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America’s Hidden Inflation and How You’re Getting Screwed

Posted by Larry Doyle on March 23, 2010 1:47 PM |

Inflation is dead, right?

If we believe The Wall Street Journal, all we had to do was read yesterday’s edition to learn this fact. The WSJ wrote, Inflation is Dead? Long Live Long-Term Treasurys:

The Treasury Department is selling $118 billion in debt this week, just as Congress tackled a $940 billion health-care bill over the weekend, shining the spotlight on the U.S.’s hefty fiscal commitments.

Budget-deficit and debt levels are forecast to worsen: Total deficits including interest costs are set to remain above $1 trillion in the next decade, according to Barclays Capital. But longer-dated U.S. government debt is as popular as ever, even at the measly 3.689% and 4.580% yields that 10- and 30-year Treasurys are paying, respectively.

That popularity is supported by a single, compelling economic fact: Inflation is dead.

There you go. The WSJ said it, so it must be right. The policy wonks in Washington continually repeat it, so they must be right, too. Or are they?

I am a firm believer that there are strong deflationary forces and strong inflationary forces at work in our economy right now. In fact, I promoted this belief last fall in writing, “Can We Add Some Inflation to Some Deflation and Claim Overall Prices Are Stable”:

Inflation? Deflation? What is it going to be? As we continue to navigate the economic landscape, that question – perhaps more than any other – is of paramount concern. As I assess the economy and the markets, I envision the following:

> Ongoing deflationary pressures in real estate. Foreclosures hit a record level based on a report this morning.

> A likely increase in deflationary pressures from wages as unemployment continues to increase, hours worked do not pick up, and average hourly earnings are stagnant. How are corporations reporting earnings? Not from growth in top line revenue, but from cutting costs, including headcount.

I firmly believe these two overriding forces most concern the Fed and the threat that the deflationary forces could grow if not counteracted. How does the Fed counteract these pressures? Keep the liquidity pump running via a 0-.25% Fed Funds rate and now increased speculation of perhaps more quantitative easing in the form of purchasing more mortgage-backed securities.

What has been the result of all this liquidity running into the system? A significant decline in the value of our dollar.

The dollar has stabilized over the last few months, especially against the Euro given problems primarily in Greece…for now.

What does that create? Inflation. That’s good, right? A little inflation will provide some pricing power which supports our equity market. Not so fast. The inflation is not directly addressing the deflationary pressures in real estate and likely deflationary pressure in wages. The inflation is being generated primarily in commodities. What does that mean? Prices for food, gas, oil, and other raw material inputs will increase. As those prices increase, the cost of living in America will increase. Regrettably, that increase in cost of living will not be offset by an increase in wages.

Are we experiencing this decline in prices for housing and wages on one side versus an increase in prices for consumer goods, fuel, and services on the other? Let’s dig a little deeper.

In a back corner of The WSJ’s “Heard on the Street” section today, we learn:

If you remove housing costs from the consumer price index, inflation looks positively resurgent. In January, the CPI was up an annualized 5.8%, excluding owners-equivalent rent, which is a rough proxy for housing costs.

Inflation is dead? Perhaps in housing (and also wages) it is, but certainly not in the other components of the consumer price index. How do you think increased healthcare costs for businesses will be handled? A combination of layoffs and lessened hiring along with passing the costs down to consumers. Feel like you’re getting screwed? You are.

Our friends in Washington, on Wall Street, and especially at the Federal Reserve have no interest in highlighting this reality, but your friend here at Sense on Cents is solely concerned with helping you navigate the economic landscape.


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  • whoisjohngalt

    Larry, you are right. There are both deflationary and inflationary process going on concurrently. I have sent you notes on this since last summer. I thought deflation had the upper hand, but with the passing of Obamacare I am not so sure now. What I am sure of is government is taking over more privite enterprise. I suppose we will all be wards of the state soon. Atlas Shrugged.

  • Mr. Doyle this is my favorite damn website in the entire internet. I could talk great about it all day but you seem to be a modest fellow who needs no such praise.

    Add to all these problems our future generations about to become adults… Overweight, uneducated due to a terrible education system (and getting worse!) and about to inherit some serious debt. It is very hard to see good things happening to this country in the long term. There seems to be encouragement to stay a lazy materialistic consumer who asks no questions and just goes with the flow.

    It is going to be very very difficult to become rich in this country. I feel most bad for the upper middle class who is getting hardest raped in taxes. I wish I had all the solutions but I do not. Australia seems to be in the best shape in the world right now with stable economy and strong currency. I think many Americans may start to immigrate to Australia to take advantage of a growing economy and American-friendly lifestyle that is ‘down’ there.

    I vote LD for president in 2012!! He will bring transparency and hope!

  • Michael Giove

    maybe the solution is to keep spending and piling on the debt because as long as we can make it to the 2030s we will be fine. Many scientists predict that a technological explosion is going to take place and robots will be built that can do ALL jobs by then. At that point, when everyone is unemployable but goods can be produced for dirt cheap, global capitalism will most likely become irrelevant. We might have to transition to a resource based economy like the “Venus Project” advocates

  • fred

    We get the monthly CPI reported Th. The number has been so manipulated by the gov’t to keep down ssi cost of living increases, that the only aspect of it that is useful as an indicator of pricing pressure is the gap between the core, which the Fed uses to justify its policies, and the full cpi.

    As reported by Shadow Gov’t Statistics the real CPI, which should reflect a constant standard of living, as calculated in 1980 and 1990, before manipulation began, is closer to 10%. Why is this important, because QE2 will only aggrevate the situation going foreward.

    When is this scam going to end?

    • fred

      Core inflation and to a bit lesser extent headline CPI will not move much until the US housing market turns. The reason being, housing comprises 49% of core CPI and 37% of headline.

      When will the housing market turn? When restructuring of mortgage debt thru foreclosure begins in earnest, a functional highly liquid MBS market develops and some semblance of mark to market accounting standards are reimplemented so bad banks can be identified and put out of their misery.

      Maybe the Fed should get out of the Keynesian financial engineering game and redirect it’s focus toward these more worthwhile pursuits!

      • fred

        Given all the risk, why is the Fed trying to create inflation? Look no further than the components of revenue inputs and calculation; if units are not expanding then the only other way to increase $ revenues is to increase prices. By increasing prices and thereby revenues, it creates an illusion of growth in the absence of unit expansion.

        • LD


          You are spot on. Additionally the Fed knows they need to spur consumer spending in light of the disinflationary trends in income and housing.

          One huge and dangerous experiment.

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