To stimulate or not stimulate? That is the question. As you know Krugman and many others say to not add more stimulus would be the exact same mistake that caused the first Depression. They certainly have a good argument. And with high unemployment and what many indicators show to be a slowing US economy it looks like it is time to make that decision once again. I expect more stimulus. I expect the Fed to keep rates at zero for a couple more years. And I expect this means inflation will become quite a problem. Now many will say there is no need to worry about inflation now in the US. They can make a decent argument with the current CPI numbers. But the thing about inflation is that you have to be ahead of the curve to control it. Once it shows up, it can get a mind of its own and move in and stay for a lot longer than you'd like. So what does the data say?
The Rest of the World
India - In India where their economy is growing at rates that will never happen again in the US, they have an inflation problem. Each month when the numbers show it isn't going away, they promise it will go away in a few months. It hasn't.
Though he expressed concern over increasing inflation, Finance Minister Pranab Mukherjee said the high inflation will not affect interest rates, which will not be raised.
He also said that the food prices are likely to ease after July. He said that the government may resort to import of commodities to curb prices.
Here is what they were saying about inflation in India in February
The rise in inflation in India is disturbing but the federal government has taken steps that will moderate the price increase in the next few months, Finance Minister Pranab Mukherjee said Wednesday.
They were wrong in February, perhaps they will be right this time.
China - Something strange is afoot in China. Wage inflation. Which means all that crap we buy from them will get more expensive. Unless our corporate masters can find cheaper economies to exploit.
Rising labor costs in China are forcing U.S. apparel and accessories retailers, such as AnnTaylor Stores Corp. and Coach Inc., to consider relocating at least some of their production to countries with cheaper work forces. But doing so could risk increasing other expenses, such as shipping.
"We are looking to move production into lower-cost geographies, most notably Vietnam and India," Mike Devine, Coach's chief financial officer, said at a conference last week. The luxury-handbag retailer already produces goods in those countries, but plans to increase its presence in both of them.
Recent minimum-wage increases have pushed up Chinese labor costs by 5% to 15% on average this year
Eventually this race to the bottom will catch up with all of us. You won't be getting wage increases in America but you will be picking up the tab for your Chinese brothers and sisters. Chinese products also will get more expensive if the US gets its way and they give in to pressure to revalue the Yuan. So far that hasn't happened but their inflation will be exported to you one way or the other.
Brazil - Same story as India and China. Rapid growth, inflation above target rate.
Consumer price growth eased slightly in May, but the inflation reprieve was likely temporary and will not affect a monetary tightening cycle under way at the Brazilian Central Bank.
The IPCA consumer price index rose 0.43% in May compared with a 0.57% gain in April, the Brazilian Census Bureau, or IBGE, said Wednesday. The rolling 12-month inflation rate retreated to 5.22% but remained above the government's year-end target of 4.5%.
With the rolling 12-month inflation rate still above the government's year-end target and Latin America's largest economy expanding at a record pace in the first quarter, the Brazilian Central Bank was expected to raise rates for a second time this year at its meeting later Wednesday.
England - England is experiencing what will also happen in the US in the next few months. When oil dropped from $87 to $68 in a few weeks it of course knocked down inflation numbers. If all you look at is the short term, you can argue that inflation is dead. Dealing with inflation on a short term basis is not a wise move.
"While today’s outcome definitely brought some relief to the BOE, the level of inflation remains still too high and, more importantly, the dynamics of core prices (remain) uncomfortably uneven," said Chiara Corsa, economist at UniCredit Bank.
The annual rate of inflation remains far above the bank’s target of 2%. Core inflation, which excludes energy, food, alcohol and tobacco, slowed to an annual pace of 2.9%, in line with forecasts.
USA - Inflation readings are likely to be tame in the next few months in the US due to declining real estate values and the sudden drop in the price of oil. If there is no more stimulus and the economy heads into another tailspin there won't be much need to worry about inflation. Perhaps we will have a few decades of falling real estate prices like Japan. Or, perhaps they will take steps to insure that doesn't happen which makes inflation very likely. And there are people arguing this is a good idea.
The Bank of International Settlements this week pointed out that a currency collapse might spur economic growth.
The positive effects of a weaker currency on GDP, including making local products cheaper than imported goods, may outweigh the negative ones, such as rising inflation. Currency collapses occur when the annual exchange rate drops by about 22 percent, according to the BIS, which identified 79 such episodes, "more commonly in Africa than in Asia or Latin America," since 1960, Tovar said.
The San Francisco Fed also released a paper this week saying that they would recommend not using CPI numbers to track inflation because they include things like food and gas.
In the U.S. context, where the Fed does not have an explicit target for inflation, the well-known consumer price index would be a poor basis for an inflation target, according to the latest San Francisco Fed Economic Letter.
The CPI is unsuitable because it includes food and gas, whose prices fluctuate frequently, and such items as tobacco, whose price is swayed more by tax policy than by market forces, the paper said. The index is also a measure of the cost of living, which is not necessarily the best target for monetary policy, according to the paper.
They want to be able to decouple inflation from the cost of living. Why might they want to do that?
Instead, the report published yesterday (15 June) warns that the average wheat and coarse grain prices will be between 15-40% higher in real terms (adjusted for inflation) over the next ten years compared to their average levels during the 1997-2006 period.
Real prices for vegetable oils are projected to be more than 40% higher and dairy prices have soared by an average of 16-45%.
So food prices are going up. What about gas prices? (This report was released yesterday)
The Chief Executive Officer of insurance giants Lloyds is warning that the world is facing a "period of deep uncertainty" over the decline of fossil fuels – and may soon be coping with $200-a-barrel oil.
It may be hard to believe now, writes Dr Richard Ward in his introduction to a "stark" report just published by Lloyds and an influential UK think tank, but that’s because "the bad times have not yet hit." He warns business managers to be ready for "dramatic changes" as oil, gas and coal supplies will soon be "less reliable and more expensive." The world "has entered a period of deep uncertainty in how we will source energy for power, heat and mobility, and how much we will pay for it," he states
.
Kind of frightening to think "that the bad times have not yet hit".
Oh yeah, that cup of coffee is going to get more expensive, too.
Coffee prices leapt on Tuesday, posting gains for the sixth session ina row as the developing global supply crunch seeped deeper into market sentiment.
Coffee futures have risen 20% since June 7. Traders have increasingly come to understand that two consecutive years of poor harvests in Central America and key coffee grower Colombia will put a dent in supplies that won't be offset by Brazil, which this year is expecting its biggest-ever harvest, albeit of lower-quality arabica coffee beans.
Get used to hearing the phrase "global supply crunch".
It looks like we are going to have to get used to higher unemployment and higher cost of living. And lower wages unless you are part of the elite. In case you want to take a crack at becoming part of the elite, you might want to consider that Harvard raised its tuition almost 4% this year, "bringing the annual cost of a Harvard education, including room and board, to $50,724."
Good luck out there.