Do you perceive an inflation generation gap?

[ziggy29]

I think part of the problem now is that so much inflation is tied to oil prices -- it affects the cost to produce almost everything -- and every time the economy improves the oil markets spike, which (a) creates more inflationary pressures in the pipeline and (b) threatens to derail the attempt at recovery. IMO, cheap oil circa 2009 did more to revive the economy than government stimulus ever could. And no amount of "policy" will overcome spiking oil prices in a world economy dangerously dependent on it.

So we're in a situation where I think it will be really hard to really break an inflationary tendency in a decent economy because oil market speculators and others who increase industrial demand will see to it that oil prices get really high. It takes very little incremental change in supply or demand to move prices a LOT right now.

I just don't see any sustained improvements in consumer confidence or business climate as long as we have a situation where any economic improvement is met with the bucket of cold water in the energy markets.

 

[youbet]

I think persistent low or negative inflation is very possible for a long time.

I think prolonged moderate inflation (3% - 5%) is likely for a long time. People who believe they won't have to cope with moderate but persistant rising prices on energy, food, consumer goods and taxes will be surprised a decade from now.

 

[youbet]

So we're in a situation where I think it will be really hard to really break an inflationary tendency in a decent economy because oil market speculators and others who increase industrial demand will see to it that oil prices get really high. It takes very little incremental change in supply or demand to move prices a LOT right now.

The situation can be viewed with simpler concepts than "speculators" or other market manipulators. Commodities and natural resources in general are becoming increasingly scarce in relation to the population sharing them. Prices are going to increase unless new technology bears fruit and we're able to significantly increase the earth's output of crops, fuel, building materials, commodities and all the natural resources that seem relatively plentiful today. Supply and demand will drive up prices in an attempt to ration what we have until demand lowers, likely manifested in an abrupt drop in the world population.

It's going to be an "interesting" world for the grandkids!

 

[MichaelB]

I think prolonged moderate inflation (3% - 5%) is likely for a long time. People who believe they won't have to cope with moderate but persistant rising prices on energy, food, consumer goods and taxes will be surprised a decade from now.

No disagreement, just a comment, that 3%-5% is a lot of inflation over a long period. It is moderate when it's around for only a few years. Someone living on a fixed income will really suffer after such a decade.

 

[ziggy29]

The situation can be viewed with simpler concepts than "speculators" or other market manipulators. Commodities and natural resources in general are becoming increasingly scarce in relation to the population sharing them.

This is certainly true. but I do think the "players" in the financial markets tend to exacerbate the swings as they all try to get on the bandwagon at the first sign of a tighter supply/demand curve expected in the future. If it were *only* supply and demand, oil would not rise $10 a barrel because of some event in the Middle East that *might* reduce supply in the future, or rise $5 a barrel because a stronger than expected economic report suggests demand *might* rise slightly in the future.

These bear no relation to current supply and demand. It's all about the futures markets there, and while there are some "legitimate" players in the futures market who have a business need to lock in cost certainty -- transport companies, delivery companies such as UPS and FedEx, the airlines -- there are many just hoping to get in before prices rise, which cause them to rise even more.

 

[ziggy29]

No disagreement, just a comment, that 3%-5% is a lot of inflation over a long period. It is moderate when it's around for only a few years. Someone living on a fixed income will really suffer after such a decade.

And "moderate" inflation not so bad if wages are generally keeping up with them. With wage growth stuck near zero for the last several years, *any* inflation over a prolonged amount of time has significant erosive effect on purchasing power. Most folks can deal with 2-3% inflation and no raises or COLAs for a couple of years -- but over 5-10 years you have lost a *lot* of ground.

 

[youbet]

No disagreement, just a comment, that 3%-5% is a lot of inflation over a long period. It is moderate when it's around for only a few years. Someone living on a fixed income will really suffer after such a decade.

Yep.

I suppose I'm disproportionally influenced by local friends and acquaintances from my MegaCorp days and our personal situations. I meet with several different groups (Friday morning "breakfast with the boys," monthly retiree club meetings, ad hoc get-togethers at the pub, etc.). Many of us are close in age and were booted by MegaCorp during downsizings over the past decade. Typically, we have budgets funded approximately by 50% non-cola'd pensions and 50% FIRE portfolio withdrawals.

The guys who started their pensions immediately upon forced ER (typically mid to late 50's) and who are very conservative investors are doing a lot of talking about incomes not keeping up with their personal cost of living situations and seem surprised.

