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Generational Dynamics Web Log for 19-Nov-04
Inflation is back, according to analysts.

Web Log - November, 2004

Inflation is back, according to analysts.

Both wholesale and consumer prices are sharply up - but not if you don't count oil and food.

The Producer Price Index (PPI - for wholesale prices) jumped 1.7%, and the Consumer Price Index (CPI - for retail prices) jumped 0.6% in October. Both increases were much higher than they've been for a while.

As a result, analysts are talking about the return of inflation. That's not all. The value of a dollar has been falling internationally, with the euro going over $1.30 for the first time.

The return of serious inflation would have a significant impact on policy at Alan Greenspan's Fed, forcing him to be more aggressive in raising interest rates. That could cause other problems, however, with a number of analysts predicting a recession next year.

So what's going on? The following table shows the values of the PPI and CPI for each month so far in 2004:


                        Changes from preceding month    
                                    2004                
                     Jan. Feb. Mar. Apr.  May June July  Aug Sept  Oct
   ----------------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
   PPI                .6    .1   .6   .7   .7  -.3   .1  -.1   .1  1.7
   ----------------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
   PPI "Core index"   .3   -.1   .3   .1   .4   .2   .1  -.1   .3   .3
   ----------------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
   ----------------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
   CPI                .5    .3   .5   .2   .6   .3  -.1   .1   .2   .6
   ----------------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
   CPI "Core index"   .2    .2   .4   .3   .2   .1   .1   .1   .3   .2
   ----------------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----

In each case, the "core index" is the index without food and energy prices factored in.

Now, the price of oil has increased over 40% this year, and it topped $50 per barrel in October. That's why the PPI jumped so high.

When you look at it that way, the question isn't "Why did the PPI go up?" The relevant question is, "Why did it take so long to go up?"

And there's a second relevant question: "Why are the two core index values still so low?"

These figures indicate that both businesses and consumers are being forced to pay very high prices for energy and food items, but that businesses are unable to pass high energy prices through to finished goods.

From the point of view of Generational Dynamics, what's happening is this: The Great Depression of the 1930s forced many inefficient businesses to close, and forced others to completely change course to survive. By the time it was over, almost every business, university, government agency, labor union and non-profit organization was "lean and mean," getting everything done with a few highly motivated employees.

Over the years, all of these organizations have become increasingly inefficient, until today they're so inefficient that they're producing products and services that people don't really want at prices much higher than people are willing to pay.

When you combine that with the great bubble of the late 1990s, that's why we're entering a new 1930s style great depression again. We would already have had massive bankruptcies and homelessness, except that Alan Greenspan's Fed poured money into the economy by pushing interest rates down to near-zero, allowing people to borrow enormous amounts of money at lower interest rates to avoid bankruptcy.

The result is that inefficient businesses have continued to survive on credit, pushing public debt to astronomically high levels. Thus, the Fed policy has not prevented the financial crisis, but only postponed it.

Furthermore, as we've previously said, if you look at long-term trends instead of just a few months, we're actually in a long-term deflationary period, and we actually expect prices to fall by 30% in the next few years. That's why huge spurts in oil prices are causing temporary spikes in the PPI, but aren't having much effect on the the core values, and won't have any long-term effect. (19-Nov-04) Permanent Link
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Generational Dynamics Web Log for 19-Nov-04 Inflation is back, according to analysts.

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Generational Dynamics Web Log for 19-Nov-04
Inflation is back, according to analysts.