Inflation Returns: The Untold Story

Inflation Returns: The Untold Story
The wayback machine is set to 1979.
by John Hayward
11/02/20118

CNBC published a fascinating article yesterday about the return of inflation. One of the reasons it’s so fascinating is that nobody else is reporting it.

If you’re old enough to remember the 1970s, you know that inflation used to be considered a very big deal, and for many years its return would have been greeted like the blockbuster sequel to a horror movie:Paranormal Inactivity 2. Coupled with Obama’s high unemployment and moribund private-sector productivity, what we’ve been seeing for the past year is the return of stagflation, a word that terrifies everyone in the media who would like to see Obama re-elected in 2012, which means virtually everyone in the media.

One of the major factors that helps the media ignore inflation is that it’s been re-defined, along with the other metrics that charted the Jimmy Carter disaster. CNBC adds back all the stuff that got pulled out of the Consumer Price Index, and does not like what it sees:

Economists increasingly believe that while the so-called core Consumer Price Index (CPI) measure has remained around the 2 percent level that pleases the Fed, headline inflation that includes things such as groceries and gasoline is becoming a growing menace. The more inclusive inflation measure is at 3.9 percent and hammering at consumers, including the 14 million who remain unemployed.

"Contrary to some monetary policymaker protestations, we believe the rise in food and energy costs is highly unlikely to be temporary, although weaker global growth is likely to slow the rate of projected future gains," Joseph A. LaVorgna, chief U.S. economist at Deutsche Bank​, wrote in an analysis.

It’s not surprising that the most energy-hostile Administration since Carter has engineered higher energy costs, and since producing and shipping everything in a modern economy requires copious amounts of energy, other prices are being dragged up as well.

There’s some hope for short-term relief, but the long-term picture remains grim, as LaVorgna explains: “Expecting food and energy prices to drop does not jibe with recent history, which shows that over the past 24 years there has never been a five-year period where those two categories showed decreases.”

Another big culprit in rising inflation has been the government’s brilliant plan to buy its own debt:

Critics say the various measures the Fed has taken to buy government debt to spur the economy also have planted the seeds for inflation by increasing the money supply and dropping the value of the U.S. dollar, which in turn makes commodities cheaper in foreign currencies and drives prices higher.

The two most widely used measures of money supply have been increasing sharply.

M1, which includes currency, travelers checks, and demand and other deposits, is up 21 percent over the past year. At the same time, M2, a more closely watched inflation gauge that includes M1 plus savings and time deposits and retail money funds, has risen 10 percent.

Remember, some of the depressing effect on the dollar was a deliberate goal of quantitative easing, to improve U.S. exports and encourage foreign investment. As a general matter of principle, skyrocketing government debt leads to more money being printed, which devalues every dollar in your wallet, and makes everything you buy more expensive.

The people who breezily dismiss mountains of government debt as silly red numbers on a spreadsheet that should be no obstacle to further truckloads of enlightened government spending are dead wrong, and you are literally paying for their ignorance. Inflation is the slow-acting toxic residue of Keynesian failure. Trillion-dollar “stimulus” plans that don’t create any jobs are disasters with long half-lives.

A surge in the money supply “could mean the economy is primed for growth ahead”… but only if the money is put to productive use in the private sector. Lots of dollars + stagnant business growth = disaster. And we can’t exactly hope for a rescue from European purchasing and investment when Greece is about to blow up, and take much of the European Union with it. Quantitative easing baited our export hook with easy dollars, but there aren’t any fish in the Atlantic willing to take the bait.

This is a huge under-reported story for two reasons. One is that slowly rising inflation, in the absence of copious media coverage, leaves people confused about why it’s slowly getting harder to make ends meet. They notice when gas pump prices soar, whether it gets saturation coverage or not, but the other effects of inflation are subtle. For instance, food manufacturers have begun putting less product in their packages, and otherwise reducing quality, in order to hold price relatively constant and hide the inflationary bite from customers. Confusion about the causes of a malady makes people receptive to snake-oil sales pitches.

The other danger is that inflation sets the stage for hyper-inflation, which is what will happen when our spendthrift government finds itself forced to choose between unpopular “austerity” measures for a public they have addicted to endless government growth, and flipping the Treasury printing press to turbo speed. Big Government will offer to “cure” the effects of its foolish monetary policy with insane monetary policy, especially if it patches things up long enough to get the political class through a re-election campaign.
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To read another article by John Hayward, click here.