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Source link: http://archive.mises.org/15803/inflation-is-here-and-it-is-going-to-get-worse/

Inflation Is Here, and It Is Going to Get Worse

February 24, 2011 by

As compared to September last year, the growth momentum of price indexes shows visible strengthening. Prepare for more. FULL ARTICLE by Frank Shostak


Ned Netterville February 24, 2011 at 11:20 am

Bernanke says (paraphrasing), “Not to worry. We (the Fed) have the tools to deal with inflation if it ever becomes a problem, but for now it is at historic lows.” lol

fundamentalist February 24, 2011 at 12:00 pm

Nicely done! Thanks!

I have an old econometrics book from the mid-80′s in which the author does a distributed lack linear regression of changes in M2 to cpi. His analysis showed a 4-year lag from the increase in money supply to the peak effect on prices. However, the effect wasn’t limited to one quarter. A slug of new money showed an effect within a few months and the effect continued to grow until it peaked at 4 years and then declined.

Of course, the effect will change over time and the lags will vary. The lags are much greater during a depression and much shorter in the last quarters of a boom.

greg February 24, 2011 at 12:56 pm

My question is will you still stand by you position if the CPI falls?
The past week:
Cotton down $30
Corn down $20
Soybean down $60

And yes we have a spike in oil and gold which is a direct result of the problems in the Middle East. In the end, supply will trump the political problems and the price of oil will fall too.

fundamentalist February 24, 2011 at 1:18 pm

greg, the money supply doesn’t explain individual price movements, just general price movements as recorded in indexes like the cpi. Many things other than the money supply affect individual prices.

And the money supply doesn’t explain 100% of cpi movements. If you did a regression money would explain about 90% of cpi changes. Productivity is a major factor in cpi changes. And then there is just plain randomness.

J. Murray February 24, 2011 at 1:41 pm

Inflation is the difference between the price today and the price where it would have been had the new money not been printed. It’s only a component of the price fluctuations. Corn and soybean are considered staple products, meaning they tend to get produced in greater quantities during economic downtimes, leading to lower pricing. The question is if a 20% price decline in corn is too small given the monetary stimulus attached to it.

Rick February 24, 2011 at 1:50 pm

Also, how does government subsidy impact prices?

J. Murray February 24, 2011 at 1:55 pm

Subsidy tends to create lower at-market prices for the specific good, though the consumer ended up buying a portion of it via taxes before ever getting a hand on the product. This is reflected by increased production of the good in question. Of course, this is offset by the increase in prices of alternate goods and a total increase in overall agriculture costs because a less efficient product is being subsidized (if it were the best product, it wouldn’t need subsidy), placing a market-superior product at a disadvantage.

Eric February 24, 2011 at 2:28 pm

Take a look at a chart of cotton prices over a longer time frame and then place that $30 in perspective:


It looks to me as if cotton prices have doubled since about 2009. And even with some sell-offs, it’s still pretty high.

norman February 24, 2011 at 1:25 pm

The title to you article is: “Inflation Is Here, and It Is Going to Get Worse” How do you know? Do you believe the Fed will continue monetary expansion? Since you are trying to disprove the idea that inflation is an increase in prices, then are you expecting price inflation? I believe Mises feels that the word “inflation” can be used in two senses, one an increase in money, but also as a term describing general price increases. I agree with your explanation that there are both monetary and non-monetary causes for price changes. Whether inflation is a monetary expansion or price increase, is more of an ever debated semantic argument.

Freedom Fighter February 24, 2011 at 1:36 pm

The FED will continue money expansion up to the point of oblivion and destroying the US currency and the middle class. Fiat currencies always fail and the US dollar is no exception.

Plus, the FED is banking on the fact that the US dollar is the world’s reserve currency. This is about to change and will cause the US dollar to suffer the same fate as the Mexican peso.

Look at your US dollar and the purchasing power it has today. In 5 years, the purchasing power will be only 25% of what’s it worth today. In 5 years, it will take 4 bucks to buy what one buck buys today.

In 5 years, when you will go to the convenience store, it will take 4 bucks to buy a chocolate bar. It will take 30 bucks to buy a gallon of gas.

fundamentalist February 24, 2011 at 1:38 pm

Actually, Mises tried to kill the idea that inflation referred to prices. He always insisted it meant expansion of the money supply. Rising prices is the result of such inflation. Shostak is merely using the word with its popular, faulty meaning, which can cause confusion.

J. Murray February 24, 2011 at 1:42 pm

The Fed may stop printing now, but the effects of inflation usually aren’t felt for about two to three years after the fact. The reason we’re saying inflation is going to get worse is because we haven’t yet gotten to the point where the 2007 bailouts and stimulus spending will reflect in pricing.

Economics isn’t an instant effect. It takes time to see the results of actions.

Rick February 24, 2011 at 1:54 pm

I don’t know about hyper-inflation. But I do think inflation will be a big issue in the next few years. By inflation I mean the government/central bank creation of fiat money and the gradual, or sometimes sharp, decline in purchasing power of the dollar. The details? I can’t predict. Nobody realistically can. One of the things I take from Austrian economics is that you can predict trends, but that you can’t predict precise details and you can’t perfectly time markets.

