Friday, April 18, 2014

Price Inflation Is All Around Us

But don't worry. If you don't eat or need a place to live, and just spend all day reading Paul Krugman blog  posts, you will realize there is no problem.

From My Budget 360:

Inflation is accepted as a normal part of our economy similar to how we take it for granted that the sky is blue.  It is close to a religion where people simply believe that inflation is part of the economic fabric of our nation.  Yet inflation with no subsequent rise in wages is tantamount to a loss in living standards like a lumberjack slowly chopping away at a big pine tree.  Inflation is a slow process and erodes purchasing power through a variety of avenues.  We sometimes need to step out one generation to see how massive the changes are in the system.  Even today inflation is hitting the pocketbooks of most Americans.  First, inflation adjusted wages are simply not keeping up.  You spend more at the grocery store and get the same or even less amount of goods.  Sending your kids to college?  More of your money is being allocated to this purchase compared to the previous generation.  Housing?  The large push of investors in the market has caused housing prices and rents to go up.  What this means for most Americans is that more income is being siphoned away into housing.  All of these are very tangible impacts of inflation so why is it that central banking policy is practically ignoring all forms of this erosion of living standards to continue monetary easing?

Food costs are certainly up in price.  Families spend a good portion on food each month.  Just think of the typical American family making $50,000 a year.  If you are spending $500 to $750 a month that is a good portion of your disposable income.  One needs to eat.  We’ve seen disinflation hit in this market were producers are repackaging items with less content but for the same price.  These are sneakier ways of hiding inflation since consumers feel they are purchasing the same amount of goods but in reality, they are paying more for the same item.  For example, smaller tuna cans or repackaged cereal boxes.

If we look at the S&P GSCI Agriculture and Livestock Index the change in prices are very visible.  Most of the changes started in 2000.

The index is up more than 133 percent since 2000.  You see that corn, soybeans, and wheat are all up in the double-digits this year alone.  All of these items are large staples in our food supply.

The Case Shiller Index is showing home prices are up 13 percent year-over-year and more than 20 percent from their trough after the housing bubble popped.

The problem here is that a big part of the push up in price has been from big investors buying up properties with artificially low rates crowding out regular home buyers.  The market was already low in inventory and since the recession officially ended in 2009, nearly 1 out of 3 home purchases has gone to investors.  That is, people not looking to live in the home which was the traditional method for middle class families to build up their wealth.  Inventory was already low in the market thus the push up in prices.  Many of these investors were seeking to rent places out and we have seen rents go up as well:


  1. The Fed and the national govt has been very effective at instituting and perpetuating the lie that inflation is just a normal feature of a healthy economy. It's one of their most pernicious lies, for sure.

    1. Of course it is better to buy inventory and sell it for a loss due to falling prices.

    2. Re: Jerry Wolfgang,

      -- Of course it is better to buy inventory and sell it for a loss due to falling prices. --

      World, meet the nitwit who thinks that someone who sells something for an amount of money that is progressively increasing in value (deflation) is operating "at a loss."

  2. Another point to consider as it relates to a low housing inventory is the amount of "shadow" inventory. That is to say, residential properties that have been forecloesed on, held as REO on bank balance sheets, but not listed for sale. This keeps inventory low, artificially, and is a contributing to the rise in home prices.

    Yet another point to consider is a return to sub-prime lending - you're already seeing this with Wells Fargo and a few other banks and financial institutions. Once this heats up, probably toward the end of this year, the inventory currently in the "shadow"s will come to market as demand increases due to lax lending standards. Prices will increase as demand for homes outstrips the supply coming to market. The banksters will benefit as previous "shadow" inventory can be sold at higher prices. Once this all plays out, the real estate market will tank again leading to another downturn the likes of which have never been seen before, except in Weimar or Zimbabwe. It will make the Great Recession of 2007 / 2008 pale in comparison.

    1. Good take, Derek F.

      Reminds me of two comments I saw over at thehousingbubbleblog on Friday:

      RE: a WSJ article, “Vital Signs: Housing Inventory Remains Spacious”

      "Massive and growing excess empty housing inventory, collapsing housing demand at 20 year lows, asking prices of resale housing 300% higher than construction costs(with profit);

      What do you think was going to happen?"

      .... And this:

      "Let’s put two and two together:

      ‘90% of All Foreclosures Held Off Market…the shadow inventory…is more than seven times the inventory of REOs that Fannie Mae, Freddie Mac and HUD currently own’

      So 10% of what could be 700% larger is listed. Hmmm, that means the number you see on the market is miniscule."

  3. " why is it that central banking policy is practically ignoring all forms of this erosion of living standards to continue monetary easing?"

    Gee, could it be because counterfeiting is a lot of fun for the counterfeiters?


  4. But Janet Yellen says inflation is 1%. Why would she lie? /sarcasm

    1. She's merely reporting numbers provided by commerce department and labor department. why would they lie? If the govt wants to increase spending and buy votes as claimed, then they would overstate inflation and argue to the fiscal hawks that govt spending is not even keeping pace with inflation.

    2. Jerry "The Resident Troll" Wolfgang, you're clearly losing it. It's rather the opposite: they can claim that low price inflation indicates they haven't spent enough.

  5. So the housing graph shows home prices rising 70% since 2000. That comes out to 3.8%/year growth in home prices. Now you also claim that inflation is much higher than reported, something like 6%/year. So once you adjust for inflation, you get home prices falling 2.2%/year since 2000.

    1. Jerry Wolfgang is living proof of why so many American schools fail to teach math to pupils.

      Jerry, sweetheart: just because prices are rising faster than house prices (if that were the case) is does NOT mean house prices are FALLING from the year 2000 baseline. If you have two cars, one traveling at 45 miles an hour and another traveling at 60 miles an hour, it does not mean the first car is going BACKWARDS.

      Go back to school.

  6. The good news for Jerry is that the staple of his diet, Top Ramen, has experienced relatively little price inflation, and since he pays no rent to live in his mother's basement, he'll have no worries with housing either. This will allow him to continue posting his fantasies well after the majority of economic data inescapably aligns with what economic theory indicates, and which some data elements already confirm is occurring.