Inflation

[Ben]

I am a big believer that inflation is heavily underreported. I think that part of this is by excluding food and energy costs (which are the most important costs to people) and part of it is manipulation by people who want to advertise inflation as being in a certain state.

How much longer can the US government say that inflation is only a few percent, when food and energy costs are rising so much, and not have a big uproar from the people? Mortgage costs are also excluded, which has also misrepresented inflation recently.

I think that considering *real* inflation, the downward adjustment of home prices in non-adjusted dollars will appear to smooth out fairly soon now. But how long will it take for incomes to catch up?

[ira s]

the downward adjustment of home prices in non-adjusted dollars will appear to smooth out fairly soon now. But how long will it take for incomes to catch up?

So Ben: Does this mean that you think that housing prices aren't that far from their bottom?

[Ben]

[TJ_98370]

I'm no economist either, but I think it's accurate to say that since WW I the US has experienced significant inflation after every extended military conflict. The most common explanation for this is that the money supply was rapidly increased to pay for the war. I believe we are going to see a repeat at the end of our current festivities in the Middle East. In fact we may be seeing the beginning of wartime induced inflation right now.

[sorin]

I think the fact that the national debt has gone from 5.5 trillion to over 9.3 trillion (and growing rapidly) in the past 8 years is a part of the "why". The government pays $0.20 of every tax dollar collected to interest on the debt. The other part is that the government has kept interest rates artificially low, which just serves to de-value the US dollar vs other currencies with more responsible fiscal policies (canadian dollar, euro, etc). This is part of the energy and food price increases. They have kept their inflation numbers below rational because in effect US fiscal policy is between a rock and a hard place. We may be in for (if we aren't already) a period of both high inflation and recession.

[TJ_98370]

.
This article summarizes the current situation nicely, IMHO.



...... Here is what basic economics suggests about where we are now.

We are waiting to see how an ongoing credit and housing crisis creates a national economic recession and how this recession reacts back on financial firms and distressed households. You should think in terms of feedback loops. Just like in the bubbly boom, there will be self re-enforcing cycles. The coming set of cycles will be vicious, as opposed to the virtuous cycles of yesteryear.

Where we had imported deflation from globalization, we will have inflation from rising global commodity prices and weak dollars. Where we had limited demands for wage increases and tax receipts the political wind will change and stressed households and governments are likely to want a larger share of the pie. Households spent the last 6 years borrowing - heavily against their rising house prices. This is running in reverse. They will need more money to pay-off past purchases. Some rebalancing will come as default and the rest as wage demands and lower consumption. Where we had asset prices rising much more rapidly than prices in general- inflation- we will have asset price increases lagging inflation. All of this will take place against an uncertain backdrop of stressed financial institutions and households. This will place significant structural pressure on the national economy. This will have local and global effects......

[Robroy]

Inflation?!

HAHAHA!!!

http://www.minyanville.com/articles/GS- ... ex/a/17804

Batten down the hatches. It's a perfect storm brewin'!

[sniglet]

I tend to side with the deflationist camp. Yes, we are seeing energy and commodity prices rise (and anything related to them), but if inflation were really going to be a major threat in the coming years we should see T-bill rates and house prices soaring.

Moreover, every period of high inflation has also seen a drop in delinquencies since people's earnings were rising so fast that it was easy to pay off debt. Real estate prices are also a key indicator of inflationary tendencies. Real estate prices always rise dramatically in periods of significant inflation.

Instead, what we see happening today is a contraction in credit, a rush to the safety of T-bonds, and a collapse in real-estate prices. These are all very deflationary trends. The rise we are seeing in energy and commodities is just the tail end of the credit bubble, which will come crashing down as demand starts to decrease significantly (as credit contracts).

[rose-colored-coolaid]

I mostly agree with sniglet on this one. However, I want to ask if we are perhaps facing a perfect storm of both inflation and deflation. The credit bubble is a world wide phenomenon, and it will definitely bring in a bout of deflation in many assets. But what about the hard assets like steel and oil? Or even corn and beef for that matter. Global demand is surging for many of these things. Even with a US recession, demand should still trend up.

I think it's entirely possible, though perhaps not probably that we will have both pressures simultaneously. What do T-Bills do then?

[deejayoh]

[sniglet]

[EconE]

Why is it that we keep hearing "inflation adjusted" when it comes to what the prices of houses will be at the "bottom"?

It's almost as if people are saying that the prices aren't going to go down to reflect incomes.

Why should houses increase at the rate of inflation? Is that some sort of mathematical law?

I'm under the belief that the inflation that we are seeing in food and energy will be a deflationary force when it comes to housing. People need to eat. If their income doesn't go up then there will be less money for other things...such as housing.

Where's the wage inflation?

Sorry...I just don't buy all the "housing will bottom out at $X after adjusting for inflation"...especially when most people scream that incomes don't keep up with inflation.

So...really...when I hear of "inflating our way out of this"...all they should do is have the price of food and gas double again from where it currently is and the prices of houses will be justified.

Makes no sense to me.

Maybe they should just make gas $100/gallon and McDonalds will have $99 Double Cheeseburgers. Then people won't even be able to afford rent and will look at all the empty houses and condos and dream of what it must be like to live in a multi-million dollar 400 sf studio condo.

[rose-colored-coolaid]

sniglet, I pretty much agree with you on all the deflationary pressures. I'm just posing the question...what if foreign economies don't crash? What if they keep positive (albeit lower) growth, and demand for certain classes of commodities remains high (if lower than today)?

I think it's an interesting question, and I don't hear many people asking it, probably because you have to get past inflation to deflation before you can even ask my question. If it happens though, it might make stagflation look nice.

[EconE]

RCC & Sniglet...first...let me say that I always look forward to reading your contributions to both the blog and the forum. I'm personally in the deflationary camp with the exceptions of things that people need to have. Such as food. When I look at developing countries I think that the first demand that will increase will be for food as large percentages of these countries are living on diets that would have an American anorexic looking like a glutton (exaggeration).

I feel that there will be a substantially increased demand for energy for transportation but I think that there are far more people that are just concerned with putting food on the table rather than buying an automobile. It's that extreme disparity of income issue I guess.

I think that we have already seen actual deflation for some time now in many products such as cars. For example...look at what a 1994 BMW 328 cost at the time and look at the new 2008 1 series. The price is the same and that doesn't even factor in the devaluation of the $. It's also a better handling, safer, more powerful, faster, more luxurious car and the MPG is actually better when you consider that the ratings recently changed. If they bring the diesel here the mileage will smoke the 94 3 series at 58+ MPG. Shouldn't those be selling for more if inflation is factored in? I'd cringe to see what it would cost if we factored in the devaluation of the dollar and the "shadowstats" inflation over the last 14 years. Even the new 3 series aren't that much more expensive save the M3. I don't drive a BWW fwiw...I prefer to buy used cars that hold their value or appreciate.

It's the same with electronics, clothes, appliances and many other expenditures that people make. I don't pay much more for clothing as I did in the 80's and 90's. What else is there. Medication and healthcare has of course gone through the roof as has housing...even renting as far as I am concerned. Even at @ 40% PITI+HOA that I'm paying to rent downtown hardly feels like a "deal".

Food/Energy will continue to increase until there is heavy handed government intervention. Housing will continue to decrease likewise IMO.

just my 2c

[Robroy]