Is inflation out of control?
 

Ok, the equity market says the Fed is done. Futures markets are discounting the likelihood of an August rate hike. We have a slowing economy and elevated levels of inflation (12 year highs). One can argue that 12 yr highs in inflation are not bad, because inflation has trended really low the past decade.

There are two problems I see:
1) Bernanke says a slowing economy will quell inflation. I think he is right to some extent, but I believe that contained inflation requires a collapsing US economy. Why? The inflation we are seeing is not contained to the US. It's a worldwide phenomenon.

2) If a slowing economy persists, Bernanke may have to reduce rates in 2007. Will this not make inflation worse yet?

It seems like the real key to inflation is moderating demand in developing countries (namely India and China). The only way WE (the US) can accomplish this with the tools at hand is collapse the US economy and subsequently the world economy.

So where am I wrong?

The millions of little US children dying of starvation part.
Other than that it's a valid strategy, except the the Euro/Yuan global dominance idea which may become permanent, as in centuries permanent.

Out of control inflation??? You must not have been around when Jimmy Carter was in the White House....

Many economists firmly believe that inflation is caused by excess liquidity. They even commented that the Chair's comment about a slowing economy slowing inflation is completely wrong and he knows better than to say that remark. His problem is recovering from Greenspan's huge increase in liquidity due to the possibility of a 2000 crash and disinflation scares.

The industrial key to containing their inflation is productivity increases which allow higher wages without raising prices.

Some have said that re appreciation is partially the results of re tax law changes a short time ago.

Re: Is inflation out of control?
 

some say the futures mkts and high volitality in general is due to the flat yield curve. A player would have a better explain but the pros are having problems confirming their beliefs in the short term on direction in contrast to a firm belief that would happen with a steeper curve. There isn't any slack today.

Well, I was around, but not a player. I've read articles that contend inflation numbers would be much higher if we used pre-Clinton equations. It's certainly no match for inflation in the 80s, though.

The only important measure, I suppose, is are we keeping up with inflation, staying ahead, or falling behind? If S&P is up 8% in one year, and inflation is 6%...

I'm just bouncing some ideas. Most who have read my posts know I'm in the deflation camp, but it's good to consider all outcomes and plan according. I just can't tell if we are truly at a breaking point, or if this is just a speedbump. I have a high cash position, and inflation is my worst enemy.

I still believe that removing excess liquidity means a fall in the US economy. However, I'm not sure if the politicians and Bernanke are willing to let this go on for long. In which case, adding liquidity = reigniting inflation and several other issues.

Much of the current US inflation is externally generated. High growth in China/India/etc so upwards pressure on energy and commodity prices. Very low interest rates in Japan adding to liquidity. War, the military and political kinds, in Middle East driving up oil prices.

Thus changes we make internally, such as raising interest rates and depressing economic growth, have less impact on US inflation. Because of these external factors, I think we probably need a larger US slowdown to bring inflation down to 1%+ range.

I also recently read a study that concluded the current US economy, compared w/ the past US economies, requires more pain (this might have been measured in job loss, I can't recall) to produce a given level of economic slowdown. It wasn't a very deep analysis but still interesting.

On the related topic of what the Fed will do - Bernanke is focused on expectations of future inflation, in addition to or perhaps in place of, current inflation. So while the headlines focus on each month's CPI data, he is presumably looking at survey and market-based measures of future inflation expectations, as well as his models of future inflation.

I think this increases the risk that the Fed will not raise rates enough, and thereby fail to control inflation. Compared to a Fed that was focused on current inflation and thus would raise rates until CPI is knocked back to 1%; that Fed would have a higher risk of raising rates too much. Of course, in the end the Fed's #1 job is to control inflation so if they cease raising rates too soon, they'll have to resume raising.

This all makes me worry about a 2007 scenario in which the US economy is in a substantial slowdown or recession, but the Fed is actively raising (not lowering) rates.

That would be a pretty bad situation. Memories of 1970s stagflation, and just look at the 1970s stock market.

