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Types of Inflation

  • Sat, Sep 17, 2016 - 07:54pm

    #3

    Grover

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    Types of Inflation

In the 9/15/2016 PM Market Commentary comment #7 …

[quote=dryam2000]

CPI is mainly up because of higher healthcare & health insurance price increases.  This reflects anything but a strong economy & rising wages.  The price increases come directly from the government's own (misguided) mandated healthcare polices.  This rise in CPI has absolutely nothing to do with true growth or anything remotely close to it.  Only the MSM spin machines can argue the Fed's low interest rates are somehow responsible for this higher CPI number & that this somehow supports higher rate expectations & a bid for the USD.

Smoke, mirrors, & misdirection.  At least it makes for some good feeding for the sheeple.

[/quote]

I agree with dryam2000. Too many sins can get hidden in simple metrics. We need to plunge into the reports and analyze the source – in this case, the driver for the CPI increase. The FOMC has stated that they want to see inflation, but is all inflation created equal? If I had to guess, I'd suppose the FOMC would prefer the "animal spirits" type of inflation where people feel confident enough in their situation that they choose to go further in debt to purchase their wants/needs. That type of inflation seems to be the most controllable with interest rates – which is what the FOMC has some control over.

To some extent, we've had their nudgings with the ultra low interest rate policy that the FOMC continues to support. I'm astonished at the number of newish cars and heavy duty pickups pulling travel trailers that I see on the road. I assume that most of those buyers bought on credit because the low interest rates made the purchase affordable. They'll be paying for these items long into the future. Buying these products on credit brings forward demand (temporarily inflationary,) but paying for the loan reduces the amount of future discretionary money. That is deflationary.

Unless wages go up to cover the higher rent/housing costs, healthcare costs, food costs, and debt support, hard choices have to be made by the consumer. It boils down to get more income, take on debt, or cut expenses. I suppose that gifts from grandma, Uncle Sam, or Aunt Janet (Yellen) would be a short term option. Uncle Sam can mandate minimum wages or rebate taxes or ??? Can Janet fly Bernanke's helicopter?

Businesses can't just raise wages without raising prices, cutting expenses, increasing productivity, taking on debt, or reducing profitability. Businesses would love to pass the costs onto the consumers, but if the consumers are already making tough choices, are they going to be able to afford it? Cutting expenses includes laying off their people. Increasing productivity without cutting expenses means that there is more product on the market. Can the market absorb the extra amount or will it drive prices down? Why would a company take on debt to improve operations or just limp along unless they saw great opportunities around the bend?

Because individuals, businesses, and governments are so saturated with debt, is there any real possibility that the "animal spirits" inflation will occur? It is more likely that increased prices will result in a decrease in consumption causing the beginning of recession/depression. The debt levels need to be sufficiently lowered before animal spirits can take hold. Paying debt off is deflationary. Forgiving debt hurts owners of debt such as pensions.

I don't know if there is any "good" inflation, but inflation caused by government mandates is worse than "animal spirits" inflation. Can Federal Reserve interest rate policy actually combat this type of inflation?

Grover