I am old enough that I lived through the big inflation in the late 70′s. And right now it appears to me that we are embarking down a similar road.
The thing that surprises me most is that most analysts I read and see on CNBC say the same thing, “inflation is not a problem.” They must not do any of their own shopping.
The important thing to think about right now is the trend of inflation. We are coming out of a 20 plus year period where the environment was disinflation. As a result, most people think right now a “little” inflation is good. And, I agree with that. Unfortunately, when inflation begins to pick up there is no real way to determine how far, how big, or how long. But right now the trend is up.
Right now, it’s true that short term price increases of products will tend to help the economy and add to GDP. The longer term downside, however, will be a reduction in purchasing power, and the reduction of “real” GDP. So in the short term the economy will continue to look great, but it’s only a short term phenomena. The longer term effects of inflation are always debilitating to the economy.
Sometimes you really need to wonder what the analysts are thinking about. They continually say the oil price is not a problem. Meanwhile, if you added up all the commodities of the world you would find that oil all by itself is about 49 percent of the entire value of commodities. And, oil goes into just about everything you can imagine.
I tend to watch the price of things I buy. For example, let’s take the Oreo cookie. A year ago full price on Oreo cookies in my grocery store was $3.39. Now? The price is $3.89. A whopping 14.7 percent increase. I don’t know if you noticed this one–the amount of product in a given container. Last year a bag of Hershey kisses weighted 13 ounces, right now? A bag contains 12 ounces. Same price, 7 percent less product. And actually the full price is up more than 10 percent.
Do you ever hear the term a “pound of coffee”? Well, go look at the cans in the coffee isle. You will find that a pound no longer equals 16 ounces. Buy any steak lately?
Not convinced? Import prices rose 1.6 percent last month. You will be seeing the effects of jumps like this soon. It takes a while for price increases to show up in retail.
The biggest problem on the horizon is clear. You ever take Econ 101 in college? They have that section on guns and butter. Anybody remember that section? Well bottom-line, the book says governments cannot have guns and butter without causing inflation and slow downs in the economy. Well we have guns–Iraq. And we have butter–tax cuts. You can decide for yourself, but this strategy has never worked in the past. Remember Viet Nam. I don’t mean the war; I mean the cost of fighting a war and not taxing to fight the war. That is what lead to the late 70′s explosion in prices. Of course, there were other bad decisions that helped add fuel to the fire.
Right now, most investors are thinking the FED might raise short term rates 25-50 basis points. What happens if its 50-100, 100-200? Short term rates are going up, and they are going up dramatically in the years ahead. If anything, the historians will look back at this point in history and shake their heads. Too young to remember when the fed funds rate was 20 percent?
Think rates cannot go up much? Like I said, I have been around a while. The mortgage rate on the first property I ever purchased? 14.75%. And, I had excellent credit and no debt.
Next time around we’ll talk about the next Internet bubble–housing! And along the way we will talk about ways to benefit from rising inflation.
I am also the editor of the Watch Right Internet Crimes Against Children Weblog
About the Author
Robert T DeMarco is transitioning from the corporate world to the world of Blogging. He is interested in meeting people on the Internet that are interested in becoming P*S*Ds.
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