I have no problems withy inflation. The guage on the end of my inflator tells me when to stop putting air in my tires. Have you guys tried this?

the external inflation is worrisome. We could see an environment with flat/modest wage growth, while commodities and imported goods increase. Reports from Financial Times indicate pricing pressure in China is increasing. Product/commodity increases + wage increases means one source of cheap goods (and lower inflation in the US) goes bye-bye.

Complicating this is the fact liquidity is still high. As long as this nation has access to cheap capital, this up cycle could go on far longer than anyone expects, but like the housing market, extending the game only makes the hangover worse.

red, the gauge is useless when you already blew out the tires. I knew I shoulda never used retreads on my Porsche. :p

We've benefited from years of falling goods prices as US manufacturers shifted production from high cost to to low cost regions. At some point this benefit should shrink as this shift becomes complete. Not a lot of shirts, shoes, PCs, TVs, etc made in the US any more. Meanwhile, wages are rising in China, production is shifting to even lower-cost regions like Vietnam, but I don't think that'll produce the same cost decline.

Take one look at housing prices and tell me inflation isn't a problem.

Well, PoP, there's inflation and then there's INFLATION. This goes back to my point about wages lagging inflation. We have seen a massive growth in debt (particularly as tied to housing), and it's been a substitute for income growth. Corporate earnings as a percentage of GDP are high, while employee compensation, as a percentage of GDP has fallen. It would almost seem the middle class is getting the squeeze, but it's a quiet progression (ala boiling the frog). "Hey, we won't give you a pay raise, but you don't need it, buddy. Your house has gone up in value 78% over the last 4 years. Let me let you talk to my banker. He can get you a HELOC, and you can get that new bass boat you've been talking about." In this case, the bank is happy. The boat company is happy. The boss is happy. The employee is happy as long as he can pile up more debt. It's win-win for everyone, I think. :rolleyes:

Thing is, I don't want to be a part of the squeeze, and in doing so, I must consider all possibilities. If inflation cannot be constrained, due to worldwide demand, how does one protect himself? Will Bernanke say "All ahead flank, basis points be damned," or will he say."How soon can you load my Chinook with sacks of cash?" Preparing for situation A is a lot different than situation B.

Jeff, The problem you have with housing prices is you live in an area where demand exceeds supply. By alot. Natural market forces at work aggravated by speculators. Housing prices are adjusting downward, but may never reach the level of affordability you wish. Until we create more housing markets with perfect weather, ocean & mountains you are going to live in one of the most desirable areas of our country and have to pay for it.

Deal with it.

or move to someplace cheap.

like Ohio. :cool:

What to do about it?

On a macro-economy level, I think at some point the commodity price pressure reaches a stop. Some portion of soaring commodity prices is a speculative bubble, which will eventually burst. The biggest pension fund the country, CalPERS, is considering investing a portion of its funds in commodities. When huge, slow-moving money is getting in, is usually a sign that the smartest are getting out. As for the fundamental demand, China/India growth will eventually decelerate, perhaps helped along by a US slowdown/recession. The equilibrium price of copper probably isn't where it was 4 years ago, but it probably isn't where it is now either.

Same, I think, for energy (oil) price pressures. If the economy turns down, at some point you get demand destruction. Alternative energy sources will be developed, whether it be oil sands or solar or nuclear. And the speculative portion of the current price will eventually deflate.

Liquidity is also reversible. Whether it takes another +100bp, bank loans and securitized mortgages going bad, dunno. But eventually credit will become tight again.

The unknown, for me, is how much inflation and economic slowing/pain we get in the process, and for how long. I know I'm not smart enough to predict the path from here. All I hope to do is watch the signs and notice the directional turn when it happens.

On a personal level, I think the thing to do make your income grow, whether by advancing in your job, changing jobs, more education, etc. And tighten your belt. And, if you can, invest wisely. Maybe that means buying stocks when P/Es crash through 10X, shorting them down to there, picking up repossessed houses, who knows. But having cash and borrowing capacity is going to be a good thing in the coming year(s).

PoP, there was a point in the mid-1990s when you could buy LA houses out of repossession for good prices. I knew guys who accumulated several houses that way, and profited handsomely. Save like mad, polish up your credit, get a better-paying job, and I bet you'll get your chance - and not have to move to Ohio.

