Inflationary Reality Always Comes After “Recovery”

By: Dr_Jeff_Lewis

Inflation watchers should be witnessing already the reality of the inflationary cycle; companies are cutting down their product sizes, cutting corners on packaging, and most importantly, raising prices.  A few household names like Nike, McDonalds, and Walmart have indicated that it is inflation that is driving up their costs of doing business, and now they’re looking for ways to pass on the costs.

During the deep recession, or depression, of 2009, consider the available deals that came your way.  Restaurants were now offering a free appetizer, just for buying a dinner.  Every advertisement featured a product and a price because we were, once again, tethered to our wallets. 

The price level has generally lagged the true rate of monetary inflation by two to three years, depending on the product and its utility to the end consumer.  This phenomenon, as you can imagine, is mostly a product of marketing.  When prices are pushed higher by monetary inflation during a recession, companies try their best to burden the cost themselves.  No company wants to be seen as one to raise prices, so it is a natural fit that they instead burden the cost themselves to remain competitive.

Powerful Cycle

Shielding the cost of the raw goods from the consumer means that the general price level does not adequately reveal the extent to which the money supply has been inflated.  In fact, it often means that the central bankers, who have yet realized the danger of their inflationary game, stimulate to boost prices in the short-term, never mind that it will be the long-term inflation that ultimately breaks the consumer.

The fact of the matter is very simple; restaurants, clothing companies, and any other industry with exposure to raw commodities will soon pass on its higher costs to the consumer.  In doing so, a full two years of monetary inflation will be borne by the consumer in a matter of weeks, as prices adjust with new inventories.

In looking back through history, we can draw some unique parallels to the stagflation of the 1970s.  As prices trended higher, consumers purchased goods earlier and earlier.  So what happens when the underlying game theory comes to the surface—when buyers start buying now just so they don’t have to pay next month’s prices?

Inflation

 Inflation is measured in two ways: monetary inflation and price level inflation.  The price level, to economists and spenders alike, is the most important.  To those who want a dose of reality, monetary inflation provides a guideline for where price level inflation will be when the delay is over and the boom in money supply meets a bust in corporate profits.

In going forward, expect a higher than average rate of inflation, which is conducive to 2-3 years’ worth of lower than average inflation.  The consumer is still price-sensitive and will not respond to higher prices today as they have in the past.

We’re entering dangerous territory for the US economy in that inflation is here—or it will be soon—and the US economy isn’t prepared.  Remember again that the last stagflationary cycle was cured with double digit Federal Funds rates.  That can’t happen again.

By Dr. Jeff Lewis

Dr. Jeffrey Lewis, in addition to running a busy medical practice, is the editor of Silver-Coin-Investor.com and Hard-Money-Newsletter-Review.com

Copyright © 2011 Dr. Jeff Lewis- All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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