In light of Robert Murphy’s piece on the inflation camp, the new PPI figures are out.
Source link: http://blog.mises.org/11250/speaking-of-price-increases/
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…which seem to show a low inflation rate. Look again at the M1 chart in Murphy’s article – I’d say we have a pretty little natural experiment that shows that huge increases in the money supply do not necessarily lead to inflation.
Ross,
Did you even read Murphy’s article? Stop embarrassing yourself.
Theoretically, “huge” increases in the money supply do not necessarily lead to inflation: the demand for money must be taken into account, and a “huge” increase in the demand for money can couterbalance the effect of a growing money supply (in the case of the $, this demand is international). For this reason, it is difficult and even impossible to interpret the current US situation as a natural experiment.
Chart #5 is interesting.
i have seen countless pages on mises sites that say huge increases in the money supply is inflation…and this often leads to to price increases of goods?
i am still not sure if prices outpace wages to a greater extent (if money inflation and price increases is detrimental to many in other words)
but many at the mises sites and lrc have referred to inflation, and the resulting price increases, as a disease or an ill…..almost always in negative terminology.
maybe they are all wrong or liars, i havent determened that yet.
these figures show average hourly wage data and cpi for 1999….
Jan
Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
1999 0.06 0.03 0.04 0.04 0.05 0.04 0.05 0.03 0.06 0.03 0.02 0.04
the bls website showing the cpi for 1999 says:
0.2 0.0 0.1 0.7 0.1 0.0 0.4 0.2 0.4 0.2 0.2
0.2 jan thru december….
from tehse charts it seems that cpi greatly ouptaced increases in hourly wages….unless there is somethign in the calculation that i am missing.
Sum totaling these percentage changes (not saying this is completely mathematically or methodologically… but it surely gives a ballpark estimate), one gets a total of -0.1.
Which suggests very, very slight overall deflation, which is trending towards increasing inflation.
Theoretically, Austrians believe that in a time of recession/depression, the demand for cash holding increases, and we should therefore experience deflation. Austrians also believe that increasing the money supply is what leads to increases in the price level, the vulgar definition of inflation.
I’m not statistician, but I do appreciate the theory and hold it to be true. It seems that since the price level has not dropped substantially in this time of “Great Recession,” there must be strong inflationary prices at work.
Question/Comment: It would not necessary have to be true that there would be tremendous price increases for the economy to remain inflationary, given that there are strong deflationary pressures at work – true? Likely we may see complete stagnation and 70s like inflation, although possibly more.
Unless I am mistaken, the PPI over the last 6 months, when annualized is 7.8%.
Bernanke = Arthur Burns
A few other things to consider:
The Government systematically distorts the price-inflation statistics with things like hedonic adjustments and by excluding essentials like energy.
The Government also heavily subsidizes many of the products in today’s consumer basket. One reason food has remained relatively affordable is because of federal subsidies to commodity crops like corn, wheat and soy, as well as animal products like poultry and milk. (It is interesting to note that the hedonic adjustment never works in reverse: Today’s chicken has substantially more fat in it than does the chicken of twenty years ago, because of growth hormones. The Bureau of Labor does not compensate for that decline in quality when calculating price inflation).
I prefer to measure price inflation based on my own experience. When I started law school, my morning coffee and bagel cost $2. I graduated one year ago. During my last year, the same bagel and coffee cost $3.50. My evening beer recently went from $2.99 to $4.29.
Discount this information all you want. At least I don’t advertise my honest observations as the final word on price inflation, as the government does.
It is also important to remember that banks are holding on to most of the cash that the FED printed. Until they start lending, that money will not be in circulation and subject to fractional reserves.
@Aaron – great observation! Actually, it’s more like 8% annualized (7,9877%). Overall, there seems to be a quite marked inflationary effect, at least in the PPI, from the beginning of 2009.
@David – your CPI is no better than an average RE spaculator’s. Would you dare suggesting that he does actually feel inflated and not grimly deflated?
The PPI overall is a strange beast. Its correlation with CPI and other inflation estimates is weak and counterintuitive, most developed and almost developed countries data (including USA and China) shows that changes in CPI actually predate changes in PPI, and certainly that PPI shows much more variance than CPI. Some studies show that the correlation between PPI and CPI is very weak and I’ve seen some publications that show intuitively impossible data that PPI is almost always a lot higher than CPI over decade long periods. I don’t think these phenomena have been explained as of today. Not that they cause econometricians’ sleeplessness, though…
The federal reserve has been pumping huge amounts of funny money into the bank’s excess reserves. This means that banks can legally extend that money out in absolutely gargantuan sums; sums on the level of the price inflations of Weimar Germany.
However, in order for price inflation to actually occur, the money must actually be in the economy doing something. The money supply has been debased, there is no denying it. Looking at the amount of money that has been added to the banks vaults proves this to be true. We are already seeing the effects of this in the form of the housing market not being permitted to crash in the manner that it must for the malinvestments to be wiped. If the banks actually start lending out the money, and it starts being used to bid away goods and services from alternate uses, THEN we will start seeing price inflation.
One thing that is often ignored is the velocity of money. Large increases in the money supply will inevitably lead to inflation. However, if money is not circulating throughout the economy prices cannot increase. Despite increases in money supply, spending is down in the private sector. This decrease in spending in the private sector is why we will see deflation. Once deflation has reset prices and the private sector begins to spend again (thus increasing the velocity of money once again) we will see years of inflation from the current monetary stimulus.
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