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Small Cloud No Bigger Than A Man’s Hand?

Despite staggeringly low interest rates and multiple rounds of quantitative easing, inflation so far has not put in an appearance. A new report in the Wall Street Journal suggests that this may be beginning to change. A survey of local businesses conducted by the Federal Reserve of Atlanta reveals that while most believe that short-term inflation will stay below the Fed’s target rate, long-term inflation is expected to reach nearly three percent, well above the Fed’s comfort level.

This is just one survey and reports expectations rather than experience, but inflationary bouts often start that way — like the small cloud no bigger than a man’s hand that sometimes is the first sign of a great storm (1 Kings 18:44). Watch closely; signs of returning inflation would quite quickly create serious problems for a global financial system whose chief survival strategy these days is to print tons of money and hope inflation stays away.

There does not seem to be a Plan B if this fails.

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  • Anthony

    “History has shown us time and again that out of control money supply expansion creates inflation…” However, the demand for money (generally) has been muted – consumers, businesses, banks, etc. have excercised caution. Thus, inflation has been calmed (temporarily) but for how long as WRM intimates (because if and when recovery comes a plan B may be strategic).

  • Mrs. Davis

    QE1, QE2, and QE3 are coming home to roost. And inflation was always the intention. That is how sovereign debtors always default.

    Bernanke’s bailouts might have made sense if there had been any systemic reform of the financial system, but there was not. We will all suffer more for his profligacy.

  • Cromwell

    Watch the repo market. When the Fed does try to sop up the trillions of liquidity it’ll be there. 3 year reverse repos anyone?

    Thanks said its been Ben’s stated goal boost aggregate demand via asset price inflation. Hence the recent runup in stocks and crude: it’s mostly liquidity driven. Note the price of oil in euros hit a new record Friday, not long after draghi fired up the presses with the ECB ltro.

    Central bankers are willing to tolerate above trend inflation in the hopes it will reflag economy. History suggests it will all end badly.

  • Cromwell

    Sorry for typos. It’s this damn iPhone.

  • Tom

    People at the Fed are, for the most part, praying for some inflation. Only way for the global economy to get out from under this debt load is to inflate away some of it.

  • Eric from Texas

    Chairman Bernanke is a student of financial history. Inflation is a risk, but he knows that a classic Fisher debt-deflation spiral is still a greater risk. (Frau Merkel doesn’t get it, which is one of the reasons for the worsening Euro crisis)

    What Chairman Bernanke can’t do is get Congress and the President to accelerate the clearing of the housing market. Trying to keep people in homes that can’t afford is delaying one of the two biggest problems we face. Fixing the federal deficit is the other problem, but we will have to wait until after the election in November for that fix to start.

    The Chairman is playing the hand he’s been dealt the best he can. US politicians, on the other hand….

  • Andrew Allison

    It appears that the staff of the stately Mead domiciles buy the food and energy to fuel our favorite blog. They must be painfully aware of the inflation in two key components of the cost of living which are excluded from the CPI, food and energy. Being of an analytical turn on mind, I’ve noticed the the price of such basics as beans, sugar, flour and milk have increased of the order of 50% during the past couple of years! Naturally, this burden falls heaviest upon the poor that the Blue state is sworn to protect.

  • Kenny

    Inflation is coming alright. That’s one way the government will repudiate its massive (and unpayable) debt.

    And please, who are you kidding, Mr. Mead, when you say, “…long-term inflation is expected to reach nearly three percent, well above the Fed’s comfort level.”

    The government lies about the inflation number. Its bureaucrats have changed the way the CPI is calculated so as to grossly understate inflation.

    Right now the ‘official’ government numbers put infation at 2-pc. However, a more reliable estimate by puts it already above 6-pc.

    And from here, inflation can only grow as the reckless QEs work their way through the economy.

  • Luke Lea

    What’s not to like? A little inflation may be just what the doctor ordered. Seriously. It reduces dept and real hourly wages, both ow which may be necessary to get the economy going again.

    Of course I’m against real falling wages. But when you continue to trade with China on a truly massive scale and to import tens of millions of low-skilled Mexicans into the labor market, lower wages is the only way to maintain full-employment for ordinary Americans.

    For them it sucks. But if you are lucky enough to have a few brains, a good education or some money in the family it totally rocks! That’s Mead’s team it seems.

  • Walter Sobchak

    I believe that the Fed is intentionally yanking our collective chain. I just checked at and looked at the CPI stats for 2011. The index was up 3% from December 2010 to Dec 2011.

    The Fed claims that the “core” rate of inflation is less than that because they subtract out the “volatile” food and energy components. As if there were some justification in economic theory for doing that. There is not, the only justification for looking at “core” cpi is political. Its sole purpose is to dumbfound the rubes.

    In economic theory, the sector of the economy with the most market driven prices and the highest short term volatility, is the sector where inflation (which is not the increase of prices, but is the decrease of the value of the dollar) should show up the earliest and strongest.

    When food and energy are backed out the index is dominated by housing costs, which are set by long term contracts (leases and mortgages), and which will continue to drag for many years as the bubble of the 00 decade is worked off.

    This allows the Fed to claim that it is holding inflation in check when in fact it is pumping inflation up with both hands. And why would they do that? Simple their masters are the same craven politicians who run the federal government, who are hoping for an inflationary bailout of their profligacy.

    At the very least, I believe that the Fed must have its wings clipped. Employment should be removed as a monetary target, and Congress should require the fed to pursue price stability, not a continual low grade fever of inflation.

  • Jacksonian Libertarian

    Far too many of us were traumatized by the double digit inflation of the 70’s and 80’s, and now we see it everywhere we look.
    There isn’t any inflation, home prices are still under pressure from foreclosures, and have already lost $7 Trillion in value. The M3 money supply is still $500 Billion below its peak despite the Fed printing $2.3+ Trillion in QE1 and QE2. What we really need is some inflation, in order to gain back some of the lost home value, and because the present deflation is destructive, creating depression era levels of foreclosures, unemployment, and bankruptcies.
    Don’t confuse the Energy Supply shortages caused by the Environmentalist’s blocking of necessary Energy Development, with real inflation. Wages are falling, that doesn’t happen in an inflationary economy, as money is in reality a measure of work, and it is gaining value by that measure.

  • jaed

    “No inflation.” I am in fact old enough to remember the inflation of the 70s, and when I go to the grocery store, I’m getting bad flashbacks. Processed foods are being repackaged into smaller containers at the same price, and basic foods (where it’s hard to reduce the amount) are going up quite fast. I see other consumer goods rising also. Not all of them, but many.

    Moreover, this is not a new trend. Food’s been going up for at least a year and a half.

    “home prices are still under pressure from foreclosures”

    Yes, the bubble is stil in its much-prolonged (by federal policy) “popping” phase. This doesn’t mean there’s nothing to worry about; the housing market was hyperinflating, going up far faster than the general rate of price inflation, for years before it peaked (in some geographical markets, for decades). So a minor correction doesn’t mean normalcy has been restored. What I fear is that policymakers, in their anxiety to reinflate the housing bubble, are systematically underestimating general inflation.

    Also, in terms of day-to-day living conditions, you have to buy food and fuel every week or so. No one buys a house every week. Food and fuel prices should be heavily weighted when considering inflation in terms of the effect on disposable income and on economic pressure on families, yet they’re ignored because they’re “volatile”. Statisticians normally handle volatility by using a rolling average over a longer period of time, not by ignoring the input! Food and fuel prices are important. Critical, in fact.

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