Inflation to Hit Consumers as Oil Price Rises, House Prices Fall

This could be it, dear reader. This could be the week when three important milestones are reached.

The unstoppable force of inflation seemed to be hurtling towards the immovable object of deflation.

But yesterday morning, we checked the headlines. What happened?

First, let’s look at inflation.

The most inflationary price of all is the price of oil. And guess what? Oil hit a new all-time high on Friday – at US$98. The hundred dollar mark is less than the cost of a cup of coffee away.

What will US$100 oil mean? Use your imagination, dear reader.

Over the weekend, we went back to France to celebrate Thanksgiving at our old country house. We drive a Nissan Patrol, which Elizabeth uses to pull a horse van. Filling it up, we watched the numbers fly around on the pump; we thought we were watching the world population counter. By the time the figures came to a rest, we owed the station nearly 140 euros – or more than US$200. The high price comes from several sources.

Gasoline is always more expensive in Europe than in America; the Europeans tax it more heavily. Plus, oil itself is more expensive worldwide. Finally, the euro is a much stronger currency. Result: pain at the pump.

In America, as in Europe, the rising price of gasoline is much more painful at the bottom of the income pyramid than it is at the top. It’s at the bottom where inflation is most keenly felt. That’s where people who spend more on gas have less to spend on other things.

A lower dollar is inflationary. On world markets you get less for your money. Meaning, prices rise. Since so much of what goes around the world eventually comes around to the US domestic market, soon consumer prices rise in the United States, too.

There was also a back-eddy in the stock market on Friday. The Dow gained 181 points. We call it a “back-eddy” because it looks to us as though the tide is running in the other direction – but we could be wrong.

And gold – the ultimate measure of paper currency inflation – shot up US$26. Ooh la la. We saw the correction in the gold market coming; our problem was that we didn’t see it going. Gold was clearly ready to do some backing and filling a couple of weeks ago – when the price shot up over US$830. We knew we would soon have an opportunity to buy it more cheaply. Trouble was, the correction was so fast and so short; it came and went before we had a chance to react. Last week, gold had practically already recovered. And this week, we wouldn’t be surprised to set it hit that old milestone from 27 years ago – US$850. In fact, we wouldn’t be too surprised to see it knock over the milestone and keep on going.

Nevertheless, this morning, the force of inflation looks less unstoppable than it did last week. Up against the immovable object of falling prices, inflation looks like it might come to a halt.

Everywhere we look; there are more signs of a slump. Two year Treasuries have been having a nice bull run; they’re now yielding less than 4%. Holiday shopping fell short of last year’s binge by 3.5%.

“Don’t look now; here comes the recession,” says Fortune.

Finally, the press is putting two and two together:

Americans owe more money than ever before – including US$11 trillion of mortgage debt. And their #1 asset – the main collateral behind all this debt – is falling in price. Housing prices are down 5% so far, nationwide. Robert Shiller, whose index tracks the housing market, says this could turn out much worse than people expect. The last major downturn in housing was ’25-’33, when prices fell 30%. A 30% drop in the value of America’s housing stock today would turn the immovable object of deflation into something closer to a black hole.

It could “create a nightmare effect”, says an Associated Press report.

“Subprime mess to worsen”, says the Wall Street Journal.

“Subprime woes leaking into economy”, says another article.

Let’s see, a 30% drop in housing prices is equal to, more or less…US$6 trillion down the black hole of deflation. Hey…a trillion here…a trillion there…

Bill Bonner
Markets and Money

Bill Bonner

Bill Bonner

Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America’s most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind Markets and Money.
Bill Bonner

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