O’Driscoll on Inflation
If I were a medical resident, I would concur:
Global output of key crops such as corn, soybeans and wheat is down, and their prices are up, respectively, 94%, 51% and 80% from June lows. Today’s PPI report has wholesale prices up 1.1% in December after rising 0.8% in November. The Journal reminds us that in 2008 high food prices sparked riots around the world.
Meanwhile Fed officials tell us they don’t expect inflation. It is not an issue of expecting inflation, but of observing it here and now. The Fed prefers, of course, to look at “core” inflation rates, which are much lower. A former Fed colleague explained to me the central bank does so on the theory that people do not need to drive to work and can stop eating.
In our global economy, easy US monetary policy has thus far mainly affected commodity prices (including now food), real-estate in Asia and now broader price measures in Asia. It is implausible that the US would remain unaffected. Food, energy and clothing prices are all rising. I don’t think many households are presently gripped with a fear of deflation.
In the Mises/Hayek theory of economic fluctuations, the transmission of monetary shocks works through producer prices and incomes, and only later consumer prices. No measure of consumer prices, and certainly not a subset of consumer prices, is an adequate gauge of inflation.
BTW, check out the PPI report. Besides the humongous monthly jumps, the year-over-year increases are the following:
Finished goods +4.0%
Intermediate goods +6.5%
Crude goods 15.5%
===> FYI, as regular readers have no doubt noticed, I have been really swamped with work lately. I actually decided last Sunday would be my last Facebook foray until the 8-week Anatomy of the Fed Class is over. I went through withdrawal the first 48 hours, but now I can’t believe how much more time I have in the day. If you need help, call 1-800-I-UNLIKE.
Dr. Murphy didn’t you know that commodity, food prices, energy prices, and all the other myriad of products rising in price has nothing to do with inflation? I’m sure Krugman will be able to explain how all of us experiencing price inflation and expecting it to continue to rise are just a bunch of chicken littles.
Mish has gotta be getting nervous. He’ll never live down this call. You might have jumped the gun on the price inflation call, as did most of us, but good old Ben wasn’t about to let you down over the long haul. It’s either inflation or default and is there any doubt which one helicopter Ben will give us.
“In the Mises/Hayek theory of economic fluctuations, the transmission of monetary shocks works through producer prices and incomes, and only later consumer prices. ”
When is the massive deflation in consumer prices arriving then? Commodities fell 60% and nominal income went negative 2008? Consumer prises are next, right? How long is this lag supposed to take? From what I’m told by Austrians, we’ve been having massive inflation this entire recession so the deflation must be coming any second, right?
went negative in* 2008.
I’m not really sure I follow your logic. ABCT says that products that are furthest away from being a consumer good are going to be the hardest hit during the bust and consumer goods sectors are the least affected. This is what we saw.
They say that during a fed manipulated boom producer prices will tend to rise first followed by consumer prices. That makes sense since stages of production furthest away from a consumer good are the most sensitive to interest rates.
They also define inflation as an increase in the supply of money. Obviously we have had a massive increase in the supply of money. This will tend to eventually lead to rising prices which we are beginning to see since Bernanke turned on the paper spigots late last year.
I’m not sure why you believe that printing massive amounts of money leads to deflation. I’m definitely not aware of any Austrian making that case. A collapse in prices will not come as long as Bernanke is printing like a mad man. The end game for this scenario is a crack up boom.
I’m not really sure I follow your logic.
The logic is that if increases in the PPI lead to comparable increases in the CPI, then decreases in the PPI should lead to comparable decreases in the CPI. But that hasn’t happened.
Obviously we have had a massive increase in the supply of money.
I don’t consider this obvious. Certain portions of the money supply have increased, but overall it seems like the money supply now is about where it was in the summer of 2008.
I’m not sure why you believe that printing massive amounts of money leads to deflation.
Printing money doesn’t lead to deflation, but it may be a response to it. In the same way, the heater in my car doesn’t make my car colder, but if the heater is on full blast this is a sign not that the car is really hot but that it is really cold.
Blackadder,
I’m not arguing that we didn’t have deflationary moves at the end of 2008 and first few months of 2009. I’m saying that Bernanke got chilly and cranked the heat up in the car. Are you saying that turning the heat on wont cause the temperature to rise in the car higher than it would have been?
You claim we are way off on our calls for prices to start rising. What do you think is going to happen? Do you believe that asset prices are on the verge of deflation, we have it now, or what? I said a month or so ago that in Jan we would start to see price inflation pick up and it has (ppi and CPI made huge gains for Dec.). I further argue that this will accelerate unless Bernanke stops his QE ways. Spell out what you think we will see and then we will be able to judge who is right as the year goes on.
Also could you point me to anyone arguing for deflation that had predicted these large increases in energy, food, and commodities since March of 09?
Are you saying that turning the heat on wont cause the temperature to rise in the car higher than it would have been?
I would hope that turning the heat on causes the temperature to rise higher than it otherwise would have been. If it didn’t, then it would be pointless to turn the heat on.
You claim we are way off on our calls for prices to start rising.
The claim I object to isn’t that prices will rise. There’s nothing unusual about that. The claim is that we will see ‘big’ or ‘huge’ or ‘severe’ price increases.
What counts as huge is, of course, somewhat vague. You say that the “CPI made huge gains for Dec,” for example, when the annualized increase in the CPI was 2.4%. It seems to me that to count as huge inflation rates would have to be a lot higher than they were in the first half of 2008. I don’t think that will happen.
Again what are you claiming is going to happen? Deflation, mild inflation, etc. I agree with Robert Wenzel that we will see double digit increases in CPI (not core cpi) by the end of the year. If Bernanke abandons QE and thus M2 grinds to a halt then we will see a collapse but i think the chances he does this are very slim. What do you see happening?
CPI rose .5% in dec. This is the largest increase in 18 months. That means the inflation numbers are 13% annualized out for PPI and 6% CPI. I find that to be a big increase.
Again what are you claiming is going to happen?
I don’t claim to be able to predict what will happen with a high degree of certainty.
CPI rose .5% in dec. This is the largest increase in 18 months.
The seasonally adjusted CPI rose .5%. The unadjusted CPI rose .2% (see here). If you are trying to use the December numbers as an indication of what 2011 will bring, you need to use unadjusted numbers.
That response reminds me of when Art Laffer said the reason he was so wrong on his bet with Peter Schiff is that you can’t predict what will happen more than 9 months in advance.
So you can’t predict what will happen in advance but insist on claiming that it is wrong to claim that price inflation will rise significantly this year if Bernanke continues with QE. How do you come up with that prediction?
I’m not even sure how to take your views because you aren’t even willing to tell us what you think is going to happen. All I know is you say price inflation isn’t significant yet and Austrians like Wenzel are wrong without offering any alternative view.