Fighting inflation. But where is it?

January 18, 2013

Earlier this week the Bureau of Labor Statistics released its monthly inflation report. The numbers came in at 1.7 percent a year for all items. Excluding the ever-volatile food and energy, it was 1.9 percent.

That’s about as low as inflation has been in the last 50 years.  Only 1986 (1.1 percent), 1998 and 2001 (1.6 percent), 2008 (0.1 percent) and 2010 (1.5 percent) have come in lower, and a few years in the mid-2000s registered the same.

The disappearance of inflation over the past 20 years, however, has barely dented the pervasive belief that inflation remains one of the greatest threats to economic stability. These convictions persist in spite of all evidence to the contrary: Inflation is nowhere visible. For many, that is just proof that we are living in a lull — a phony war soon to be disrupted when that age-old enemy reappears and wreaks havoc.

At the Federal Reserve – legally mandated guardian of price stability and responsible for monitoring and containing inflation – the president of the Richmond Fed, Jeffrey Lacker, has been warning that the current policy of very low interest rates and expansion of the balance sheet is almost certain to spark inflation in the near future.

In Europe, those views are even more deeply held. The German Bundesbank – still seared by memories of hyperinflation in the 1920s and the collapse of political order that gave rise to the Nazis – remains ever vigilant. Its president, Jens Weidman, is strongly opposed to many of the recent sovereign bailouts to preserve the euro on the grounds that good money chasing bad will spark inflation.

These officials tend to be firm yet measured in their concern ‑ something that cannot be said of populist politicians and analysis. The Tea Party is fueled not just by debt animus but by a deep-seated belief that “real” inflation is much higher than what the government reports, and it insists that the spending habits of the government will end in the collapse of the dollar, hyperinflation and the government’s de facto stealing from hard-working Americans’ money.

That is the fear of gold bugs, and added to the mix are the views of former Representative Ron Paul and his son, Senator Rand Paul (R-Ky.), that the Fed is putting the United States in inflation peril. Many professional investors and economists are similarly convinced that the current policies of zero interest rates and deficit spending are setting the stage for massive inflation.

How to explain the inverse relationship between inflation concerns and inflation realities? Yes, low inflation in recent years has been juxtaposed with modest economic growth and wage stagnation for most Americans ‑ as well as for most Europeans and Japanese. Given that perceptions of economic well-being are ultimately tied to disposable income, these forces have largely canceled each other out.

In addition, people tend to be acutely aware of the volatility of energy and food prices, which have spiked – and then receded – many times in past years.

Yet even with food and fuel, inflation perceptions can be deceptive. Many people are aware that the price of a loaf of bread has risen from less than 40 cents in the 1970s to an average of more than $2 today. Food prices have also risen periodically over the past few years in the face of global demand and droughts. That cements a perception of inflation.

Yet over the past few decades, food as an overall percent of income has gone down, down and down. In 1972, Americans spent 15 percent of their disposable income on food; today, that figure is 11 percent. The only shift has been in eating out ‑ people spend more on restaurants and much less on food at home. And that has happened even as incomes have stagnated. Gasoline, which has fluctuated widely, has maintained a steady share of disposable income for decades, at about 3.5 percent, which is now decreasing because of production from shale oil deposits and ever-more-efficient vehicles.

One of the strongest arguments for vigilance against inflation comes from economists following the dicta of Milton Friedman that “inflation is always and everywhere a monetary phenomenon.” In that view, the actions of governments and central bankers are the determining factor, and the experience of the 20th century was that inflation often followed government policies, especially promiscuous government spending. Since that is what happened in the past, many are firmly convinced that it will, perforce, happen in the future.

One pernicious cliché is that history repeats itself. It doesn’t. Historians repeat each other ‑ and economists then pile on with theorems based on a limited amount of history that then constitute “laws” of economics.

Unquestionably, inflation was a systemic threat not just in the 20th century but for centuries before. Thus the absence of inflation today is explained as an anomaly soon to end; an artificial state of affairs generated by easy-money policies of governments and central banks around the world; or a false statement in that inflation is underreported by governments interested in pretending it doesn’t exist.

The virtue of these arguments is that they are not falsifiable. You can’t prove there isn’t a government conspiracy about “real” inflation, and you can’t prove that something isn’t about to happen. If you argue that there has been a systemic shift – that, say, technology and globalization have combined to send manufactured goods ever lower (with food as much a manufactured good as a computer) – you can easily be dismissed for foolishly contending that “this time it’s different.”

What, then, is the statute of limitations for inflation? How long must there be low, low inflation before the risk of it is judged as de minimus?