J. Murray February 24, 2011 at 2:03 pm

Exactly. Trying to predict something in economics is like trying to solve a math equation with a dozen unknown variables. We know there is a single right answer, but we lack the information (and always will) to get that answer. And history is of no use because what was true yesterday is no longer true today. The exact mix of market preferences fluctuates by the second and all data is good for is for that specific moment in time which is now past.

Sione February 24, 2011 at 2:59 pm

More than a dozen unknown variables, more like hundreds of interrelated, interdependent variables as well as hundreds of unknown independent variables. Heck, maybe millions of them.

Nevetheless the trends are visable.


Freedom Fighter February 24, 2011 at 3:41 pm

Not to mention that those unknown variables are highly chaotic and have a mind of their own and that because of Heisenberg’s principle of uncertainty, measuring one variable makes all the other ones fuzzy and therefore there is no way you can know the exact big picture, let alone know where it’s going an any attempt to force arbitrary values in the variables because you gave up trying to find their true value will only mess things up.

I can predict economics easily, it will get worse if you try to fix them and it will get better if you leave them alone. It’s as simple as that.

Freedom Fighter February 24, 2011 at 1:33 pm

Is Inflation about Price Rises?

No, inflation is about money supply rise due to government recklessness and more rarely due to the diminishing of goods and services supply.

If we run out of oil, there will be an inflation in the price of oil but that will be due to the decrease of oil supply.

But most often than not, inflation is due to quantitative easing (printing money) done by the governments to fund their wars on drugs, on terror and on poverty which destroys the savings of people.

But gold is overrated, hedge yourself against inflation by buying food, water, guns and ammunition. The rest is worthless. If the shit hits the fan and it will, gold will mean nothing.

Rick February 24, 2011 at 2:05 pm

I think things will get rough. But I don’t think there will be total collapse or an economic apocalypse. Despite the problems and the likely challenges ahead, I think the prospects for the U.S. governments demise and the Feds demise are very low at this point. Not saying you shouldn’t self-insure, but I don’t think the U.S. will end up like Weimar Germany or more recently Zimbabwe. Despite inflation/deflation and the USD possibly losing its status as the world’s reserve currency someday it’s likely the Federal Reserve will continue to have a legal tender monopoly and be part of the monetary scene. So, from that perspective, at the moment gold is not overrated as a savings tool.

Freedom Fighter February 26, 2011 at 10:46 pm

“Not saying you shouldn’t self-insure, but I don’t think the U.S. will end up like Weimar Germany or more recently Zimbabwe.”

Never say never

Don Duncan March 1, 2011 at 8:22 pm

You are assuming a hunker down strategy. What about an escape strategy? I do not want all my assets tied up in anything I can’t take with me. An 80% drop in the $ will mean food shortages, riots, martial law, and an all out police state, possibly for a long time (15 years could be a life time for me). If escape is chosen, gold will be the difference between affluence and poverty. Ask the “boat people”. You stay and fight. I chose NOT to spend my “golden years” in a “camp”. I have no sympathy for the Jews who stayed in Nazi Germany.

Eric February 24, 2011 at 2:15 pm

Frank begins by explaining that the term inflation has been Orwellian-ized and no longer has its original definition. This is a problem of education. The word has been changed to hide from the public what the FED has been doing.

In the latter part of the article he has adjusted, as should everyone, and only use the two word hyphenated terms, price-inflation and money-inflation. If everyone were to adjust to these terms and never say inflation alone it should defeat those that try to confuse the issue. In conversation, when one says inflation, I always ask if they mean price or money inflation.

It also helps to point out that prices go up or down and the term inflation is not a good analogy for rising prices.

Don Duncan March 1, 2011 at 8:54 pm

The economist Howard S. Katz thinks we should use the term “currency depreciation” instead of inflation (price-inflation). This emphasizes that goods are not going up in value but the money is going down. I doubt such a term will be popular. Maybe “falling dollar” or “shrinking dollar” would catch on. Actually we should not call the FRN a dollar. A dollar is a weight of silver or gold. When education and media are controlled by gov it’s only a matter of time before communication for critical analysis becomes difficult because manipulation of language for indoctrination has been used to protect the elite from the masses. Breaking that psychological-intellectual stranglehold which is over a century in the making will be a monumental task. LONG LIVE THE NET!

The Fringe Economist February 24, 2011 at 2:25 pm

I find myself constantly trying to explain to people the difference between price and money inflation. The two terms really help a lot in understanding the negative effects the Fed has on our economy.

J. Murray February 24, 2011 at 2:28 pm

I usually try to avoid using the term inflation when dealing with prices. Inflation is purely a monetary phenomenon. Changes in price include preference changes and supply changes, which aren’t inflation or deflation.

