What about inflation?

The real worry right now should be deflation, as we have not yet beaten back all of the ill deflationary effects of the financial crisis.  Nevertheless, a growing number of market participants see inflation as a longer term worry.  With unemployment high, a cost-wage push will not be part of that equation.  Nevertheless, increases in food, oil and commodity prices could create problems down the line as this Bloomberg News video on milk prices attests – they are talking about a doubling in milk prices in 2010.



And, remember, before 2007, $70 was an unheard of, recession-inducing price for a barrel of oil.  Yet, in the midst of a deep, deep global recession, we have $70 oil.  What does that tell you about likely prices in a recovery?  Is it too early to worry about inflation?

Dairy-Cow Kill to Double Milk Price on Biggest Slump Since 1980 – Bloomberg

  1. davosSherman says

    It is pleasing to see economists and bloggers that take oil into the equation, especially since we are so petro-chemically dependent.

    I agree with you and what Mish is saying about deflation – with just one HUGE caveat. “Our” budget deficits have caught up to us, we are on CBO target of 1.86 trillion for fiscal 2009. This weeks bond sales and T-bill sales is north of 160bn.

    Just this week.

    With all respect, I don’t see them pushing this many IOU’s and when they start monetizing the difference I sincerely feel it will put the dollar under adverse pressure. I think we could have hyper inflationary effects as a result of this.

    Super blog btw! Take care

  2. aitrader says

    The deflation cycle has barely begun. Inflation will be a problem down the road but for the near-term deflation is wrapping its death grip on the global economy. No amount of money printing can rebalance the whopping drop in the velocity of money and the evaporation of credit. Anyone who thinks even the US Fed’s massive money issuance can offset this is not doing the math.

  3. Stevie b. says

    Ed – as there will probably be miniscule if any pay-rises due to global competition (& ongoing pay cuts are not out of the question), why shouldn’t we be talking about stagflation? I know you say don’t underestimate the power of printing money, but because everyone knows that’s happening, wouldn’t you agree that at some point as and when velocity ever starts to pick-up, bond markets along with commodities will crucify any incipient recovery and condemn the developed world to years of no growth with inflation? And there’s no get-out with a falling currency to try & grow out of the mess with a competitive “devaluation”, cos don’t you think the whole developed world will be at it, so we’ll end up right back where we started, having had an extra dose of inflation but still with no growth (i.e. stagflation)?

    1. Edward Harrison says

      Stevie, sorry for the late response. You’re entirely right, stagflation is the term. But, because of debt deflation, I think a stagflationary outcome is inherently unstable and will always lead to renewed deflationary pressure due to the likely policy response.

      1. Stevie b. says

        Ed – totally forgiven and thanks for responding, but I still need help as I am genuinely confused on what for me at any rate seems a vital debate. How does “the power of printing money” fit in with “debt deflation”, when (all other things being equal – which they wont be!) the result of such printing will -eventually- devalue the debt to more manageable levels? Also a bit befuddled by the description of stagflation as “inherently unstable and will always lead to renewed deflationary pressure due to the likely policy response”, so would much appreciate if you can please take a minute to expand on this or put it another way – thanks!

  4. Bob_in_MA says

    What seems kind absurd to me is that many of the people who see a big threat of inflation also see the economy going to hell in a hand basket.

    And most of the people who have a sanguine view on the economy, many seeing recovery in the next month or two, also have a sanguine view on inflation.

    1. Edward Harrison says

      It does seem to be an either or proposition. You either get recovery and (maybe) inflation or you get a weak economy and deflation or near-deflation. If Japan is any guide, one can easily pump trillions into the economy without inflation because the money multipliers slow and excess reserves pile up.

      Since I expect recovery by Q4 or Q1, I also expect some inflation – mostly from oil and commodities. If we get a rise in those markets, the excess liquidity will threaten to create a bubble there as it did in 2008.

      But, this is a ways off still. Meanwhile, deflation rules the day.

      1. Stevie b. says

        Ed – I still don’t understand and would really like to be enlightened as to why you can’t seem to bring yourself to mention the s word… -stagflation-. If there’s to be a global “recovery” after everything the CBs have done, how on earth will that not lead in the twinkling of an eye to much higher long-term rates and commodity prices? What will that do to the “recovery” – why couldn’t it abort in very short order, leaving us stagnating at a higher price level?
        Please sort this ignoramus out – thanks!

      2. Bob_in_MA says

        My view is actually becoming more negative, principally for two reasons. First, even people like yourself who see a delayed subdued recovery have yet to explain how it can be sustained when the massive unwinding of debt will need to play out for years.

        Household debt as a percentage of GDP went from 45% in 1978 to 99% in 2008, which is where it remains. Both the debt and GDP will fall some this year, so in Q1 2010, there will be little improvement, possibly down to 96% of GDP.

        Then that’s it? If you see household debt continue to fall, what propels the economy, ever-growing government deficits? We saw the answer to that possibility when the yields on long Treasuries jumped recently.

        If you want to make a convincing case for growth in 2010, you need to explain how it jives with continuing household (and business) deleveraging.

        Second, I think the BRIC recovery is somewhat shallow and in many ways phony. China’s industrial production is supposedly up 7% YoY, while electricity production is down 3%, and exports (15% of GDP) are down 24%. Neat trick.

  5. Anon says

    Who cares about crude oil? Crude went from $10 to $150 and CPI (annualized) barely budged. Crude’s net effect on prices has come down big time since the 70s. Will $250 oil have a big negative effect on GDP? Yes. Will unemployment surge? Will wages drop? Yes. Will the middle class become poorer in real terms? Yes. Will it spark hyperinflation? No.

    1. davosSherman says

      CPI Backs out a lot of stuff. Food and gas for one. They also use hedonics and substitution. Oil is in everything and not just for transportation.

      Take care

      PS http://www.shadowstats.com

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