WARNING:Indications of Accelerating Price Inflation Are Developing All Over

I have been warning at the EPJ Daily Alert that price inflation will intensify as the desire to hold cash balances declines as people become less fearful of a downturn in the economy and more fearful of increasing prices. This is exactly what is starting to develop and Bill Fleckenstein has taken notice:

I would now like to turn my attention to the subject of inflation. Longtime readers know exactly how I feel on this subject, but I am beginning to see more and more stories about price hikes in various and sundry publications. Today’s Wall Street Journal and New York Times contained no fewer than three articles on this topic, with the front page of the Times featuring a story headlined, “The Price of Prevention: Vaccine Costs Soaring,” which reported the following: “Vaccination prices have gone from single digits to sometimes triple digits in the last two decades, creating dilemmas for doctors and their patients as well as straining public health budgets.”

Meanwhile, on the NYT op-ed page, successful restaurateur Danny Meyer penned an editorial headlined, “There Goes the Neighborhood Cafe: Rising Rents Are Killing Off Manhattan’s Local Restaurants.” In it he stated, “Because the market suggests they can, landlords are using this moment to demand the significantly higher rents they’ve been waiting for since first betting on their neighborhoods. In our case, the advertised rent is triple what we are now paying.

The Wall Street Journal, on page two, ran a story headlined, “Retail Rents Rise As Low Vacancies Bolster Landlords,” and noted, “Shopping center owners continued to increase rents in the second quarter as a host of retailers in expansion mode jockeyed for dwindling available space in the existing high-quality centers… Meanwhile, the shrinking vacancies allowed retail landlords to raise rents at malls for the 13th consecutive quarter and at strip malls for the 11th.”

Down the Road Looks a Little Steeper

That is the way it is with inflation. Price increases leak out all over the place. When you print $1 trillion in a year, to think that much printed money is only going to boost asset prices and not push up the cost of goods and services (and thus the rate of inflation) is just plain silly. What we have not seen thus far, though I think that is beginning to change, is an adjustment to people’s expectations of future inflation. Once it occurs, it is almost impossible to reverse that psychology, as we saw in the late 1970s when solving the problem required Fed chairman Paul Volcker to take interest rates to high double digits.

When folks look back on this period they are going to shake their heads and wonder how people ever concluded that all this money printing wouldn’t end in wild inflation.

I currently believe that a Janet Yellen led Fed, while it  has a stated inflation "target" of 2%,will not start becoming concerned about price inflation until it is at 3%. Once, the Fed does become concerned, it will act too timidly in its battle against the inflation. Thus they Fed might, for example, raise interest rates by 50 basis points, when 150 basis points might be required to smother the inflation. Thus, a tiger by the tail scenario might develop,where timid interest rate hikes are followed by accelerating price inflation, which are then followed by more timid rate hikes, which will mean even stronger price inflation.

-RW