Yes, it might rear up in future. Yes, past patterns may prove correct. It would be foolish not to be on guard about the possibility and the risk ‑ just as it would be foolish not to forget that we still live in a world suffused with nuclear weapons.

Yet it would be equally foolish to ignore the weight of evidence about low inflation everywhere around the globe, not just for the past few years but over the past few decades. The consequences of planning for a war that never happens can be just as deleterious as fighting that war unprepared.

If inflation is not the proximate risk of today’s economy, then we are radically misjudging our problems and missing solutions. If inflation is not a dire threat, then we need not be so concerned about government spending or central bank policy. We should instead focus on the ability of our national economies and the global economic system to generate sustainable living standards for billions of people.

Right now, so many are so fixated on inflation that these other challenges receive short shrift. If inflation revives, that fixation may be justified. If not, we will have squandered our time chasing echoes instead of meeting our present with eyes wide open to the possibilities of the future.

PHOTO (Top) President of German Bundesbank Jens Weidmann during the Frankfurt Euro Finance Week in Frankfurt November 19, 2012. REUTERS/Lisi Niesner

PHOTO (Insert): A Deutsche Bundesbank employee tests a gold bar with an ultrasonic appliance in Frankfurt January 16, 2013. REUTERS/Lisi Niesner



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There’s a lesson from the history of journalism. Around the time when all the pundits have concluded that something is not possible, or no longer possible, is usually just about the time it’s about to burst on the scene and bite us in the butt.

Posted by LeeAdler | Report as abusive

If you look at the aggregated change in the Consumer Price Index from 20 years ago to today, you will see that that inflation has not disappeared. Even though inflation has been low for the last 20 years, any non-zero inflation accumulates over time and appears non-trivial to the average guy.

Posted by Bob9999 | Report as abusive

If we did not have all those cheap Chinese products to buy, inflation on everything we buy would be 200% over the past 10 years. The ONLY thing that has kept inflation down to less than 10% a year is cheap Chinese products. Almost everything we buy is made in China.
The cheap Chinese products hide and offset inflation, and keep the working dogs clueless, while the wealthy have more money than ever in the history of the US.
Forgot to mention that, didn’t you Zachary?

Posted by americanguy | Report as abusive

Non-trivial economical trivia:
When Vladimir Putin was first elected, $1 cost nearly 30 RURs. Average rouble inflation in Russia was about more than 10% annually all these years. USD officially inflated at less than 2%.
How can it be that 12 years later when Putin was elected third time, $1 still costs roughly 30 RURs?

Posted by chyron | Report as abusive

Articles like this drive me batsh*t, as it repeats a lie put forth by the govt and used by employers as an excuse to hold wages down.

Inflation is everywhere around us. All you have to do to find it is walk outside your door. Pickup the newspaper; it cost you three times to get it from a few years ago, say five. Get in your car. Prices go up 5-6 % every year. Drive to the store and buy a steak. 5-6 years ago it was $6-8.00/pound. Now its $12-15.00. Park your car at the airport and buy a ticket to Rio de Janeiro. I bought a roundtrip in economy in 2007 for $650.00. The same ticket today is almost $1,700.00. I could go on.

Inflation theorists (whom the government cant seem to hire enough of) always want to exclude volatile components from the equation. Well geniuses, if you exclude them you will miss the fact, as you obviously have that the price of everything is going up. Duh!

Posted by unobtr | Report as abusive

Chryon- one answer would be that in that 12 years the U.S. has printed money like it was going out of style and the greenback has been cheapened as a result.

Only answer I can come up with anyway.

Posted by unobtr | Report as abusive


Simple. The Russian government under Putin is as corrupt and dysfunctional as the U.S. government. Inflation has an entirely different effect on these two populations.

Because the dollar, and not the Ruble, is the de facto global currency, the effect of dollar dilution of more and more dollars being printed with no increase in supporting assets has less effect on the purchasing power of Americans because most such dollars go into the coffers of other governments to hold as assets. No government in it’s right mind holds Rubles as assets except Russia and dependent satellite states.

Make no mistake, life in Russia is progressively deteoriating as Russians discover their Ruble buys less and less as time goes by. The same is true of the dollar, but our standard of living is decreasing much more slowly. But down is still down!

So both governments lie. And Russia is the bigger liar.

Posted by OneOfTheSheep | Report as abusive

If you export jobs there is less money chasing goods.

Posted by Samrch | Report as abusive

Yes, inflation is really is very low right now. While the government is printing lots of money, too little is getting into the hands of real consumers or being used in any useful fashion (new factories in the U.S., updating our infrastructure, enhancing education and research, etc.). Thus inflation is very low – maybe even too low. Policies that favor getting more money into the hands of the middle class and less into the coffers of the ultrarich (where it lies idle and useless) will revitalize the economy and then maybe inflation will increase, but right now a deflationary period like the Great Depression is still the greater threat.