Inflation is not a problem in the US at this point. Although housing has risen significantly in some areas....that is not a good indicator. Most folks are simply wrong...including the Fed who seems to think oil prices are inflationary, when in fact, they are just the opposite, and are deflationary.

Housing inflation does not affect everyone the same way. If you own and have owned for a while and don't plan to move, then you are not affected. Most people fit in the catagory.

Also, the housing market will continue to go up in some areas and it will go down significantly in other.

fint, can you explain further? E.g. why are rising oil prices deflationary?

Because it acts more like a tax since the majority of oil comes from outside the US...and the money does not go back into the US household pockets.

But are taxes really deflationary? Seems to me we've had periods of high tax rates and also high inflation. For example, in the 1970s income and capital gains tax rates were very high and yet, with the oil price shocks of the decade, we also had very high inflation.

Compare:
http://www.ctj.org/pdf/regcg.pdf - table of historical US tax rates
http://proft.50megs.com/inflation.html - chart of historical US inflation

I'm watching what companies do when confronted by high energy prices. Many of the companies I cover are raising prices wherever they can, with more urgency than I've seen in years, and the primary motivation is that rising oil (and commodity) prices are increasing their cost of goods. They've been doing everything they can to cut other costs - moving production offshore, freezing pension contributions, streamlining distribution networks, holding the line on wages, etc. But many of them are finding it harder to preserve their margins through those measures, so now they are raising prices. For example, packaged food companies are doing this as fast as they can.

Edit: I found and added the inflation chart above. I can't see any particular relationship between higher (lower) taxes and lower (higher) inflation. I realize the theory is that high taxes lead to lower demand and thus lower prices. I'd like to see the data that actually supports either theory (that taxes are deflationary, or that oil acts like a tax).

Discount all the price noise, including commodities markets, and common knowledge says growth rates affect inflation. Growth means added wealth. For instance does the debt add an over weighing of wealth?

Even the WSJ connects a slower GNP with lower inflation in many of their articles. So in a contrast faster growth stimulates inflation. If you want a booming economy you risk inflation so the idea says. [Inflation meaning the value of the dollar without noise.] From this point of view opinions are made on investment, etc. Differences in opinion made markets.

What if the idea of lower growth reducing inflation and visa versa is wrong ?

If the wrong idea is used to base opinions then it becomes more noise of a different gender.

If the right idea is used then maybe things become clearer ?

I ran with this above on my first reply.

Discussion of inflation isn't moot.

Just beacuse technology progressed and you can buy microwave owen for 40 bucks doesn't mean that there is no inflation.

It's better to check prices for a basket of products.

Inflation is also a way to quench raising pays. If your pay grows 3% a year but prices grow 6% a year you are effectivly getting less to buy with (unless you are buying computers and microwave owens).

Inflation is also increased with raising foreign debt and international trade deficit.

I believe it's trade deficit that's fueling US inflation right now. You want to buy chinese T-shirts cheap but chinese would like to buy something back for their dollars.

Technology usually lowers the cost for certain aspects of product-basket (notably: telecommunnications, computers, TV's etc.) but certain things remain unaffected or change little (food, hairdesser) and certain go up (housing, oil).

If you try to cover the fact that economy is not as good as it was buy priniting more money (it's more covert way of doing it than saying: we screwed up) you'll hgave inflation.

Unfortunately, there are hidden costs of inflation as it's unethical. Savers get punished (their savings get eaten by inflation) and spenders rewarded (their loans are worth less). There is also constant overhead of spending time adjusting the prices as inflation goes on instead of producing the goods.

I believe that war in ME and "foreign debt doesn't matter"-opinion is fueling inflation in US right now.

True, but what happens when inflation is being driven by worldwide forces and not those within our borders? In this case short term Fed rates lose punch.

Like you said, we have to acknowledge the possibility a slowing economy does not slow inflation enough. I won't argue that lower rates creates inflation, but rising rates may have a limited effect on inflation.

