In December the CPI jumped 0.5 percent. This increase was not only the result of a huge 8.5 surge in gasoline prices, but also increases in food, health care and airline prices. The stock market shrugged this off as if it were some kind of aberration, a one-time fluke. Unfortunately that is not likely to be the case.
What usually keeps inflation in check best is a recession of the kind this country has been experiencing for years — financial talking heads and government officials’ twaddle about a “recovery” notwithstanding. After all, if a lot of people are out of work, and most of those actually working see their real wages flat or declining, then the price of goods can’t be raised and inflation is controlled. That economics truism has worked for awhile. Now, though, other factors have come into play.
Food prices are soaring around the world. The floods in Australia, the kinky weather in Russia, the taste for more meats and certain grains among a fast growing Chinese and Indian middle class, are going to ensure food prices continue to go up for some time to come. Petroleum prices are already over $90 a barrel and OPEC members have indicated a price of $100 or even $125 would not be unwelcome. Food and energy prices will thus almost certainly keep rising and generating real inflation for Americans, whether or not economists choose to dismiss these increases as ‘volatility.”
Food and energy are not the only causes of today’s bubbling up inflation, however. Metals such as copper and gold are way up in price, as are so-called “rare earths” used in so many applications as their main source, China, has cut back on their exports. Cotton prices are up. Health care costs are so linked to population aging that no amount of finagling by anyone in Washington, no matter how well meant, can keep it under control. The growing number of industries with the clout to stick it to consumers (banks and airlines come to mind here) will do so more and more egregiously.
And oh, yes, there’s our own Fed, pumping all those billions into the banking system in hopes that some of it might get loaned out and boost real economic growth instead of puffing up stock prices and bank balance sheets. If this hope is actually realized, it will be another major inflationary stimulus.
China’s and India’s own inflation is now being felt here. The latter’s increased a hefty 8.4 percent in 2010 and China’s increase, though less, is worrisome. In terms of America’s own inflation, inflation in Asia is pushing up prices of the many goods we import from there.
A major window into where prices are headed is the Producer Price Index, the PPI, which surged 1.1 percent in December. If producers are paying so much more for their own materials, this has to gravitate into higher consumer prices.
Are we headed for a a 1970s-style bout of stagflation, a stagnant economy where inflation is also rampant? Maybe not. But consider this: Stagflation in the 1970s was generated almost exclusively by an oil price shock. The bubbling up inflation today has many causes — oil, food, health cost demographics, a pump priming Fed, et. al., and therefore has no single antidote.
We may be seeing the beginnings of a perfect inflationary storm.
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