More Inflation Than Deflation in US as Consumer Price Index Rises

As far as the current situation is concerned…we think it could go either way.

What we are watching is a final, desperate push by Late, Degenerate, (Socialised) Capitalism…

Yesterday, the Dow hit a new all-time high. Everything with a price on it seemed to go up – oil over US$80 again…and gold went up US$4.60.
This sounds like good news – at least to the people who want another big round of bull market prices. The flation with an “in” in front of it is beating the flation preceded by a “de”. It means the dollar is going down. And when the dollar goes down, it buys fewer stocks, less oil…and less food.

Food prices are rising fast. They’re moving up at a 12% rate in the United States. In China, they’re soaring at an 18% rate. The Chinese are poorer than Americans. So food is a bigger part of family expenses. According to the people who figure out the inflation rate in China, food is 37% of the total.

This puts the official inflation rate in China at 6.5%…alarmingly high. Naturally, the government is swinging into action and is almost sure to make the situation worse.

In the United States, meanwhile, people spend less of their income on food…so the inflation rate is less responsive to increases in the price of milk and wheat – both rising at spectacular rates. What’s more, the feds take major cost items – notably food and energy – out of their ‘core rate’ calculations, on the grounds that…well…the rate will look a lot better without things that are moving up fast.

“In the first eight months of 2007, the consumer price index – the main gauge of inflation – rose at a 3.7 percent annual rate,” writes Daniel Gross. “That’s more than 50 percent higher than the mild 2.3 percent core rate. The prices of energy and food are soaring, at 12.7 percent and 5.6 percent annual rates, respectively, and have been doing so for years. As a result, the CPI – including food and energy – has risen 12.6 percent since July 2003, for a compound rate of about 3 percent.

“Signs of inflation are evident throughout the economy. When investors fear a rising inflationary tide, they latch onto the driftwood of gold. The day Bernanke cut rates, the price of the precious metal soared to heights not seen since 1980, when inflation ran at nearly 12 percent! I read about this in The Wall Street Journal (whose newsstand price rose 50 percent in July), which I picked up in the lobby of a New York hotel (where the average nightly rate soared 12.5 percent in the first seven months of 2007 from 2006, according to PKF Consulting), while sipping on a Starbucks Frappuccino (whose price has risen twice since last October).”

But we are not writing today to gripe about inflation. No, dear reader, that would be too easy. Instead, we’re aiming to make sense of the Big Picture.

Inflation is picking up – everything is going up except house prices. And the Fed is prepared to make darned sure prices KEEP rising. That was the message delivered so eloquently by the Fed’s Open Market Committee last month when it lowered the fed funds rate by 50 basis points. The real question is: will it work? Can they keep the “in” in front of flation? Most people think so; that’s why they are buying stocks. They think Ben Bernanke has cleared the way to another big boost in stock prices. They think the sub-prime credit problem is now ‘contained’. They think consumer price inflation is under control; the Fed chairman said so!

It could go either way, in our opinion. There might be another big burst of “in” flation in asset prices – thanks to Fed policies. The Dow could go to 15,000…or to 20,000, for that matter. Then again, the price of a copy of the Wall Street Journal could go to US$10.

Or maybe not.

Since the early ’70s, the practice of American financial authorities has been to try to keep the pot boiling by stimulating consumer demand. Trouble was, the economy really hasn’t been doing very well. After ’79, hourly wages didn’t increase in real, inflation-adjusted terms. So in order for consumers to continue to spend, they had to borrow.

In the 1960s, it was government borrowing that led the way. Then, in the ’80s, borrowing was largely privatised. In effect, consumer spending was subsidised by low lending rates; as a consequence, households more than doubled their debt/capita.

Consumption, as a percentage of GDP, rose to more than 70%. In the present expansion – since 2002 – consumer spending and house building have contributed 90% to 100% of GDP gains. Thanks to more consumer spending, while holding down labour costs, business profits have been decent.

Of course, the whole thing is unhealthy and unstable – in an economic sense. When people go deeper into debt, it feels good – it is as if they are getting something for nothing. But when they have to pay off the debt, it doesn’t feel so good. Then, they are giving up something…and getting nothing for it.

But the goal of late, degenerate managed-capitalism is to make it feel good for as long as possible…while disguising the pain. The costs – inflation, the fall of the dollar – are socialised, spread out among people who don’t deserve them…and mostly don’t understand what is going on. It won’t be the debtors who pay their bills, in other words…instead, it will be consumers and wage earners. Central banks will bail out speculators and big banks, while also trying to make sure that the currency of record keeps going down. This will be good for those who borrowed and bad for those who saved. It will also be bad for anyone who has to buy gas or breakfast…or earn his money in dollars. That is, it will be bad for almost everyone.

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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