painful decisions are often the MOST LIGICAL ones. If you maintain your policitcal views, you often are afraid to make these decisions. Yeah……austerity sucks and it hurts…BUT it is the MOST logical and the correct way to deal with this. Stop wasting money (yeah I said wasting) on Medicare and Medicaid. Get rid of Social Security. Abolish the Education department and give that back to the states…wehre it belongs. As for the Defense…..bring home all the troops and stop playing policeman. Put them on our borders and start doing what they are supposed to do..Defend the American people. There aer a few nice, but painful ways of starting. Can you think of any 1 politician that is willign to do that?? I can’t!!!….why not? Doing the right thing (long term) won;t protect their job short term (get re-elected). The system sucks and is designed to weaken the country….this way power stays at the top. It is all fucked.

  29. carpediem0496 says:

    We have been in a period of stagflation. How long will it last and how strong are the inflationary pressures remain to be seen.

    The decline in the money multiplier in part reflects how poorly targeted the stilumus spending has been. The commodities and Fed QE chart reflects in part that commodities are dollar denominated, QE is a weak dollar policy and commodity prices include a speculative element as an inflation hedge. The later charts show the impact of unemployment on employment costs although the mix and duration of unemployment varies widely by education.

    Higher costs for food and energy are impacting discretionary spending. Less discretionary spending means lower demand, which argues for moderate inflation.

    Meanwhile, we have a profligate government with $1.5 trillion deficits as far as the eye can see. We are spending approximately 10% of GDP to but 2% to 3% GDP growth. Debt and the cost of carry (i.e. interest expense) are compounding at rates greater than total federal receipts. In other words, leverage is increasing at the federal level (while leverage is decreasing the private sector). This is inflationary – at least in the short-run.

    With QE2, the Fed is buying 100% of the incremental issuance of UST from November 2010 through June 2011. Richard Fisher, President of the Dallas Fed, has acknowledged this verbally and in writing. This is highly inflationary, especially if demand picks up at all.

    Of course, this raises the question of who will be the incremental buyer of UST once QE2 concludes and at what price (i.e. yield). Will QE3 be far off? The impact on inflation could be yes or no.

    The math is unsustainable in the long-term. The long-term is hard to define because we know that those in power will try to keep the ball in the air for as long as possible regardless of the cost. Bill Gross, who is one of smartest bond buyers, is short UST.

    Will we have a deflationary debt driven deflation when the music stops as bad debt (private and public bad debts finally gets purged) or will we end up in an equally destroyed economic condition by the pursuit of inflationary (and potentially hyper-inflationary) policies? It depends.

    There are no adults in the room and everyone wants a free pony. This violates the first rule of economics which is there is no free lunch. Consequently, it hard to see an orderly outcome to the present conundrum.

  30. cgercke says:

    Chart C: I am suspicious whenever anyone shows correlation (and implied causality) wiht a chart that has different scale axes, based upon my reading of Edward Tufte’s work. Can anyone more qualified than me opine on whether Chart C is as significant as it appears?

  31. DeDude says:

    Curbyourrisk;

    Talk about the pot calling the kettle black, you attack Petey for being political and then proceed to ramble off a load of right wing BS that has been discredited and proven useless decades ago.

    To increase money velocity you have to give it to those who spend it rather than invest it. Current speculative bubbles are clear indications that our society has way to much investment money and not enough consumption (to gainfully employ that investment capital). In the past decade we had another idiotic right wing experiment giving the consumer class more money (as you must to grow the economy) but via increased credit rather than increased income. As predicted by anybody with a brain, that ended in disaster. The only sustainable growth comes from sustained increases in consumer income. We need to transfer wealth from the rich to the poor and with the demise of unions that has to be done by taxing them.

  32. Petey Wheatstraw says:

    curbyourrisk:

    Again: At this point our economy is PURELY and structurally political.

    You write of austerity when we give our common wealth away to the upper class? Answer me this: How is anyone in the US wealthy when our government is borrowing to support the economy? How do we have wars we can’t finance directly (keeping in mind that war profiteering is making new billionaires every day)? How has the upper class gotten richer if not via government transfer of wealth to them? Who has allowed them to keep their tax-free, government financed windfall?

    Public health is important to any stable society. So is an educated citizenry. If you want to stop wasting money, stop giving it to those who don’t need, and will only hoard it or lend it to you at usury interest rates.