Posted by QuietThinker | Report as abusive

This just shows how being inside the bubble distorts the view. Since the year 2000, the cost of living in the US has multiplied many times over. Housing prices have doubled, utilities have skyrocketed and clothing and food have either gone up dramatically in price or become so cheaply made that it compares to the previous version in name only. Every month we pay the same price for a package of something that has been reduced in size by 20-30%. What would you call that if not inflation?
The world that this information is coming from leads me to suspect that there really is life on Mars.

Posted by thinkb4its2late | Report as abusive

I beg to differ. There are innumerable examples of how our currency is losing value. I clearly remember a high school friend going to the Pontiac dealership and buying a brand new 1968 GTO 442 with Hurst 4 speed and all options, out the door price was $3200 cash, money he earned on the ranch over three summers. I also remember driving across country in 1970 and paying 19 cents a gallon for regular in TN, elsewhere it was never above 25 cents. Has the author been to the grocery store lately, how about buying lumber, drywall and sheet metal for a home improvement project? A person would be naive to believe the trumped up numbers our government puts out, the true picture is out the door where normal people buy necessities. IMHO I think we’re on the same path as Weimer Germany after WW1, only we’re bigger, armed to the teeth, and more disparate then their population was. This “empire” may well be at it’s end and we have no one to blame but ourselves.

Posted by M33 | Report as abusive

If you knew anything about economics, which obviously you don’t — don’t feel bad, neither do our leaders and especially not the Fed Chairmen Greenspan and Bernanke — you would understand that the US is in the end stages of the most massive asset inflation in history, one which began decades, ago and is still growing.

It also exists in the huge amount of federal debt we have amassed to bail out the wealthy. That is currently somewhere between $15-16 trillion of “official” Federal debt (not counting the “off the books” organizations like Fannie Mae and Freddie Mac) nor the latest QE program which puts another $85bn per month into inflationary debt (i.e. over a trilliion dollars more this year alone). This represents “accrued inflation” that will/must be released as soon as the Fed is unable to keep pumping worthless dollars into the global economy.

This is the greatest speculative bubble in history, and everyone is either too stupid to understand that, or too greedy and in absolute denial that it exists at all.

If you want the truth about inflation, you can start by educating yourself by reading this excerpt from a recent article by Doug Noland at the Prudent Bear:


A Credit Theory and “Ro, Ro” Update

by Doug Noland
January 11, 2013

My thesis contends that we are in that late-stage of a multi-decade global Credit Bubble. From a Macro Credit Theory perspective, this period of serial Bubbles has some well-defined general characteristics. First of all, monetary policy is the prevailing force behind the boom and bust cycles. Each Bubble will be larger than its predecessor, and each successive post-Bubble policy response will be more aggressive and encompassing. The government’s role expands – before it becomes even bigger.

Today, in the midst of the greatest financial Bubble in history, most contend there’s no Bubble at all. Bubble excesses have made it to the heart/foundation of the U.S. and global Credit system, while most analysts fail to see problematic asset-price overvaluation (stocks, bonds, real estate, etc.). “Money” and “money”-like instruments have at this late-stage of the cycle become the core source of monetary inflation for this crowning Bubble. This is critical, as inflationary impacts have evolved to become deeply systemic – and sufficiently all-encompassing to ensure impacts are not readily evident and of a different ilk from previous Bubble

Curiously – one might say “ironically” – as each grander new Bubble becomes more systemic the excesses generally turn less conspicuous. The technology/Internet Bubble was spectacular, although Bubble-related (financial and economic) impacts were generally contained to specific industries/sectors (technology), financial assets (tech stocks and telecom debt) and geographical regions (California). The consequences from the Mortgage Finance Bubble were less conspicuous than Nasdaq 5,000, while the impacts on spending and investment patterns had much broader impacts on the underlying structure of the U.S. economy.

Treasury debt has surreptitiously further inflated incomes throughout the economy, spreading inflationary purchasing power in a more balanced – and seductively much less disruptive/alarming – fashion than the previous tech and mortgage finance Bubbles. This has worked to sustain a problematic economic structure and only exacerbate U.S. and global imbalances. Importantly, TREASURY AND FED MONETARY FUEL HAS INFLATED FINANCIAL ASSET PRICES ACROSS EQUITIES, BONDS AND FIXED EQUITIES, BONDS, AND FIXED-INCOME MORE GENERALLY.


Moreover, the atypically systemic inflation in securities prices has worked to broadly loosen financial conditions and boost perceived wealth throughout the economy, again limiting the degree of conspicuous inflation and associated excess in particular sectors.