On one hand, the conversation is about low inflation rates, even deflation fears, and on the other constant comments about higher energy, food, utilities, entertainment (the restaurant we have breakfast at just bumped the "breakfast special" price up $1.00) and other costs of living a nice retirement lifestyle.

My take-away from this local and strictly anecdotal hearsay is that there are folks on primarily fixed incomes who are being surprised by the erosion of their buying power from 6 - 8 years ago until now. This despite the media talk being focused more on deflationary fears than inflation during that timeframe. It's as though they assumed inflation would have to kick up to double digits and be drawing headlines before they'd have an issue.

 

[youbet]

And "moderate" inflation not so bad if wages are generally keeping up with them.

Inflation redistributes wealth. Depending on your personal situation (working or not, debtor or not, type of investor, perhaps a cola'd pension) you'll have different personal results.

I'm surprised when retired buddies shake in fear over the prospect of a 50% drop in portfolio value (and a 50% drop in portfolio generated income) but yawn at the prospect of moderate inflation causing the purchasing power of their non-COLA'd pension to drop by 50% over the next decade.

I just have a "feeling" that lots of folks are going to be surprised sometime out in the future. They're very, very willing to go conservative and protect their portfolios from future market crashes but don't seem concerned if their low growth portfolio is losing to inflation.

 

[GrayHare]

Annual inflation exceeded 10% in 10 of the last 100 years The last year that inflation exceeded 10% was 1981. Our 31 year run of relatively low inflation is unusually long. No question why there would be a generation gap in the perception of inflation.

+1

Since I'm able to remember the '70s, to try to keep pace with expected inflation my non-bond assets are heavily weighted toward tangibles like energy, mining, real estate, etc.

 

[NW-Bound]

In an earlier post, I said that the average inflation in the US is 3.16%. I thought I saw that on a Web site, but could not find it again.

Just now, saw a Web site saying that it is 3.24%. So, I used another Web site that said the cumulative inflation from 1914 till now is 2176%. That number over 98 years indeed works out to 3.24%/yr (geometric mean, not arithmetic mean).

 

[Gone4Good]

Just now, saw a Web site saying that it is 3.24%. So, I used another Web site that said the cumulative inflation from 1914 till now is 2176%. That number over 98 years indeed works out to 3.24%/yr (geometric mean, not arithmetic mean).

And if you look at the year-to-year inflation rates over the past century, you'll see extreme volatility up until modern times when Central Banks discovered how to control inflation. Since 1990, inflation as measured by CPI has averaged 2.6% and has rarely exceed 5% in any given year. If anything, the trend has been toward lower inflation. Now with an explict 2% Fed target, we're more likely to have even lower inflation over the next 30 years than we had over the prior 30.

 

[NW-Bound]

We will see their prowess in the years ahead. I have got nothing to lose if they are that good.

 

[MichaelB]

If the trend to lower inflation is the result of Central Bank policy execution, we may indeed be seeing lower levels for a long time. If the bankers are taking the credit but other unattributed factors are at play we may be setting ourselves up for an unhappy surprise.

 

[Gone4Good]

If the bankers are taking the credit but other unattributed factors are at play we may be setting ourselves up for an unhappy surprise.

Agreed. We don't know what we don't know.

But it's hard to see the dramatic differences in inflation outcomes between the financial panic of 2008 and those of 1929 as anything other than the results of better monetary policy. Even in the midst of all hell breaking loose, prices remained amazingly stable when they should have fallen off of a cliff.

 

[youbet]

Sooooo......

When the time comes that we must consume less of certain natural resources due to depletion and lack of adequate development of substitutes, what will signal us to do so if monetary policy is successful at maintaining stable prices?

 

[GrayHare]

If inflation is indeed now largely under control of central banks, they can raise it as well as lower it as needed to suit policy. For example, such control may allow retiree entitlements within the US to be honored in nominal terms, but far below honor in real terms.

 

[MichaelB]

The policy response to 2008 was different, much better, and shows knowledge, understanding and policy execution. It is very encouraging. The lower inflation over the past two decades that defied belief and laid waste to so many forecasts may also be a victory for monetary policy here and elsewhere, but it might be deflationary economic pressure from China, or a long spurt of global productivity increases that has come to an end. Like others, I don't know, but I am somewhat skeptical that such understanding allows the central bankers to control inflation but not be aware of severe credit imbalances and asset price bubbles that have caused major distortions in US and global economies.

 

[NW-Bound]

But, but, but I thought I already proposed a solution.

Sooooo......

When the time comes that we must consume less of certain natural resources due to depletion and lack of adequate development of substitutes, what will signal us to do so if monetary policy is successful at maintaining stable prices?

