And the beat goes on. Two days after having a bunch of fair weather friends tell me, “Normally I love your stuff Bob, but Mish is right–we can’t have inflation until the deleveraging is complete,” the media tells us “Inflation Remains Tame” even though prices went up 0.7% from May to June. (Since when is an 8.7% annualized inflation rate “tame”??) Of course, the real number was 0.9%, and they seasonally adjusted away 20 bps. A few observations:
* Now the grace period is over. Every single month this year, the BLS has reported a lower inflation number than the actual increase in the CPI. Now that in and of itself isn’t sinister, so long as they now overreport the numbers from July through December. (That’s the whole rationale of seasonal adjustment, that prices tend to rise in the first half of the year, and so the BLS spreads it around more evenly among the months so as not to give a misleading impression in the early months when prices shoot up.) But since the desire is to keep inflation expectations low–among other things, it allows Bernanke to continue with his insane policies–I predict that they won’t bump up the actual numbers in a symmetrical fashion in the coming months. Rather, they will revise the adjustments from the first half of this year, saying, “Oh, we actually did have real inflation back in the first two quarters. So now we’ll book the price rises to those previous months, meaning that the price rise of 1.2 percent in September is real; we don’t need to bump it up to a seasonally adjusted 1.6 percent hike.”
* For those who don’t know how to do exponentiation, the actual 0.9% price hike from May to June corresponds to an annualized price inflation rate of 11.4%. I’m not sure how that’s possible, because everybody from Paul Krugman to the Austrians who email me, assures me you can’t have inflation when there’s “excess capacity” in the system. Why, just this morning even our beloved Robert Wenzel wrote in a post that hyperinflation and depression were on opposite ends of a spectrum. (I think it was a brief lapse for the great Wenzel; earlier he has been good by pointing out that Zimbabwe shows you can get big unemployment and big inflation at the same time.)
* Of course, you can’t cherry pick a single month. Rather than looking at just what happened from May to June, let’s go from Dec 08–when prices bottomed out–to June 09. That is half a year, kids, so surely that’s a decent length of time for the trends to assert themselves. This is no mere blip. And during this six-month interval, when “right wingers” like Mankiw and left wingers like Krugman are telling us we need to fear a deflationary black hole, the actual, unadjusted CPI rose 2.6%, translating into an annualized price inflation rate of 5.3%. Can someone remind me what Bernanke’s “comfort zone” is on inflation? I’m pretty sure 5.3% inflation is way way above it. At what point is he going to start sucking reserves out?
* For those who like pictures, try this:
So what’s my explanation of the above? Simple. Because of the panic that began in September 2008, everybody wanted to hold more cash. Bernanke accommodated them by expanding M1 at double digit rates. However, the demand for cash outstripped even this huge growth in supply, and prices had to fall a few points to restore equilibrium. But this process ended back in December. Since then, we are back on the normal inflationary path. The kicker is, banks have an obscene amount of excess reserves. Once people besides me (and a few others who “don’t get deleveraging”) realize that our future portends INflation, not deflation, banks are going to get those reserves into something that yields more than 0.25% (or whatever rate Big Ben is paying them). And then you’re going to wish you had more gold and silver coins under your bed.
* Last point: In fairness, the humongous 0.9% jump in prices last month was not across the board; it was focused in energy and a few other sectors. You can see the breakdown here. So someone pushing the Mishian approach could wriggle out of it, I suppose, and say that this is just due to blips in oil, and isn’t representative of “the trend.” Yet that picture above sure looks like a trend to me.