Inflation: WHEN? HOW MUCH?

[Puppycow]

So, when will we get inflation and how much inflation will we get?

My WAG: 2010 and about 2% to 3%. I don't expect inflation in excess of 4% for any full year for the next 3 years.

Apparantly some people disagree however.

 

[drkitten]

So, when will we get inflation and how much inflation will we get?

My WAG: 2010 and about 2% to 3%. I don't expect inflation in excess of 4% for any full year for the next 3 years.

Apparantly some people disagree however.

I bet 1% in 2010, 2-3% in 2011.

But the question is really premature in a sense, since it's so political. The key question is whether, when, and how fast the Obama administration can unwind itself from the stimulus policies. It's already trying to do so (it shut down Cash for Clunkers, has announced the cessation of some of the bank insurance policies, and is trying to encourage banks to repay TARP funds), but I'm sure there are various people on the gravy train that will want to lobby for the government to keep shovelling money into their pockets.

 

[drkitten]

Apparantly some people disagree however.

It looks like the "smart money" isn't part of what's disagreeing (to me).

Silver prices are actually down (according to your source), as is platinum. The people who actually pay attention to these things tend to regard silver as a better inflation hedge than gold, because there's industrial demand for silver. And if you've got enough money that you're really worried about needing precious metal as an inflation hedge, you're rich enough and smart enough that you'll diversify your metals "just in case."

This looks to me more like lots of Teabaggers preparing for the apocalypse by buying bullion, Kruggerands, and Maple Leafs.

 

[Puppycow]

This looks to me more like lots of Teabaggers preparing for the apocalypse by buying bullion, Kruggerands, and Maple Leafs.

That and China.

Forbes notes this though:

Official market. The market for official buyers of gold offers mixed signals about longevity of any push above $1,000:

--Sales agreement. A group of central banks in Europe in August renewed their agreement to limit gold sales for another five-year period, to September 2014. In addition, they lowered the limit by 500 tons to 2,000 tons, and stated that sales of IMF gold could be accommodated within this ceiling.

--Lethargic official demand. An asset that requires collusion against sales does not seem an attractive store of value. Indeed, there is little noteworthy demand for gold from official buyers. Official reserve holdings of physical gold slid 11% between 2000 and the first quarter of 2009.
Reserve asset? One selling point for gold is the metal's role as an asset class. Its increased use as an official reserve asset would boost this. Since de-monetization of gold in 1971, official physical holdings have been in decline. However, there is a caveat to this truism, which might be big enough to make a difference:

--China. Chinese official gold reserve holdings increased 75% in the spring, rising 115 tons to 267 tons.

--Russia. Moscow also increased holdings, to a more modest 126 tons.

China's gold move came in the aftermath of the large fall in price from March 2008. Considering Beijing's concern over the dollar, combined with the prospect for a gradual lifting of the renminbi's value, further declines in the gold price are likely to bring back China into the market.

 

[mhaze]

So, when will we get inflation?

When people would rather have Stuff than Dollars.

So, how much inflation will we get?

It can't be unthinkable amounts, that would be unthinkable.

 

[Puppycow]

No inflation yet

Oct. 15 (Bloomberg) -- Slowing inflation may give the upper hand to Federal Reserve policy makers who want to keep interest rates low for a long time to support a recovery from the worst recession since the 1930s.

The consumer-price index rose 0.2 percent last month, after a 0.4 percent increase in August, figures from the Labor Department showed today in Washington. Compared with a year earlier, consumer prices were down 1.3 percent.

Recent comments have shown a growing rift between policy makers who believe the central bank has plenty of time to act before inflation flares and those saying rate increases may happen sooner, or with more force, than some investors anticipate. Bond-market trading shows investors expect inflation over the next 10 years to exceed the latest readings.

 

[Puppycow]

Well, the price of gold is even higher now than when I wrote the OP: $1,014 then, $1,211 now. But gold is about the only commodity whose price has gone up in the last 10 months.

Now, the threat of deflation looks greater than the likelihood of even mild inflation.

Still waiting on that inflation the gold bugs said was coming.

The CPI, up 2 percent in the past 12 months, fell in both April (-0.1 percent) and May (-0.2 percent) and has been basically flat for the first five months of 2010.

