Inflation vs Deflation, with Stats

26Feb17 blog
Inflation vs Deflation

Once upon a time, back in Chicago, I was a boy.  I was sitting with grandfather at the kitchen table. This was during the sixties. I was reading the front page of the newspaper while he was eyes down on the paper’s stock tables.  He had owned and managed a successful freight hauling business through the Great Depression.

I read that several economic authorities were concerned about inflation.  I asked grandfather, “Grandpa, what about inflation?”

Grandfather did not look up from his stock tables, but he cracked a rare smile. Out of the corner of his mouth he said, “You should see Deflation.”

Commodities inflation vs wage deflation.

The central banks are breathing a sigh of relief that all their inflationary tactics, such as QE (printing money), bond buying, and negative interest rates, have rescued us from the downward spiral of deflation.

Does that mean that we have turned the corner into inflation? Hardly.

The recent UK and EU inflation indicators have been driven by the price of oil. Thank you, Saudis, for cutting supply.

On the other hand, the CB’s are concerned that full employment will drive up wage inflation.

Bunk. In a globalised economy there are millions of people chasing jobs, and therefore driving down wages.  For the time being there is no such thing as full employment. Here is an example of economists’ 70’s-80’s thinking.

So the CB’s are concerned about inflation. I agree, but I say don’t do what the CB of Japan did during the nineties, by raising rates at the first sign of inflation. They put their economy into deflation and it still hasn't recovered. Their CB's were oldies, educated in the 70’s-80’s, when interest rates were 14%.

Inflation ain’t gonna happen any time soon, boys and girls.


Inflation Stats and Indicators

This past week, headline, pan-European inflation hit  1.76% Dangerous? No way. Core inflation, ex oil and food, was unch’d at 0.9 %. Relax, EU CB.

However, one telling sign of potential inflation is the price of Comex May Copper, which has risen from  appx 2.23 during Oct16 to appx 2.75 during Feb17. Keep an eye on it.

And Oil may be $50 per barrel, but it’s not $100. Get real.

Another source of inflation is the price of stocks. The P/E of the S&P 500 is now appx 25. Would you buy 25%? What is the cost of investing in stocks? Does anyone remember how to calculate the yield on dividends?

(Idea: create a futures contract based on the P/E level of the S&P 500.)

Raising interest rates may be a solution to control inflation, but it is also a cause of inflation because it raises the cost of borrowing.

Solution for the CBankers, Conclusion

The immediate solution for the CB's - in this era of transition - is for the CBs' to hike rates in order to lag inflation, and not try to anticipate inflation. Get it? These CBankers are stuck in the 70’s-80’s.

Next week

Mon, 27Feb17: US Durables
Tues, 28Feb:  US GDP,  Consumer Confidence, and a new one: S&P annualised index of home values. Was 5.3%.
Wed, 01Mar17: US Car Sales and Beige Book
Fri, 03Mar17: NFP postponed until 10Mar17