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Monetary Inflation not leading to Price Inflation?

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ViennaSausage Posted: Mon, Dec 26 2011 10:35 AM

Theoretically speaking, monetary inflation will eventually lead to price inflation.  However, we have yet to see price inflation since QE 1 and 2.  What factors are keeping price inflation from taking effect, despite a a rise in the money supply?

Some ideas are:

  • wages of most americans have stagnated since 2007
  • equity positions of most americans have dropped significantly since 2007
  • big banks that recieved bailouts are withholding capital as reserves, thus keeping "new money" in one sector of the economy
  • big banks are not lending, thus keeping "new money" in one sector of the economy
  • others suggestions?  any critique of the above?

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Wheylous replied on Mon, Dec 26 2011 1:39 PM

http://mises.org/daily/2302

This core rate excludes product prices that are "volatile," and by volatile they mean rising faster than other prices. Excluding the most inflationary prices from the CPI estimates allows the feds to conceal the true harm of inflation.

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claudius replied on Mon, Dec 26 2011 4:30 PM

http://www.nytimes.com/2011/07/31/business/economy/whats-with-all-the-bernanke-bashing.html

"Mr. Bernanke became the Fed chairman in February 2006. Since then, the inflation measure favored by the Fed — the price index for personal consumption, excluding food and energy — has averaged 1.9 percent, annualized. A broader price index that includes food and energy has averaged 2.1 percent."

IOW, core inflation is not that different from regular PCE inflation right now.

 

 

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Sphairon replied on Mon, Dec 26 2011 5:35 PM

This.


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"This."

Whoa.  I think this supports the latter two points above of not lending and/or withholding capital.  By far, this seems the likely explination.

But how about support and/or critiques for the other two points above on stagnant wages and equity?  Does this have affect overall on price inflation?

 

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"This core rate excludes product prices that are "volatile," and by volatile they mean rising faster than other prices. Excluding the most inflationary prices from the CPI estimates allows the feds to conceal the true harm of inflation."

 

So we are experiencing inflation even thought we don't see it?  How do we know we are experiencing it if we can't measure it and or it is consealed?

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JH2011 replied on Mon, Dec 26 2011 6:42 PM

Another possible reason... Inflation expectations are currently low or non-existent in the eyes of most Americans (primary users of US Dollars).  Some well-known economists (Paul Krugman) and large wall street research firms have recently warned about deflation and may still be warning about it... and the general public is buying these claims.  Therefore I believe that most users of Dollars do not have high expectations for inflation, and they are not in any hurry to use their Dollars to bid up the price of goods.  In fact, as you mentioned, individuals and banks are building up their own cash balances - probably to keep a safe buffer because people are worried that something like 2008 could happen all over again.  But if expectations for inflation begin to increase in aggregate, this will cause a decrease in the demand for Dollars as investors look to spend their holdings sooner rather than later to avoid the effects of decreased purchasing power.  A switch in inflation expectations can set off the dreaded inflation spiral that becomes possible when the money supply is being increased dramatically.  

Another possible reason... The sovereign debt issues in Europe are causing investors to buy the US Dollar at the expense of the Euro.  Because inflation is a function of the demand and supply of a particular money, we should note that the action of investors buying the Dollar at the expense of the Euro will incease the demand for Dollars (all else equal).  As the demand to hold Dollars increases, less Dollars are spent in bidding up the prices of goods, i.e. price inflation is mitigated by the current increase in demand for Dollars as there looms much uncertainty in Europe. 

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Joe replied on Mon, Dec 26 2011 8:19 PM

don't know where Murphy said/found this, but I think I remember seeing him post somewhere about inflation in high order capital goods being quite high and then he showed all the other measures being slightly less.

 

Found it:

 

http://consultingbyrpm.com/blog/2011/10/friendly-monthly-price-inflation-update.html

 

 

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