Saturday, October 11, 2014

Economists Have Downgraded Estimates for Inflation Due to Falling Oil Prices and a Strengthening Dollar

On average, the forecasters expect inflation—defined as the 12-month percent change in the consumer price index—will end this year at 1.9%, but they  also expect price inflation to still be running at a mild 2% in the final month of 2015..

The Keynesians are correct on this one, to a degree, Increased oil productivity is putting downward pressure on oil prices, which will lead to lower gasoline prices, and, thus, the overall CPI will see short-term downward pressure.

Two things to note about this.

A slowing of price gains does not stop the distortinary impact of Fed money printing on the capital structure. As Murray Rothbard pointed out in his book America's Great Depression, the 1920s was a period of falling to stable prices, though that didn't stop the business cycle from developing.

Second, the slowed price advance is likely to be very short-term in nature. The Fed can always print so much money that it over rides downward price pressure from productivity gains. However, even more important, the desire to hold cash balances is likely to dampen as the economy "improves" and this will put very strong upward pressure on prices.

Thus, in the medium to longer term, the Keynesians are significantly underestimating the potential price inflation.

As for the strong dollar, I have a special report on Monday in the EPJ Daily Alert discussing the surprising reason the dollar is strong and what the outlook is for the dollar long term.

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