Courtesy of Mish.
This is a guest post by Joseph Y. Calhoun at Alhambra Investment Partners. His post starts off with this quote by Stanley Fischer, Fed Vice-Chair in a speech before the National Association for Business Economics.
Says Fischer “We may well at present be seeing the first stirrings of an increase in the inflation rate — something that we would like to happen.”
I dispense blockquotes using a guest post format.
Is Inflation About To Make A Comeback? by Joseph Y. Calhoun
Anyone renting an apartment over the last few years might well wonder what rock Mr. Fischer has been residing beneath – and whether it was rent controlled. Certainly not all prices have been as reluctant to rise as the CPI itself which has been running quite a bit beneath the Fed’s target the last few years. But relative price changes, where the price of one good or service rises as another falls are not inflation by any definition. And so despite the rapid increase in rents the even more dramatic drop in the price of oil and other commodities means that the CPI and the other measures of official inflation have not risen as fast as our monetary minders would like. They would like us to be impoverished at a more rapid clip apparently. I’ve never really understood the economic profession’s fear of deflation. It is, after all, the very evidence that capitalism is all it’s cracked up to be. Improving productivity, the very definition of economic growth, is deflationary.
In any case, when I speak of inflation I don’t really care much about the CPI or the other government sponsored price measures. Price indexes are nothing more than attempts – inevitably flawed – at measuring the value of the currency, the US dollar in the case of America. What the CPI or the GDP deflator or the PCE deflator attempt to measure is the purchasing power of the dollar. I prefer to observe the value of the dollar more directly. The various dollar indexes provide us with information about the dollar’s value versus other currencies. Gold provides an indication of the value of the dollar as do general commodity indexes. So when I ask if inflation is about to make a comeback, what I’m really wondering is if the value of the dollar is about to fall. I prefer these measures not because they are more accurate – although I think they generally are – but because they are more timely. Prices will follow the value of the dollar eventually but the impact on investments is much quicker.
The movements of the dollar can have a dramatic impact. Just witness the incredible changes in the energy industry over the last two years as oil prices collapsed. The explanations for that collapse are myriad and some of them conspiratorial but there seems little doubt the dollar played a major role. It is not mere coincidence that the dollar started to rise strongly and oil started to fall at the same time in mid-2014. I suppose one might argue about causation – the fall in oil prices may have caused the rise in the dollar – but that the two were linked seems beyond question. It might be that causation ran both ways but frankly I’m not sure it matters; the dollar value will impact the price of oil and other commodities. There may be other supply/demand fundamentals having an impact on individual commodities but when they rise or fall together, the culprit is always the dollar. And in this case it wasn’t just oil that was falling.
The rise of the dollar and the fall in commodity prices over the last two years has had a dramatic impact on the global economy and markets. South America is in the midst of one of its periodic bouts of stagflation as capital flees and currencies collapse (Chile as usual an exception). Japan’s devaluation – the flip side of the dollar rise – produced rapidly rising Yen profits for Japanese corporations and a bull market in stocks even if the economic results left a lot to be desired. That’s probably because the rest of Asia felt obliged to let their currencies fall against the dollar as well. The fall off in emerging market growth, a function of capital outflows and lower commodity prices, offset any advantage Europe gained by going first in the global currency war, the Euro falling from 150 to 125 before the Yen even peaked in early 2012.