 

[Just thinking]

Is hidden inflation part of the numbers?

By that, I mean not seeing final prices go up, but having unit price increases along with lesser product. Recently I've noticed a number of grocery goods (not just food) come in smaller and smaller volumes for the same price. Some former six-packs are now four-packs. Soda is now (for some brands) coming in 1.5 litre bottles for what the 2 litre bottles sold for just 2 - 3 years ago. Now that's a 33% increase, which is nowhere near the numbers quoted above.

 

[Puppycow]

Is hidden inflation part of the numbers?

By that, I mean not seeing final prices go up, but having unit price increases along with lesser product. Recently I've noticed a number of grocery goods (not just food) come in smaller and smaller volumes for the same price. Some former six-packs are now four-packs. Soda is now (for some brands) coming in 1.5 litre bottles for what the 2 litre bottles sold for just 2 - 3 years ago. Now that's a 33% increase, which is nowhere near the numbers quoted above.

I'm sure they account for that. Boxes of cereal and bottles of soda come in all sizes, so they would have to measure it by weight or by volume, not number of boxes or bottles.

You can see the breakdown of the CPI here:
CPI data for May 2010 (the most recent available) the beverages and cereals components of the CPI are basically flat or slightly down. One or two brands may be raising prices that way, but not enough to make an overall difference in the average.

 

[drkitten]

Is hidden inflation part of the numbers?

It is.


"With the exception of the 40 therms, 100 therms, and 500 kwh price quotes, all eligible prices are converted to a price per normalized quantity. These prices are then used to estimate a price for a defined fixed quantity. For example, prices for a variety of package sizes for flour are converted to prices per ounce. An average price per ounce of flour is then estimated and multiplied by 16 to yield a price per pound, the published quantity."

 

[pgwenthold]

It is.


"With the exception of the 40 therms, 100 therms, and 500 kwh price quotes, all eligible prices are converted to a price per normalized quantity. These prices are then used to estimate a price for a defined fixed quantity. For example, prices for a variety of package sizes for flour are converted to prices per ounce. An average price per ounce of flour is then estimated and multiplied by 16 to yield a price per pound, the published quantity."

So you are saying that the people who calculate inflation are NOT blinkingly clueless, as one would have to be to not take such things into account?

 

[drkitten]

So you are saying that the people who calculate inflation are NOT blinkingly clueless, as one would have to be to not take such things into account?

More or less.

It's actually quite an interesting read. They have a formal procedure in place, for example, for figuring out how much potatoes cost when they're 4/1$, because of course four huge Idaho baking spuds are much better value than four titchy little boiling potatoes.

They did a good job of covering as many bases as they could,... I couldn't find any loopholes in their procedures.

 

[pgwenthold]

More or less.

It's actually quite an interesting read. They have a formal procedure in place, for example, for figuring out how much potatoes cost when they're 4/1$, because of course four huge Idaho baking spuds are much better value than four titchy little boiling potatoes.

They did a good job of covering as many bases as they could,... I couldn't find any loopholes in their procedures.

Of course they did. Because unlike some people's apparent perceptions, economists aren't moronic simpletons who don't understand the concept of a standard increment. They do actually think about what they are doing.

 

[Emperor_Gestahl]

drkitten, recently I read Denninger say that the problem with printing more is that it would cause a credit crunch. Unlike bond vigilantes, if banks see big inflation even 5 years out that would impact their lending decisions immediately. You think that could be why the government is being so restrained about all of this?

I mean as opposed to Krugman's theory of "everyone's crazy", maybe the EU and to a lesser extent the US are trying to reassure the banks that lending now isn't a terrible idea.

 

[drkitten]

drkitten, recently I read Denninger say that the problem with printing more is that it would cause a credit crunch. Unlike bond vigilantes, if banks see big inflation even 5 years out that would impact their lending decisions immediately. You think that could be why the government is being so restrained about all of this?

I rather doubt it. Interest rates even on consumer loans are too low.

(I'm a little confused, actually, about how printing more is supposed to cause a credit crunch; printing more is generally the solution to a credit crunch. It makes puts more money into circulation so it's easier to pay off loans, which makes everyone a better loan candidate.)

