2007 is the transition year at the Merkel household.  Our two oldest children go off to college in the fall, and our youngest starts home schooling at the same time.  As such, this is the last time that we can rely on that we will be able to take all of our children on a trip.  In the late summer of 2006, we went to visit my wife’s parents in San Diego; next week, we visit my parents in Milwaukee.

Now, I have no idea what internet access I might have while there.  If I have good access, I will post in the late evenings.  If not, well, you’ll hear from me next on the 29th.  With that, I sign off.  I have a lot of other things to write about, but little time to do so.  Traveling with eight children is quite a feat, and it will take a lot of my energy to accomplish that.

Inflation is a vague concept, because the term stretches to do duty in multiple areas: wage inflation, consumer price inflation, asset inflation, and monetary inflation, to name a few.  I agree with what Milton Friedman said that inflation is always and everywhere a monetary phenomenon, but where I differ is that monetary inflation may express itself in terms of inflation in the prices of goods and services, or in asset inflation.  Where inflation chooses to manifest itself depends on the balance of savers vs. spenders in a country.  Monetary inflation plus saving equals asset price inflation.  Monetary inflation plus spending equals goods and services price inflation.

As for the last week, I have a few articles to bring to your attention on inflation:

1. Baby Boomers need to think about purchasing power risk in their old age.  This doesn’t mean overdosing on stocks, but it does mean considering investment classes that are correlated with inflation, like TIPS, floating rate bonds, selected commodities, and stocks of companies that produce them.
2. I’m on record that I don’t like the way that the US government calculates goods price inflation.  From the way that they deal with owners equivalent rent, to the substitution effect, to hedonics (correct in principle, but they don’t do it right), to plain mismeasurement of the proper basket of goods, and the concept of core inflation, they mess things up.
3. Barry Ritholtz and I agree on many things.  Inflation is one of them.  These two articles express much of what I think about what is wrong with the measurement of inflation.  Far better to use a median (Cleveland Fed) or trimmed mean (Dallas Fed) to eliminate volatility than to exclude food and energy.  Food and energy are crucial to our lives, and they have been running at higher rates of inflation.

Inflation is growing in many areas of the world, including those that finance our current account deficit.  Buying our bonds rather than letting their currencies rise, encourages inflation in their countries, while suppressing it in the US.  There will come a day when they float their currencies, and then inflation will return to the US with a vengeance.  When that happens, call Chuck Schumer to thank him for his vigilance on the Chinese exchange rate, not.