Many commodities such as copper are unlikely to fully retrace their 2020/2021 gains. Many companies including Procter & Gamble ( PG) and Coca-Cola ( KO) are raising prices due to higher input costs. However, many prices are unlikely to revert back to where they were pre-2021. Lumber’s extreme price behavior, for example, is due to an acute sawmill bottleneck. Some specific parabolic price levels will almost certainly come back down pretty far. This second type of inflation is likely what we’re experiencing at this time. As the market adjusts over time, this price inflation becomes transitory in rate of change terms, but with prices that ultimately settle at a higher level, due to more money permanently being in the system. On the other hand, rapid increases in the broad money supply that boost demand for goods and services without boosting the supply of goods and services, result in supply shocks and cause price inflation. Official inflation was 2.7% at the time, and rising: I began cataloguing this in multiple articles, newsletters, and premium reports throughout 20, with my May 2021 Newsletter being the culmination of much of that analysis. And money creation occurred not just in bank reserves for the financial system, but out in the broad money supply for consumers and businesses to spend. Trillions of dollars in new money creation occurred, especially in the United States but also globally across most developed countries. Throughout 20, that’s what happened, and in a bigger way than even I would have expected when I wrote that in 2019, due to the COVID-19 catalyst. Negative yields would be even more vulnerable. I wouldn’t want to be holding a 20-year or 30-year bond at super-low fixed yields in that kind of environment. They can issue helicopter money to pay off debts, boost inflation, build infrastructure, bail out unfunded pension systems, and prop up the middle class if that’s what policymakers decide to do. If central bank actions get more aggressive, combine with fiscal policies, and start targeting the middle class, they have the power to override these various deflationary forces with sheer monetary expansion. They printed money, but kept the money on the central bank balance sheets by buying bonds. So far, central bank tools have not been inflationary because they have primarily benefited asset prices rather than middle class consumption. However, when a highly-leveraged economy up to the sovereign level is struck by a significant economic shock and contraction, it faces the prospect of widespread default or extraordinary money printing to finance the debts and devalue the currency instead.įor this second scenario, in a 2019 article where I examined the prospect of the world being in a bond bubble, I discussed how the next economic downturn could see a massive combination of fiscal and monetary policy, resulting in major inflation: The economy muddles through, malinvestment gets wiped out, some debts get defaulted on, and productive investment can rebuild from there. When a relatively unlevered economy is struck by a significant economic shock or contraction, it’s unpleasant but workable. Areas where money supply growth greatly exceeded changes to consumer price index were generally due to some sort of productivity boom. These charts show the five-year rolling cumulative amount of broad money supply growth and consumer price index growth. We can see this with long-term charts of several different developed countries as examples. a major boom or a major loss in productive capacity) also significantly affect price inflation. On the other side, sharp changes in the supply of goods and services (e.g. On one side of this, a sharp and persistent increase in the broad money supply is the biggest quantifiable correlate with price inflation. Price inflation happens when too much money chases too few goods and services. Inflation is currently on a downtrend, but with some of the underlying problems still unresolved, it risks a resurgence in the years ahead. This article examines the topic of inflation, to take a data-driven look at the causes and fixes for inflation over the past century.
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