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Something to Worry About?

One of the few bright spots in the gloomy world economic picture has been the absence of inflation even as governments around the world go deep into debt and the world’s central banks print money in unprecedented quantities.

Could that be changing?

Energy and food are pretty much the basics of the world system, and prices may be about to nudge up for both.

On energy: Tension over Iran’s nuclear program is pushing up energy prices. And that confrontation is unlikely to fade away any time soon. There’s more: The civil war in Syria could easily spill over into Iraq, where Sunni-Shiite tensions are high. A Sunni government in Syria overseeing chaos and armed groups running around could mean more support, fighters, and weapons for Sunnis inside Iraq. Throw in the possibility that political unrest could spread in the Gulf, and the energy picture could turn scary very fast.

The other problem is food. The worst drought in years is hitting the American breadbasket. Earlier this year the U.S. looked set to produce record harvests. If, as forecasters now believe, the region stays dry for the next two weeks, corn and soybean yields will plummet, and prices will rise.

Food riots and political unrest across the globe are likely consequences. But this will also push price increases and demands for higher wages around the world to keep up.

We should all be very, very glad that inflation hasn’t made an appearance yet, but it’s getting easier to envision the conditions that could bring it roaring back. That’s a very ugly thought, as policymakers couldn’t do much about it without pushing the world back into a new and perhaps even deeper recession than we just had.

Stagflation is another big worry: stagnant economies, high unemployment, and rising prices. Next to actual deflation, it’s the worst thing, because all the policy options you have to curb the inflation actually make unemployment worse.

Nouriel Roubini, the famed Dr. Doom, shares some of these fears. He predicts a “perfect storm” in 2013: a convergence of multiple bad economic trends and geopolitical crises. Reuters summarizes:

Those factors are a worsening of the debt crisis in Europe; tax increases and spending cuts in United Sates that may push the world’s biggest economy into recession; a hard landing for China’s economy; further slowing in emerging markets; and a military confrontation with Iran.

When (if) that happens, says Roubini, governments will quickly realize they have no more “rabbits to pull out of the hat.” Other doomsayers more radical than Roubini see an even more frightening picture. Via Meadia hopes things don’t go that way.

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  • Felipe Pait

    Whoever has been concerned about inflation in the last 4 years hasn’t really been paying attention to what Roubini has to say. The crisis in Europe and the US is a failure of demand – one could call it a crisis of deflation, or disinflation.

    If it goes on for too long, other problems will appear.

  • Andrew Allison

    It’s painfully clear that the serfs, er interns who do the good professor’s grocery shopping have concealed from him the tremendous “inflation” in domestic food and fuel costs of the past few years. Of course, it’s not really inflation at all but devaluation of the dollar. Dollar-denominated commodity (notably gold and oil) prices tell the story.

  • Luke Lea

    Here is a longer Roubini piece on the US outlook:

  • Jacksonian Libertarian

    There isn’t any inflation because we are in Great Depression 2.0; deflation is everywhere if you just look. Home prices have fallen 35% which has wiped out the American Family nest egg, cutting American Family net worth by 40% and hitting the lower and middle class the hardest as they own little in the way of stocks, bonds, and businesses. The M3 money supply is still $500 billion below its peak, despite $2.3+ Trillion in newly printed money (QE I & II). Interest rates which are very sensitive to inflation are hitting all time lows, with home mortgage rates in the 3.5% range for a fixed rate 30 year mortgage (after 20+ years of deflation Japanese mortgage rates are 1%, so ours can go much lower). If inflation was really a concern the Bankers would be demanding a serious interest premium, for example the 21.5% interest rates demanded when inflation was double digit at 12% in the early 80’s.

    What we are seeing in consumer prices isn’t inflation, which is monetary in nature. It is mostly caused by the environmentalists blocking of energy development over the last several decades, this has driven up “energy costs” which are an integral part of everything we produce and do. As Mankind has culturally evolved we have replaced muscle power with energy so that there is an “energy cost” to literally everything, even sitting at home doing nothing there are dozens of electrical appliances using energy in your home, even things on standby power are drawing power.

    Consumer Prices are not a real measure of inflation or deflation, as they are affected by supply bottlenecks, caused by the weather or evil environmentalists.

    Real inflation or deflation is all about the Money supply, and there is only one Law of economics, the “Law of Supply and Demand”.

  • Jim.

    What do you mean we might “begin” to see food and energy inflation?

    Both food and energy prices have DOUBLED since I graduated college a little over ten years ago. That shows an inflation rate between six and seven precent annually, which isn’t a record high but certainly isn’t non-existent.

    Do the people that come up with these statistics ever shop for groceries or buy gas?

  • Eurydice

    I suppose it’s a good thing that CPI is reported “ex-food and energy”

  • Art Deco

    I suppose it’s a good thing that CPI is reported “ex-food and energy”

    This is a meme that will not die. The Consumer Price Index includes food and energy prices.

    The Bureau of Labor Statistics also includes a “core inflation” metric which excludes food and energy prices because these prices are volatile.

  • Art Deco

    By the way, Dr. Mead, your last link is to a Newsmax article about Nouriel Roubini’s statements, not anyone else’s.

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