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Misguided Worries About Inflation

Economics / Inflation Aug 14, 2009 - 12:28 PM GMT

By: Mike_Shedlock

Economics

Best Financial Markets Analysis ArticleInquiring minds reading about the threat of massive inflation looming on the horizon are asking "Where's the Inflationary Beef?" It's a good question too, so let's search far and wide for symptoms.


US CPI Drops Most Since 1950

Bloomberg notes U.S. Consumer Prices Unchanged, Matching Forecasts.

The cost of living in the U.S. was unchanged in July, and dropped by the most since 1950 from a year ago, as the recession sapped companies’ pricing power.

Spain's Inflation At Record Low

Forbes is reporting Spain's inflation at record low in July.

Spanish consumer prices fell in July at the steepest rate since records began in 1962 but were expected to have hit bottom as oil and food prices recovered.

Consumer prices were down 1.4 percent year-on-year in July, final National Statistics Institute data showed on Thursday, in line with economists' forecasts.

Eurozone Prices Fall Record .7 Percent

Bloomberg is reporting European Consumer Prices Drop More Than Estimated

European consumer prices dropped more than initially estimated in July as energy costs decreased and rising unemployment prompted households to cut spending.

Prices in the 16-member euro region fell by a record 0.7 percent from the year-earlier month after declining 0.1 percent in June. Adding to signs of waning price pressures, European producer prices dropped a record 6.6 percent in July from a year earlier.

Unilever, the world’s second-largest consumer-goods maker, said on Aug. 6 that price cuts helped boost Western European sales in the second quarter. Paris-based Carrefour, Europe’s largest retailer, last month reported a second straight drop in quarterly sales due to “tough” conditions in France and Spain.

German Prices Drop First Time in 22 Years

Spiegel Online is reporting German Consumer Prices Fall For First Time in 22 Years.

This week German statisticians confirmed the first annual decline in consumer prices in the country for more than 22 years. The country's Federal Statistics Office released figures showing that consumer prices had dropped 0.5 percent in July compared to the same time last year. This is the first annual decrease since March 1987, before the reunification of Germany.

Meanwhile another indicator of price movements, wholesale prices, also dropped -- by 10.6 percent in July year-on-year, the biggest fall since the data began to be compiled in 1968.

More Peas In The Pod

Earlier today I spoke of Peas In The Deflationary Pod noting that Walmart (WMT) is lowering prices on everything from baked beans to Black Angus beef to flat panel TVs, and Safeway (SWY) slashed pices by as much as 25% on thousands of items including consumer staples like coffee, paper products, and laundry supplies.

Today Bloomberg noted that "retailers including Nordstrom Inc. (JWN), Abercrombie & Fitch Co. (ANF) and American Eagle Outfitters Inc. (AEO) have used discounts to lure consumers on tight budgets in the aftermath of job losses and home-price declines."

Confusion Over Inflation


Articles like these have people confused about what inflation is. Indeed every week I have someone email me that "We have inflation and deflation at the same time."

No we don't. It is not possible. The reason is falling prices are a symptom of deflation not a definition of it. Falling prices frequently accompany deflation, but they are not a necessary ingredient.

If you need a refresher course please read Inflation: What the heck is it?.

An Austrian Economic Definition Of Inflation

In Austrian economic terms inflation is a net increase of money supply and credit and deflation is the opposite, a net decrease in money supply and credit. In those terms we either have inflation or we don't. Prices simply do not fit into the equation.

Not all those calling themselves Austrian economists would agree with that definition. Some consider money supply only. But even by that definition, we either have inflation or we don't.

The notion of inflation and deflation at the same time is a widely held belief based on brainwashing by the Fed about what inflation is. If everyone realized inflation involved money supply, the Fed and Central Bankers would not be able to lie through their teeth about being "inflation fighters".

Once you realize that inflation involves money supply, you must come to the realization that the only source of inflation in the world comes from Central Bankers. Unfortunately, the media has bought the Fed's "inflation fighting" mantra hook line and sinker by talking about inflation as if it was prices.

Yes prices of some thing can rise while others fall. However, that will ALWAYS be the case from now until eternity. This makes the seemingly powerful statement "we have inflation and deflation at the same time" cute, but meaningless nonsense.

Fiat Mathematical Model

Those who model the world in terms of money supply only, ignoring credit, have missed the boat big time. They have been looking for massive "price inflation" for years pointing out the huge printing by the Fed.

Yes, in isolation, printing is inflation. But its effects are nonexistent when credit, marked to market, is plunging at a greater rate as is the case now. I talked about this concept in detail in Fiat World Mathematical Model.

The Fed and Central bankers, try as they might, simply have not been able to force banks to lend or consumers to borrow. For a real eye opener, take a look at the five charts in US Consumer Credit Shows Steepest Contraction in Over 5 Decades.

Those calling for higher prices because of all the printing blew the call and those looking only at prices to begin with were not even in the boat.

In a credit based economy one must take credit into consider first and foremost to have a chance at getting the global picture correct.

Where's the Inflationary Beef?

The answer is: There is none, nor will there be any unless the Fed can coax banks to lend or consumers to go on another huge spending spree.

With alternative measures of unemployment over 16%, with an unprecedented 4.4 million workers have been unemployed and looking for work for 26 weeks or longer, with 1.5 million unemployed on the verge of expiring over 52 week of extended unemployment benefits, and with home prices crashing and $trillions in imaginary "wealth" wiped out, pray tell what is the likelihood of consumers going on a huge shopping spree?

By Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Click Here To Scroll Thru My Recent Post List

Mike Shedlock / Mish is a registered investment advisor representative for SitkaPacific Capital Management . Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.

Visit Sitka Pacific's Account Management Page to learn more about wealth management and capital preservation strategies of Sitka Pacific.

I do weekly podcasts every Thursday on HoweStreet and a brief 7 minute segment on Saturday on CKNW AM 980 in Vancouver.

When not writing about stocks or the economy I spends a great deal of time on photography and in the garden. I have over 80 magazine and book cover credits. Some of my Wisconsin and gardening images can be seen at MichaelShedlock.com .

© 2009 Mike Shedlock, All Rights Reserved


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