EC Inflation Has Not Shown Up Yet, But It’s Coming

Inflation is muted, but not for long. Inflation is coming in the next two years, then will be followed by a boom/bust business cycle, or maybe two.

Over the past 12 months, consumer prices excluding food and energy have increased 1.5%, right in line with the average since the last recession. Including food and energy produces a slightly lower figure. We economists like to exclude food and energy because they cycle up and down separately from the overall inflation trend. These short-term changes usually reverse themselves in a year or two.

Individual prices also change a great deal more than the average, reflecting supply-demand imbalances in specific parts of the economy. These eventually work themselves out and do not change the overall inflation rate.

Picture of dollar bills representing inflation

(Photo by Liu Jie/Xinhua via Getty) 

XINHUA NEWS AGENCY/GETTY IMAGES

The inflation that is dangerous is broad-based and long-lasting. It robs people of value. They may have as many dollars as before, but the dollars are worthless. Inflation also biases decisions as consumers and businesses adjust their affairs to reduce their damage. Inflation can cause businesses to show fake profits that would be subject to taxation. For example, a retailer usually earns a markup, the difference between the wholesale price and retail price. With inflation, the retailer also collects the amount by which prices rose while the product was on the shelf. But this is fake profit because when the product is sold, the retailer will have to replace it at a high price. This fake profit is fully taxable. Businesses can mitigate this damage, but that involves doing things that otherwise would be unprofitable. The overall economy is damaged.

Similarly, investors may sell an asset at a dollar profit but not an economic profit. If prices rise 10%, and my investment goes up 13%, then I’m only up 3% in purchasing power. The government, though, will tax me on my entire 13% profit, leaving me with less purchasing power than I had started with.

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William K. 1 month ago Member's comment

The really awful thing about this post is that it is correct! The fact is that the poison is not fast acting does not lessen the toxic properties at all, it just allows more time to realize that it was in fact poison. And we see that the federal bank people still believe that what benefits Wall Street benefits all of society. THAT happens to be incorrect, and I am being charitable in saying that it is simply a lack of understanding.

Certainly there are a lot of folks who do need support just to survive, but there are a whole lot more folks who are rather more inconvenienced than in dire straights. Of course, giving only to those in need would be a lot more complex, no question about that.

Supporting all of those businesses that are damaged by the mandatory closures, which would probably be legally classed as a TORT if any other actor did it, is only right, unless there is some magical way of preventing the damage from the closure. So the solution would have been some very clever actions that were not done, as an alternative.

Moon Kil Woong 1 month ago Contributor's comment

In reality demand is not brisk and rising. Stimulus will free up some money but I suspect a lot of this will just go back into investing continuing the asset inflation and the under recognized inflation that is already in the market. That said I think I will revive the commodities market.

I don't buy into the gloom and doom call on this but would caution against property bets from here on out,

Terrence Howard 1 month ago Member's comment

Sound advice.