Sunday, October 19, 2014

A Key Indicator to Watch that May Be a Strong Indicator of Future Price Inflation

By Robert Wenzel

The Fed has pumped massive amounts of new money into the system since the financial crisis of 2008, so where is the price inflation?

Part of the answer is soaring productivity, especially in the energy and high tech sectors,

But another part of the answer is the strong desire by individuals and corporations to hold on to large cash balances. A very rough indicator of this is the declining velocity of money, since the crash.

There was a major decline in velocity during the Dot Com Bubble, but the it started to recover again, only to nosedive in line with the more recent financial crisis.

What could turn this around? At this point, consumer and corporate optimism. Which is why I keep a close eye on the the Thomson-Reuters/University of Michigan sentiment index. The more optimistic consumers are at this point, the more likely they are going to spend more of their cash balances.

The  preliminary October sentiment index "unexpectedly" (by Keynesian economists) increased to 86.4 from the final September reading of 84.6, according to a source who has seen the numbers, reports WSJ.

It's a continuation of increases in sentiment since the lows reached during the peek in the financial crisis.

At some point, the sentiment will become so positive that consumers will start spending so aggressively that it will overpower any productivity gains and that's when price inflation will really kick in. Timing on this is always difficult, but the trend is pretty obvious.

The Fed, Paul Krugman and most Keynesians (except probably Marty Feldstein) do not understand this. They are simply watching the current price inflation trendline (of just under 2%) and are projecting this out in their heads without understanding the powerful underlying force that will eventually cause price inflation to rocket.

Be prepared my friends, it's coming.

Robert Wenzel is Editor & Publisher at and at Target Liberty. He is also author of The Fed Flunks: My Speech at the New York Federal Reserve Bank. Follow him on twitter:@wenzeleconomics


  1. Thanks, a good insight regarding consumer confidence, retaking on debt, spending, price inflation. Read that HELOCs are back as well, using homes as piggy banks. Lower gas prices may cause more consumer spending short-term (until they again go up). Only short-term dampening effect could be the present blip in the stock market. Otherwise, old story, you have printed fiat sitting around to be utilized, at some juncture it likely is utilized.


  2. October 17, 2014
    Brilliant comment from the Chicago Fed’s McPartland on fantasy of CCP default procedures

    From Risk Magazine, “Fed official slams ‘fantasy’ of CCP default management“:

    “Five years from now, someone besides me will realise the default management process for cleared OTC derivatives begins to fall down as the number of OTC CCPs derivatives increases. The concept that 15 CCPs worldwide are all going to borrow human capital from the dealer community – all on the same day, for a week – to think this will somehow work is fantasy,” said John McPartland, senior policy adviser at the Federal Reserve Bank of Chicago. McPartland was speaking on October 14 at Risk’s Derivatives Clearing Europe conference in London, and stressed his comments were personal opinions.