Why are we not seeing more price inflation? (I’m being careful here, by price inflation I mean an increase in the general price level as measured by the PPI, CPI, GDP deflator and so forth). It seems that, given Uncle Al’s propensity to pump (inflate) the money supply, the high prices in asset and commodity markets and the “recovery”, there should be more price inflation.
Government reports show little or no price inflation. Many folks attribute this apparent contradiction to manipulated statistics – hedonic adjustments, substitution adjustments, seasonal adjustments and so forth. But there is another, simpler, view. That is more of a trader’s view, which is that the overwhelming majority of people are long inflation, and the market generally does not reward the majority. They are long inflation because they are highly leveraged with debt, which they expect to repay in devalued dollars. In effect they are long assets (houses, cars, stocks, etc.) and short the dollars with which to pay for them.
But is the majority going to win on this trade? Certainly Uncle Al is on its side. But is he enough? The bond and currency markets say no. We’ll see.
Thanks to Richard Russell for starting this train of thought.
Financial Reality 