Sunday, January 30, 2011

Krugman on Price Inflation

Paul Krugman continues to attempt to protect his former Princeton University boss, Ben Bernanke, and continues to promote the idea that current price inflation is comimg from many directions, but not from his former boss.

Krugman's focus continues to be on commodities, and his ongoing claim that price increases are the result of hoarding, other increased demand, or weather related supply reductions. As I have pointed out several times, there is no question that foreign demand factors and supply reductions play a role in the increases in commodity prices. But this does not mean that they are the only factors acting on commodity prices. I could just as easily pull out money supply charts and say, "There, Bernanke is causing most of the price gains , just look at the money growth."

The truth is both Bernanke and supply-demand factors are impacting commodity prices.

The curious thing, though, is that Krugman wants to keep the focus on commodities because he can blame the supply-demand causes for the increases and confuse the situation. Yet, price increases are certainly not limited to the commodities.

Over the last 12 months, the the stock market, as measured by the S&P 500, has climbed by 18.85%. I'd like to see Krugman blame this on Chinese farmers hoarding. Further, the last CPI release not only showed increases in the energy sector but increases in the shelter index, the indexes for airline fares, medical care and apparel.

Now some of the increases in some of these indexes can be attributed to commodity gains, but others have limited to no connection (e.g. medical care).

Then, of course, we have anecdotal evidence of non-commodity related price increases, e.g. the hike in the price of movie theater tickets.

Krugman's focus on commodity prices distorts the real picture. Many other prices are climbing, but further, Krugman is illegitimately claiming that none of the spike in commodity prices is a result of Bernanke money printing. By mid-2011, when prices really start to spike, it will be very clear that overall rising prices are not the result of simply changes in non-monetary supply and demand factors.

Then what voodoo analysis will Krugman attempt to explain all those price hikes?

1 comment:

  1. How to invest given the money printing is the million dollar question. Simply put, if the Fed doubles the money supply, all goods will not double in price. The key is to find goods with supply issues(eg food), or goods that will see their demand increase due to rising prices(eg gold/silver) Housing with the large supply overhang should under perform for a counter example.