Of Course There Is Inflation. Why Haven’t We Seen It?

Every month we get an inflation report. We know gas prices have almost doubled in the past two years and food prices have risen significantly, but according to Fed Chairman Bernanke, we are not seeing any significant inflation. What gives? Why is the government reporting such low inflation numbers?

One reason is the way inflation numbers are reported and the way information is played out in the media. For example, inflation for January was +0.4% and +1.6% year-over-year. First of all, it was just “slightly” higher than expected. OK, it doesn’t sound that bad I guess. But what if it would be reported that + 0.4% annualized is +4.8%. Or that over the past year, inflation has risen steadily from a year ago. Or that inflation has risen 26.5 % since 2000 or 164.1% since 1980. In other words, there is not much context to the report and therefore, it is minimized.

Another reason is that the media is obsessed with speed rather than content so rather than a discussion about inflation or its content, they will simply move on to new information tomorrow. Besides, they think everyone is bored any way once they have heard the number.

Another reason is the way inflation moves through the economy. In the early stages of inflation, it generally rises slowly because the numbers are small in the beginning and people do not think that inflation is here to stay so why worry. If it persists, people begin to change their minds. Once they think inflation is here and growing, people begin to react and it begins to rise more rapidly. Since it’s a compounded percent, the longer it goes, the faster it rises.

We have an unusual situation also, The money supply has been increased dramatically (the cause of inflation) but many people including many economists and the Federal Reserve have been or are worried about deflation (definition is money supply contracting) because of lower sales, lower prices in some cases and consumers not spending as they did in 2007. Never mind that consumers haven’t de-leveraged themselves yet from historic levels in 2007.)

Also, the huge increase in money supply has gone to the banks for the most part. They do not need borrowers to make money. They have been putting the money into assets (bonds, stocks, etc.) and investing overseas. We do not count a rising stock market or heavy buying of bonds (which drives interest rates down) as inflation. Yet that is what is happening. So it appears that we are creating an asset bubble at this time, just different than the tech bubble or housing bubble.

We are also exporting much of our inflation to the Chinese: exchanging our higher cost of production for their low cost imports.

One last reason is the huge Federal debt. Imagine what “investments” could be made by the private sector if we didn’t have to pay hundreds of billions of dollars in interest to foreign countries.

That’s some of the reasons we are not “seeing” inflation. We are not looking for it. But it is here and it will be rising throughout the year.