Hello inflation and maybe stagflation

[novice]

Schroeder calls for the ECB to cut interest rates to curb the Euro's strength.

The ECB will not automatically comply. But I think it shows that monetary inflation in the US, which in part causes a falling USD, will eventually cause monetary inflation around the world to try and support the USD.

Price inflation always eventually follows monetary inflation.

So hello inflation (US and world wide)!

It also seems that this inflation will not cause much in the way of economic growth so it is quite possible that there could be stagflation (i.e. rising inflation and rising unemployment) in the near future.

And I thought I wasted 3 years on an Economics degree!

[novice]

If the ECB lowers interest rates to around 1% all three major economies (i.e. USA, Euro land and Japan) will have very low interest rates. As long as economic growth does not pick up interest rates are likely to stay low. And it would appear that economic growth is not going to pick up anytime soon.

This very low interest rate environment has been created by "printing" large amounts of currency and then buying treasury securities (i.e. bonds and bills) so that their price rises and the yield falls. The falling yield then causes the interest rate to fall.

But a mountain of money has been created. This money has to find a home. Where will it go? Enough of it is going to go into hard assets (i.e. commodities) to cause a significant price rise.

[novice]

In regards to the ECB being independent and inflation targeting. It is important to remember that this is not the Bundesbank (spelling?) any more. The structure and personal has changed significantly. Thus it is much more likely to cave into political pressure and cut interest rates.

In the long term both short USD and short EUR due to inflation and low returns may both be good trades. Just have to find something hard to sell them against.

[eternalfuture]

novice,

Recent U.S. CPI figures showed that it went up to 0.5%.

However, that was the headline figure.

The core component, which excludes volatile food and energy items was still growing at a 'low rate', +0.2%.

When core component number is strong, I think it shows that economic activity is the cause of the upward pressure in inflation.

When core is still low while the headline number is strong, usually energy prices are to be blamed. The case would be of growthless inflation.

Current inflationary pressure is most likely caused by rising energy prices, while economic activity is still rather mild.

There is an increase in durable goods order lately. Excluding defense items, orders are up 2% from 1.7% in December. The December figure, was revised up from -0.7%. This is a promising sign.

Still, recent fall in consumer confidence, could ruin the whole recovery scenario. With slow job growth, consumers seem to have become rather 'pessimistic' towards the economy.

Dropping from 96.4 (revised from 96.8) to 87.3 in February, this is not something to be overlooked. If the consumers become pessimistic about the economy, they will probably put a brake to their spendings and thus put a brake on the economy as well.

Back to inflation, if you look at the chart on inflation, the figure, both headline number and core numbers are still well below 0.6% on monthly basis. Looking at the y/y data, it's undeniably falling. Take a look at the data from Labor Department, and plot the chart. Or as a shortcut, look at the chart from TheStreet.com.

So, unless we see a headline or more importantly, the core number above 0.6%, there's still weak sign of inflation.

I'm no economy genius, but I hope I'm not making error on my words above.

[eternalfuture]

Following my previous post, I would like to add that growthless inflation is just like what you mean by stagflation.

Turning to Eurozone, the data that I managed to get from EuroStat website, ECB Survey of Professional Forecasters showed that HICP - Eurozone measure of inflation - is expected to remain stable from 1.5%-1.9%. ECB is doing efforts to make the HICP stay below 2.0%.

Again, for direct exposure to the data, please visit ECB's website.

Unlike Americans, Europeans seem to be reluctant to spend a lot. In his latest testimony, the ECB President Jean-Claude Trichet urged the Europeans to spend more and to invest more. Given a 'historical low' of interest rate and expensive euro, the environment is pretty supportive. He said that Europeans do not have to worry about inflationary pressures because ECB will take care of that.

Without robust consumption and investing, the Eurozone growth will surely running slow.

So, in Europe, too, the inflationary pressure is still within ECB's tolerance. I'd say it still stays in neutral zone.

[novice]

At the moment price inflation (i.e. change in to cost of goods and services) is still low. CPI figures are low, whether the CPI does a good job measuring inflation is another matter.

But monetary inflation (i.e. the growth of the money supply) is very high. Check out the changes of M1 money.

Eventually the excess money that has been created is going to cause the price of goods and services to rise (due to a lot of money chasing relatively few goods). As such monetary inflation is eventually going to cause price inflation.

This monetary stimulus has done very little in the way of creating economic growth (at least economic growth that is real i.e. jobs, physical production, exports etc). Again you would have to question some of the actuary of the GDP numbers, especially the US Q3 number (9% annual growth?).

So in the future it would look like there is going to be both high inflation (both monetary and price) as well as low economic growth.

This seems much like the 1970's situation. In hindsight how would you trade the markets of the 1970?

[novice]

What do you think higher energy costs or higher commodity costs in general are signalling? Price inflation?

Most commodities are at multi year highs. China's demand for commodities is not the only reason.

[novice]

I did the M1 numbers my self in another thread:

Originally posted by novice


How to measure inflation? I don't think the CPI gives a good measure. A much better measure would be to look at the growth in money supply. For this I think M1 money is a better measure than M3.

Using Fed figures for M1 (link at bottom) in billions. Inflation = Change in M1 for one year/M1 ending last year

Inflation = (2003-10-01) 1286.947 - (2002-10-01) 1202.643/
(2002-10-01) 1202.643

= 84.304/1202.643

= 0.0700989

= 7%

Changes in M1 are not going to be a perfect measure of inflation but I feel that they give a better reading that current CPI measures.

Fed's own data on M1

http://www.neatideas.com/data/data/M1SL.htm

I really think any government figures have to be taken with a grain of salt. After all look at all the tricks they use to massage the unemployment numbers. This is the age of 'spin" and plausible deniability after all.

Changes in M1 would give a conservative measure of monetary inflation. Once fractional reserve banking takes effect any changes in M1 are going to be multiplied.

M1 is basically coins, notes and deposit accounts.