Inflation is Here

by Jerry O’Driscoll

 “Prices Soar on Crop Woes” reads the headline in today’s Wall Street Journal.

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.

16 thoughts on “Inflation is Here

  1. I think this post is stretching. Even you acknowledge that weak output is largely driving food prices. Droughts/fires from Russia last year, a weak U.S. harvest, and other weather effects already this year are independent of U.S. monetary policy.

  2. @John Hall

    The economy is much more sensitive to supply shocks when there is an excess of liquidity sloshing around. Think of the inflationary effects of the oil shock in the 1970s.

    For this reason, I think the O’Driscoll post will prove borne out by subsequent developments.
    Recall also that this won’t be the first time the CPI has proved to be a lagging indicator.

  3. In our global economy, easy US monetary policy has thus far mainly affected … real-estate in Asia and now broader price measures in Asia.

    Which real estate in Asia? If you are talking about China, this is quite unconvincing.

    China has capital controls, and the bubble in property in some cities there can be explained by perfectly well by internal factors, not by blaming the “evil” US Fed.

    Regarding food, the use of biofuels and surging demand from emerging eocnomies, as well as speculation, are the main factors.

  4. There is a brand of milk that, six months ago, I was buying for $0.99 a gallon. Yesterday I bought a gallon for $2.34.

    If we assume a 94% increase from corn feed (which is really stretching it, since that cost would be distributed, but let’s take a worst-case scenario), then that’s an increase to $1.92. So where is that other 42% coming from?

  5. There is a narrow path for monetary policy. If it is effective in pushing up demand, it will strain output bottlenecks and push prices up. If it is not effective enough, it will cause a relapse of the financial crisis, a reduction in credit and monetary multipliers, and push prices down.

    Usually, when the economy is structurally ok, productivity increases thanks to international trade and innovation and the financial structure is robust, it is possible to create malinvestment without creating inflation.

    This has not been the case since 2007. Too many structural problems. What is today inflation tomorrow will be deflation and viceversa. The price level cannot be predicted because it depends on the very narrow path I described before.

    The problem is that there is nothing that can resolve structural problems and avoid deflation at the same time. Deflation is like having headache after a binge. Fighting deflation harms the liver, not because deflation is good, but because it comes bundled with structural readjustments.

  6. @ Lord Keynes

    It is odd to argue the boom in China is independent from easy monetary policy in the US.

    China is hard to pin down because their policies distort credit markets. But China does follow US policy by anchoring its currency to the dollar.

    They follow US monetary expansion in the first step to keep the yuan stable. Then sterilize as much of the credit expansion as possible to prevent from overheating and support exports (which stabilizes their real exchange rate) This, of couse, is a problem and leads to major distortions.

  7. Gerry is right to draw attention to the recent inflation data. Inlation is starting to appear in the U.S. and is likely to get worse. The use of the “core rate” of inflation has no compelling justification. Policy makers prefer it because it dampens the data, hence supporting in the current policy context continued QE. But apparently like Troy, I do all the food shopping and the rise in food prices has been substantial (the WSJ reports today the Nov to Dec increase in CPI was .5%, compared to the core rate change of .1%). Higher price changes have already appeared for energy products and according to informed observers, these prices could go through the roof. Any bets on Bernanke’s success in executing the Fed’s exit strategy in the next 6-12 months…?

  8. It is odd to argue the boom in China is independent from easy monetary policy in the US.

    Which “boom”? Their export-led growth or the property bubble?

    If you are talking about export-led growth, of course it is partly a function of US demand, which is in turn related to US fiscal and monetary policy.

    I am talking the Chinese property bubble.

  9. Well, if credit expansion and inflation is influenced by US policy, so is inflation in the property markets.

    I certainly do not think that there is a single-causality and did not want to defend the Chinese policies.

    Argue that easy US monetary policy caused the Chinese housing bubble would be wrong. But -in my opinion- it contributed to it.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s