Just this last week Bloomberg carried an article about farmland prices going up by 20-25% over a wide swath of the US heartland — just as they did during the 1920s inflationary boom that ended with the crash in 1929.

The UK Guardian carried an article about how investment in US housing was growing beyond any economists’ esitimation, but NO loans were being made to prospective buyers and actual sales were stagnating.

The truth is there is NO housing recovery, there are not enough jobs being produced to “break-even” and the US economy is really in serious decline.

But as Doug Noland points out in his article, “Curiously – one might say “ironically” – as each grander new Bubble becomes more systemic the excesses generally turn less conspicuous.”

When this “non-inflation” period crashes, as it must soon, the US economy will experience the worst depression in history. One that will make the Great Depression look like a walk in the park. Since the US demographics have also changed dramatically since the Great Depression, this one will be extremely violent, as well, since millions of people in the US will suddenly lose everything they have worked for their entire lives.


References: ditbubblebulletinview?art_id=10748 jan/17/us-homebuilding-booming-foreclosu res  /fed-concerned-about-overheated-markets -amid-record-bond-buying.html

Posted by PseudoTurtle | Report as abusive

I have great confidence in what Doug Noland writes about the global economy. For those interested in learning the truth, instead of simply reading government propaganda, I suggest you begin with two other articles he has written this year.

Issues 2013

by Doug Noland
January 04, 2013 ditbubblebulletinview?art_id=10746

How Crazy?

by Doug Noland
January 18, 2013 ditbubblebulletinview?art_id=10750

Posted by PseudoTurtle | Report as abusive

The dollar is the world’s reserve currency nowadays, and that’s what’s different this time. This has allowed the U.S. to exported its inflation to BRIC countries; that’s why our inflation is low and theirs isn’t.

If this should change, buy bonds denominated in Singapore dollars.

Posted by JamesSutton | Report as abusive

“In 1972, Americans spent 15 percent of their disposable income on food; today, that figure is 11 percent.”

that’s an interesting way of saying we pay more of our wages on housing, utilities and transportation.

Posted by Robertla | Report as abusive

It’s been said that the generals are always fighting the last war and that’s probably true with economic policy makers as well.
Inflation results from too much money chasing to few goods. The economy currently has excess productive capacity so until that capacity is utilized it’s unlikely that we’ll a spike in general inflation.
Our greatest problem is not the threat of inflation but the under utilization of capacity and wage stagnation that contributes to gross inequality. Unfortunately the trend towards austerity paranoia is exacerbating the problem. We should be addressing these problems through fiscal approaches nut we’ve eschewed that and are stuck with monetary approaches that are only marginally effective.

Posted by MJamison | Report as abusive

Where is inflation? Years ago, a man would buy a good leather belt for say $10, and that belt would last at least 20 years. Today, a man buys a cheap, Chinese-made belt for $2, and that belt breaks after six months. Today, the government price statistics only look at the lower cost of the Chinese belt and they record deflation in men’s belts. Over a period of twenty years, the man would need to replace his cheap belt every six months, so he would spend $80 buying 40 “cheap” leather belts versus $10 on the one good belt. Not to mention the extra costs of going to store every six months for a replacement belt plus the extra costs of sending all those broken, cheap belts to landfill. So where is inflation? Certainly it is not in the way that government records its statistics.

Posted by nose2066 | Report as abusive

I calculated inflation in Canada over the past 20 years (from the Bank of Canada data) and it was over 40%. In that period, I, like many others, only received a marginal increase in our gross income.
So, those 1.7%’s do add up to big numbers. And it hurts.

Posted by RayGPowell | Report as abusive

That’s it. I’m going to create a list of standard groceries and get the price once a month, perhaps at two different supermarkets, to get the real inflation numbers.

I damn near had a heart attack the last trip in the price jumps in only 6 weeks.

Posted by EvPv | Report as abusive

Besides the real costs of goods going up far more than what the government numbers would suggest, most of the inflation is sitting in creditor reserves. Until money creation that has been authorized by the fed is lent by the banks, it’s not officially part of the money supply. The fact that lending has been tight has largely been the hedge against inflation. Once the economy has the appearance of health, and the risks of lending are perceived to be diminished, trillions of dollars that have already been created over the last few years will officially enter the money supply.

I’m sure they’ll once again change the way inflation is calculated to show a lower than actual inflation rate, since the dollars health is largely a matter of perception management.

Posted by Jameson4Lunch | Report as abusive

Like most people housed in the Ivory tower, you have become a believer of cooked numbers. In reality, you do not buy gasoline, and shop for groceries or else your article would have different content. Paychecks yield less value every year…what would call that?

Posted by rikfre | Report as abusive