For some time now, I don't think inflation has had a lot to do with interest rates--more to do with the price of energy (oil) and "made in China." Almost everything except food these days in America is made in China or Asia, and this has helped greatly to keep inflation down and average Americans loaded with material goods. Food is also inexpensive here.The relatively low cost of oil (until recently) has also helped. If the price of oil stabilizes, I don't think inflation will be a problem, though higher transportation costs will increase prices. It's the cost of labor in China that will determine inflation here more than anything else. That will significantly effect prices of imports--which is why it's important for the Chinese to keep their currency cheap relative to the dollar.

As far as interest rates go, they have a much bigger effect on the economy. For example, when Greenspan raised rates in the summer of '00 , before the elections, the stock market collapsed(tech stocks were also badly effected by the Microsoft government investigation--which ended after the elections). Higher rates killed capital investment, and LC growth stocks still haven't recovered.

After the elections, in January, Greenspan lowered interest rates down to 1%, to get the economy going again. This cost the average CD/bank account owner thousands in dividends. Lower rates did, however, help the housing market greatly.

Through these extreme shifts in interest rates, inflation didn't change one iota--which was Greenspan's original cited reason for raising them. He didn't seem terribly concerned about inflation when he lowered them to 1%!

The current Fed chairman seems to be stuck in the same paradigm as Greenspan--juggling interest rates to control inflation. If he raises rates any more, he will damage the housing market, and that will hurt the economy. So, interest rates today have a much bigger effect on the economy, I think, than inflation.

Just to take your point further, the mechanism the Fed is using is higher rates -> slower economy -> lower inflation. It will be a big bummer if the second link doesn't work as well as it used to. Ultimately the Fed's #1 job is to control inflation - even at the cost of growth.

Central banks across the world are raising rates. They claim it will control inflation and stabilize respective currency. If the US intends to protect the US dollar, raising rates may be necessary. Rate hikes aren't a phenomenon found only in the US. It is the overwhelming trend everywhere, so if the Fed chairman is an idiot, all central banks are managed by idiots.

Today, the St Louis Fed chairman said controlling inflation is their primary objective, so a pause next week is far from certain.

Umm, yeah. That second link is definitely my biggest worry. Could the Fed generate stagflation? With the economy wound so tight (no slack), it is entirely possible. What's the probability? Beats me.

I believe Greenspan increased rates in 2000 to deflate the stock market. He was concerned about "irrational exuberance." Remember that?

The market was booming at the time, especially tech stocks. But the Microsoft anti-trust suit killed the tech market. Was the market inflated? Yes--but part of it, I think, was due to the balanced budget achieved by Clinton and the Republican congress. There is far less confidence now with all the deficit spending going on--by the Republicans, who are supposed to be fiscally conservative.

I also think these Fed types have too much influence on the stock market with their inflation rhetoric. They should tone it down. I suspect they've got the message recently.

I sense your net position is long equities, right? :D

China has such a huge labor market that I doubt wages will go up much there in the near future. You walk into a department store there, and there are twice as many saleswomen as there are customers. There is salary compression to maximize employment.

The best wages in China are paid by foreign companies. They are responsible primarily for the rising middle class in the big cities.

The fed's primary role IS to keep inflation in check. They still have a few rate hikes to go in order to meet this charge, IMO.

IMO, inflation is under control and will continue that way thru mid 2007 if not longer.

I can remember double digit inflation and mortgage interest rates at 17% in 1980, Thanks Jimmy.

The Fed Chair's policies is the wild card.

Budget deficits is a negative use of a population's capital. Trade deficits means we are winning the competition for investment capital worldwide. Eliminate earmarks and the beltway hacks will have no choice but to act responsibly.

If asset bubbles are due to an accommodative Fed then I have to assume that money supply growth is in check. The Fed Funds rate seems to be preventing dollar weakness. Current price pressures on commodities will hopefully self correct as they usually do.

Economic growth is the only true shock absorber. I still believe that our economy is dynamic currently. Talking heads have been predicting a slower upcoming economy for a few years. The real danger is protectionism, tax increases, and capital mkt + in house regulation. They tried to screw up the mutual fund's beautiful mkt efficiency by passing a reg for an outside Chair. I think that was repealed ???