I mean as opposed to Krugman's theory of "everyone's crazy", maybe the EU and to a lesser extent the US are trying to reassure the banks that lending now isn't a terrible idea.

Maybe. But if so, it's a terrible way to reassure anyone -- what makes someone a terrible credit risk is the chance of not being paid back, not the chance of being paid back but in devalued currency. Banks are more cautious with loans because they fear default, since they expect people to be losing jobs as the economy crashes. But for good clients (i.e. people with good repayment schemes) it's a borrower's market for the actual loan terms.

 

[Puppycow]

drkitten, recently I read Denninger say that the problem with printing more is that it would cause a credit crunch. Unlike bond vigilantes, if banks see big inflation even 5 years out that would impact their lending decisions immediately. You think that could be why the government is being so restrained about all of this?

I mean as opposed to Krugman's theory of "everyone's crazy", maybe the EU and to a lesser extent the US are trying to reassure the banks that lending now isn't a terrible idea.

I believe there are ways they can hedge against inflation if they think there will be inflation.

Interest rate swaps, adjustable rate mortgages, etc.

So, no, I don't think that is correct. Besides, if they stopped lending and hoarded cash in the face of inflation, they would be certain of losing money.

 

[Emperor_Gestahl]

Well "hoarding cash" isn't the only alternative to lending to regular people.. You just said they could hedge, but if they were sure of inflation why not just make said "hedges" their main position and not lend anything?

Sure inflation makes "everyone a candidate" but depending on the expected inflation those loans could be unprofitable at current rates. Right now we're at no risk of causing inflation due to underwhelming stimulus/QE, but bank confidence could be the reason for this as even distant inflation expectations could raise loan rates now.

Being worried about bank lending seems to me more sensible than being worried about bond vigilantes, the latter having been shown here and by Krugman to be silliness. Looking for a valid alternative to "we are not doing more QE because we are idiots, EU central bankers want austerity because they are idiots".

 

[drkitten]

Well "hoarding cash" isn't the only alternative to lending to regular people.. You just said they could hedge, but if they were sure of inflation why not just make said "hedges" their main position and not lend anything?

Because the derivatives market is a zero sum game, and you need a "real" market for derivatives to exist.

Sure inflation makes "everyone a candidate" but depending on the expected inflation those loans could be unprofitable at current rates.

Right. So raise the rates.

The situation right now is that good loan clients can get fantastic rates, while less-than-good clients can't get anything. That's a situation that screams "fear of default," not "fear of inflation."

If the banks were really worried about inflation, they would be lending money out at Shylock rates to make sure they were earning on their money. If the banks were really worried about inflation, they would be lending to everyone because in periods of inflation, people typically have no problem paying back loans, and because that way you can earn money instead of effectively losing it.

Looking for a valid alternative to "we are not doing more QE because we are idiots, EU central bankers want austerity because they are idiots".

What's the problem with assuming that politicians, who by and large do not have economics training, have an idiot's understand of economics?

The problem is that I still haven't understood how inflation is supposed to keep banks from lending money. Expected inflation causes banks to lend more, not less.

 

[kevinquinnyo]

[...]

The problem is that I still haven't understood how inflation is supposed to keep banks from lending money. Expected inflation causes banks to lend more, not less.

Can you elaborate on this? This seems backwards to me, at least if you take the extreme example:

Bank lends 1,000,000, yesterday, Inflation today, makes dollar worth a million times less, the loan could be paid off with $1.

So what's missing?

 

[Puppycow]

Can you elaborate on this? This seems backwards to me, at least if you take the extreme example:

Bank lends 1,000,000, yesterday, Inflation today, makes dollar worth a million times less, the loan could be paid off with $1.

So what's missing?

Well of course everything breaks down when inflation is that high.

We were discussing realistic rates of inflation.

No-one is in favor of hyperinflation, not Krugman, not me, not drkitten.

We're talking about maybe 3% annual inflation. So if a bank lends at 6% interest, they make money. If expected inflation is 5%, they lend at 8% or 9%. If expected inflation is a 6,000,000%, they buy non-perishable food, guns and ammunition and head for the hills.