"No SS for you!"

 

[Nords]

I'm surprised when retired buddies shake in fear over the prospect of a 50% drop in portfolio value (and a 50% drop in portfolio generated income) but yawn at the prospect of moderate inflation causing the purchasing power of their non-COLA'd pension to drop by 50% over the next decade.

I sure hope they're not yawning. 50% in a decade is about 7% annual inflation, and I'd use a lot of words other than "moderate".

In an earlier post, I said that the average inflation in the US is 3.16%. I thought I saw that on a Web site, but could not find it again.

Dimson & Marsh's "Triumph of the Optimists" quoted something like 3-3.5% annually for the 20th century, with 5% annually over the 1970-2000 era.

Sooooo......
When the time comes that we must consume less of certain natural resources due to depletion and lack of adequate development of substitutes, what will signal us to do so if monetary policy is successful at maintaining stable prices?

I think that today's gasoline prices are indicating the second and maybe even possibly the first, but certainly not anything to do with the third or the fourth.

 

[youbet]

I sure hope they're not yawning. 50% in a decade is about 7% annual inflation, and I'd use a lot of words other than "moderate".

I think you're a tad high on the 7% estimate. Wouldn't it be less than 5%?

I think that today's gasoline prices are indicating the second and maybe even possibly the first, but certainly not anything to do with the third or the fourth.

Ahhhhh... Yes, definitely! Your conclusions are certainly in line with the international experts.

 

[youbet]

But, but, but I thought I already proposed a solution.

​

"No SS for you!"

Good point! Da Soup Guy's method of rationing is certainly more direct and to the point than allocation via pricing.

 

[Gone4Good]

The policy response to 2008 was different, much better, and shows knowledge, understanding and policy execution. It is very encouraging. The lower inflation over the past two decades that defied belief and laid waste to so many forecasts may also be a victory for monetary policy here and elsewhere, but it might be deflationary economic pressure from China, or a long spurt of global productivity increases that has come to an end. Like others, I don't know, but I am somewhat skeptical that such understanding allows the central bankers to control inflation but not be aware of severe credit imbalances and asset price bubbles that have caused major distortions in US and global economies.

Wouldn't deflationary pressures from China and elsewhere have made the deflationary pressures of the recent credit collapse even harder to control?

A complex understanding of the economy may be needed to achieve some kind of optimal monetary policy, but controling runaway inflation really only requires a willingness to raise rates to a sufficiently high level. I don't see the difficulty.

I think one of the differences between today and decades past is not so much a more sophisticated understanding of the economy, but a belief among central bankers that low inflation is an end in and of itself. In the early 70's, many economists questioned whether the Fed should even concern itself with inflation, preferring to focus on the rate of unemployment instead. Things today could not be more different.

 

[Gone4Good]

Sooooo......

When the time comes that we must consume less of certain natural resources due to depletion and lack of adequate development of substitutes, what will signal us to do so if monetary policy is successful at maintaining stable prices?

Stable prices doesn't mean every single price is stable. It means that average prices are stable . . . rising prices are offset by falling prices. And indeed, if there is a shortage of natural resources and those prices rise, a non-inflationary monetary policy necessitates other prices to fall.

Consider what happens when a price rises and your paycheck and credit availability remains unchanged. You either buy less of the thing that has risen in price, you buy less of other things, or both. The same thing happens on an economy wide basis. The things we buy less of fall in price to accommodate the thing we want or need to buy that has risen in price.

If, however, income and/or credit availability expands, then we can afford to buy the thing that has risen in price along with everything else we normally buy . . . presto - inflation.

 

[audreyh1]

Average annual inflation since 1913 3.24% source US Inflation by Decade Chart. That is one of my face charts.

 

[audreyh1]

The policy response to 2008 was different, much better, and shows knowledge, understanding and policy execution. It is very encouraging. The lower inflation over the past two decades that defied belief and laid waste to so many forecasts may also be a victory for monetary policy here and elsewhere, but it might be deflationary economic pressure from China, or a long spurt of global productivity increases that has come to an end. Like others, I don't know, but I am somewhat skeptical that such understanding allows the central bankers to control inflation but not be aware of severe credit imbalances and asset price bubbles that have caused major distortions in US and global economies.

I think globalization had a LOT to do with keeping prices lower over the last two decades, the same as it did with keeping wage growth in check in the US. Now that developing countries have a growing middle class with more expensive tastes, not to mention competition for global commodities, this may have run its course. I see prices of goods rising more easily. I still don't see sources of wage pressure in the US.

Audrey