The current down draft in the stock mkt is a common off Pres elect yr bear correction in an overall bull mkt imo. Either you believe that the US capital structure is the best in dealing with worldwide competition or you don't.

you are either pessimistic or optimistic. You can invest accordingly.

all above a prejudicial rant.

The federal discount rate, now ~6.5%(?), was as high as 14% in 1981, and as low as 1% at other times, and seems to fall after a crisis (1929, 2001) to improve US consumer confidence. This seems to have a huge impact on the overall cost of a home when a 30yr fixed fully paid mortgage is assumed.

There is a 100 year rate history at the link, and plenty of other websites with tracking graphs(google interest rates and compare them to their political/etc. circumstances) http://www.minneapolisfed.org/Research/data/us/disc.cfm

Are stocks and housing the only way to stay ahead of inflation? The current indicators seems to indicate Bernanke will be slowly rising the interest rates.

[edited for clairity thx]

Sorry, cyptic preceding post

Friend, who is best market technician I personally know, sent me the above

I tend not to believe that market follows simple patterns like making lows every 4 years

Feels too gimmicky

However, I've learned to genuflect to the facts

And fits w/ RoninLB's comment

I'd love to have a bigger bit scan if available for printing.. wait, I'll try printing your post. I love it but didn't want to waste bits before.




I can't pick the player's horse but I love the game. What I use as a foundation is the bond mkts. Central Bankers own that turf so now you've one player for every economy/country. Bond mkts is noticeably larger than the stk mkts. The US Fed is in an economic war with the world. "Economic growth is the only true shock absorber." Hopefully, like in most US wars,
"We win, they lose"

And if someone can't be somewhat secure in having an opinion then I would say the Feds inflation protect securities are perfect for parking cash.

meanwhile I think the US economy is the meanest, baddest, and wildest player in the world. I do a big chunk into the stock mkt.

and there was someone who was active on another $ subject ppot thread and was posting mkt action etc. I kept saying "Yep"

For those who believe inflation is not present, do you believe the CPI numbers are accurate, understated, or overstated?

hate to sound brass but inflation is always present. It better be. I think the attitude should reflect our position as in competition with other banks. How is the EC doing? [I think they suck] Also it looks like Japan's bank may be back as competition instead of bs politics being in control. Meanwhile some would argue that the Fed Chair throws around more power than any other person in the world.. routinely. I like him until I see things I don't like.

all surveys have noise. A package of more than one flavor helps.

Oh, boy. Now we're getting somewhere, or maybe not.

So whatsit gonna be, Benny B? This one is too close to call.

what happened to others?

I'm a ranting arrogant NY'er when it comes to this stuff.. understandable when the toughest capital movers in the whole world lives down the block. My bs fits my head and sugeist zazzonne.

also Treasury Sec is a very political position. His job is to make Bush look good[top secret info].. so every 50/50 bs word out of his mouth can't be taken too seriously imo.

"I believe that a strong dollar is in our nation's interest and that currency values should be determined in open and competitive markets in response to underlying economic fundamentals,"
Paulson said, according to a transcript."
---------- is an oxymoron imo

The strong dollar bs is real bs since Reagan sent the mkts some spirit and the European consolidation. Bs'ing about a strong dollar policy makes the whole word attracted to out debt and greases our long term debt mkts and lowers inflation expectations.

Bush's tax cuts was a big US jolt of Joy Juice liquidity. [US generates tons of good investment capital liquidity to grease mkts. No grease then danger prevails imo]. E's capital mkts do not have strong fundamentals imo and they have a strong currency. There are also other relatively strong currencies that have sh itty growth. Over time currency mkts gyrate and bop around a smooth tune if no severe prob's imo. If Japan gets in tune Australia will have real competition as the far east is A's stomping grounds.. and A's big business is very hard nosed competitive currently imo. I think favorable politics is a significant factor? It's business friendly.

sorry if I'm boring http://www.pelicanparts.com/support/smileys/fles.gif