  33. [...] in the economy, especially in the housing market. Hiring and wage increases still are weak. For a more detailed explanation of read the exposition by Barry Ritholz. It collects all the key points, such as that much of the [...]

  34. Greg0658 says:

    Petey “Oh, yeah” .. I was ready to high5 ya .. but never did I expect to hear that your a super patient Goldbug :-)
    that day we convert back / whats its worth ?

    “stop arguing politcal policy …”
    revolution lite please – otherwise it can play right into 1000s of years of status quo game play .. anarchy will play right into that old world order .. gated communities with no rights for those outside in the rain .. wash rinse repeat
    I like insurance too (option swaps)

  35. DL says:

    Important to draw a distinction between: (a) “inflation”, as the term is used by political pundits, and (b) actionable measures of inflation, as viewed by investors and traders.

    Very different animals.

    Very different conclusions.

  36. RW says:

    Food, energy, health care and medicine, insurance and education costs are among the few things rising at a positive real rate: The general price level trend is downward as would be expected with stagnant wages. The first two are volatile but all constitute relatively fixed costs for most consumers and that is more than enough to erode the bottom line of everyone but the top 1% of income earners.

    That sense of erosion is what contributes to inflation anxiety but it is really lack of income growth that is the core problem, that and the inexorable rise of (nearly inescapable) fixed costs.

  37. Greg0658 says:

    I heard that $100B in interest on the government debt = the American food bill (not sure where & time period)
    thats a problem

    we are discussing the repossession decade – thats it

    now in the long run will it rebalance the world for the 2nd half of the 21st century … or will it create wars that will destroy the infrastructure of the lands …. really it just doesn’t matter to the super structure behind gated communities

  38. Johnny99 says:

    Great stuff, Invictus . Your posts always make me stop and think.

    Invictus: Thanks for that. I appreciate it.

  39. Robespierre says:

    @Invictus

    “Exhibits D and E

    Two more reasons with a couple of homemade charts: Inflation has a very high correlation to the labor market. Indeed, the roots of inflation are generally found in higher labor costs. ”

    Why do you only use domestic labor market to reach your conclusion of no inflation? Isn’t true that one of the reasons we have had low on no inflation has been low labor cost in exporting nations (China for example)? Shouldn’t you use aggregate labor cost (on the rise worldwide now) to be more precise?

  40. Lugnut says:

    So is it OK if I whine about stagflation then?

  41. bigbases says:

    Versus two years ago: it costs me more to buy a stock, a gallon of gasoline, healthcare insurance, education for my kids, food, and airfare to visit my children and mom (not to forget the rising sales tax out here in AZ). God forbid, this “well contained, lack of excessive” inflation becomes hyper.

  42. Bill Wilson says:

    What do you call high commodity prices without wage inflation? I guess it’s just called expensive. It can also be called we’re all getting poorer, or a recession waiting to happen.

  43. bulfinch says:

    Stagflation is the order of the day.

    By the way, I just finished a Clif bar, and it despite being the same nt weight and price as it was last week, it has LESS protein than it did last week. Huzzah!

  44. camchuck says:

    Nice post and good discussion here. I agree that ‘hysteria’ is an apt description of many of the inflation fears that have dominated economic discourse for the past couple years. And fading those concerns has too been apt.
    That said, John Hussman has a stellar analysis ( http://www.hussmanfunds.com/wmc/wmc110124.htm ) of the threat of inflation. And while Invictus makes some strong arguments here, I would like to see him address some of Hussman’s conclusions before discounting an inflation threat too much.

  45. plantseeds says:

    Patrick Neid nailed it – semantics. Inflation may not be an issue as it is written but the cost of living is going up dramatically while wages are not keeping up. Beware of the ideological partisan tail chasing spin masters because their always on the prowl.

  46. [...] no two business cycles or economic environments are exactly the same, but as I pointed out recently here, it is unlikely that we will enter a period of sustained high inflation absent a more taut labor [...]

  47. [...] Barry Ritholtz comments, “All that heavy breathing about the flood of liquidity that was going to pour into the system. Hyper-inflation! Except not so much, apparently.” He quotes David Rosenberg: “Fully 100% of both QEs by the Fed merely was new money printing that ended up sitting idly on commercial bank balance sheets. Money velocity and money multiplier are stagnant at best.” If QE1 and QE2 are sitting in bank reserve accounts, they’re not driving up the price of gold, silver, oil and food; and they’re not being multiplied into loans, which are still contracting. [...]