Jimmy s February 24, 2011 at 5:01 pm

Here is a chart of money velocity M2V http://research.stlouisfed.org/fred2/series/M2V?cid=32242

M2V http://research.stlouisfed.org/fred2/series/M1V?cid=32242

MZM http://research.stlouisfed.org/fred2/series/MZMV?cid=32242

Really hard to see any monetary inflation effects until these charts turn around isn’t it ?

After all, if that money isn’t circulating, how is it affecting the price ?

I believe the price increases we are seeing at this point are supply demand based.
Strangely enough lack of demand can in fact increase price temporarily. If I am a retailer and my bills are x I need to sell a certain number of sku’s @ 20% to service x if that volume drops I still need to make x for bills so less volume = more gross. Price rises.

Eric February 24, 2011 at 8:51 pm

The problem with that chart (besides that it comes from the FED) is that money velocity is a derived term. There is no way to really measure it. It comes from the so called equation of exchange – a favorite of the monetarists. The meaning of that quantity is more accurately described as the demand for money.


Either Rothbard or Mises did a paper on this equation which pretty much showed it to be of little use. As for money circulating, that’s also a bad analogy, money does not circulate like current in a wire. Money is at all times in someone’s possession. There is an instant where it exchanges hands, but that’s not like a flow. So trying to figure out prices based on the concept of velocity of circulation is a faulty theory.

For example, I’ve always wondered if I get change for a $20 if that get’s counted as velocity. Or suppose I’m playing cards and the money keeps exchanging hands, is that counted as velocity? And suppose we each have a store and first I buy something from you and then you turn right around and buy something from me of the same value. In essence, we made one exchange, but according to money velocity theory, there were 2 exchanges.

However, people do have a desire to hold a certain amount of cash (for unforeseen contingencies) which varies over time. Also, in periods of hyperinflation, people try to hold as little cash as possible and for as little time as they can. These circumstances can increase or decrease the demand for money. If demand for money is high, then it will increase in value -all other things being equal – and vice versa. In this way, both supply and demand affect the “price” of money just like supply and demand affect the price of anything else that is exchanged.

However, time also is involved, as mentioned in the article that estimates 36 months lag on average to see the effects of increases in money supply.

But sometimes simply the belief that supplies will increase can change prices. Today, for example, just as oil prices were at about $103 per b. Saudi Arabia announced it was going to put more oil up for sale, and the price of oil plummeted intra day.

Many things affect prices. However, when nearly everything is increasing in price, then since money is 1/2 of every exchange, it’s generally the case that it’s the supply of money that has increased, rather than shortages of everything else causing the increase in prices.

RichF February 27, 2011 at 12:24 pm

One quibble: Have you ever noticed what retailers do when they really need to move merchandise? They put it on sale, they don’t raise the price.

Sione February 25, 2011 at 3:27 am

Well, I’m always pleased to see a Dr Shostak article. Worth thinking about and acting on.


ideaman February 25, 2011 at 6:06 am

First, I’m barely a dabbler in economics, so if I say something really stupid you’ll understand. The main question really proposed in the article is ‘if the word inflation has been absorbed into the lexicon with a different meaning than Austrian economists have always used it, how do we have a discussion of increasing prices and swelling monetary conditions’? I’ve had this problem for a while as I speak to other laymen about the problem and come to substitute the term ‘excess liquidity’. Liquidity is easy to define (using the ‘true money supply’ components), and helps do away with the claim that Bernanke truthfully makes when he says ‘we’re not printing money’. No, Ben, you’re right. You aren’t printing trillions of little bits of paper, you’re flooding the banks with trillions of dollars worth of ‘liquidity’. One example is the swapping of (worthless) assets for extra zero’s in their reserve accounts. Once accomplished, this liquidity both strengthens the bank’s balance sheet and makes it possible for the bank to put that new money to use. For example, it can offer better rates on CDs or loan it to someone like its own affiliated trading house, thereby moving those newly acquired zeros into the economy. Finally, by creating this liquidity and purchasing assets with unknown value (or next to zero value, if marked to market) it takes what was a functional liability and turns it into a functional asset. My simple mind says that if I have an “X” instrument worth $1.00 today, and the Fed buys it for $10.00 tomorrow using data entries on its balance sheet, there’s a net increase of $9.00 available to enter the economy. Newly created liquidity available to bid up the prices of assets (aka, inflation).

The term ‘excess’ is where I get myself in trouble, because it may be subjective and unquantifiable. Of course, so would “massive”, “unprecedented” or any other adjective. In any case, I feel much more comfortable using the word liquidity when I talk to my friends about what the Fed has done, and how that liquidity spreads through the economy to eventually cause prices to rise as too much liquidity chases after the same quantity of goods there were prior to the creation of that liquidity.

As a side note, yes, I realize I’m stealing a term which already has an economic meaning, but unless I just make up a new word like ‘snarvulfungis’ or import some Latin word, I’m going to be stuck redefining no matter what. And this word ‘liquidity’ has the added advantage of producing a mental image when I say “we’re all about to be drowned under a tidal wave of liquidity’ or ‘the third world economies are being swamped by a wall of liquidity emanating from the U.S.”

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