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:
- 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.
- 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.
- 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.
David
How do you tell the difference between properly functioning price signals in areas of the economy that are in shortages and monetary induced “inflation”?
The current boom in many commodities is a perfect example — didn’t most of these commodities including energy just go through a very long period of underinvestment in new supply? In energy’s case, haven’t you been talking about the limits to supply caused by most of it being controlled by socialist governments? plus aren’t finding and development costs rising and wouldn’t oil companies need higher prices to maintain returns as costs rose?
My thought to add to friedman is that inflation is caused by governments — 2 areas with the strongest and most consistent rising prices over decades is health care and education — two areas that have some of the highest levels of government spending.
thanks for your thoughts
Kyle
David — methinks that you made some prescient comments about purchasing power risk and higher inflation in the US down the road…on another topic, I’ve been meaning to ask you if you could suggest any funds or investments for a small investor who wants some exposure to foreign denominated bonds
KSmith — we can’t disaggregate the price statistics that easily. We have both cost push and demand pull happening at the same time. No disagreements on the government comments… historically governments are the biggest debasers of their own currencies.
aliens8mycow — here’s a list of all of the currency ETFs out there:
CurrencyShares Euro Trust FXE
CurrencyShares British Pound Sterling Tr FXB
CurrencyShares Canadian Dollar Trust FXC
CurrencyShares Australian Dollar Trust FXA
CurrencyShares Swiss Franc Trust FXF
CurrencyShares Swedish Krona Trust FXS
CurrencyShares Mexican Peso Trust FXM
PowerShares DB G10 Currency Harvest DBV
CurrencyShares Japanese Yen Trust FXY
PowerShares DB US Dollar Index Bullish UUP
PowerShares DB US Dollar Index Bearish UDN
I own FXY, FXF, and FXC. I used to own a number of Closed-end funds, but they all went to premiums. T. Rowe Price has a a good international bond fund. All I can think of for now.