Saturday, March 21, 2009

The Return Of Inflation

Back in December 2008, I wrote a post called "the coming return of inflation". Since inflation has in fact returned now, I will copy that post's name except for that part about "coming", as it has already come.

This week's news that the Fed will inflate at a much faster rate than previously announced seems to have actually been a statement of an already initiated policy. The Fed balance sheet expanded a full $163.7 billion to $2041.4 billion in the week to March 18, most of it in the form of mortgage backed securities and agency bonds on the asset side. This reverses some of the decline in the size of the balance sheet that we saw earlier in the year.

At the same time, money supply continues to expand rapidly. M2 expanded $39.8 billion to $8343.1 billion in the week to March 9, and is up 10.1% compared to 52 weeks earlier. Most of this increase came in the latest 26 weeks, with the annualized gain during that period being 17.8%. MZM meanwhile expanded $58.7 billion to $9505 billion during the same week. It is up 12% in the latest 52 weeks and up an annualized 17.8% in the latest 26 weeks.

This rapid increase in money supply is now finally starting to show up in prices, with the PPI being up 0.9% in the first two months of the year and the CPI 0.7%.

Different commodity price indexes show somewhat different increases, but they are all up several percent since their lows late last year. The Reuters Continuous Commodity index is for example up 11% from its November low, while the CRB spot index is up 4%. Oil, which briefly traded as low as $30 per barrel in December, closed at $52, an increase of more than 70%. Gold is up 32% from its October low of $720 per ounce.

The evidence is clear then that the significant monetary inflation is beginning to revive price inflation. And as monetary inflation continues, so will likely price inflation.


Blogger Henry said...

Inflation is going to get out of control ie it will overshoot and the authorities will not be able to rein the beast in.

The UK is in a particularly dangerous situation because of rising public expenditure due to welfare, falling tax revenues and falling production as businesses close. Political repercussions are probable, including civil unrest.

If the UK is lucky it will only experience late 1970s levels of inflation ie about 20% a year. It could be much worse. Hyperinflation remains a possibility and the IMF will not be able to bail the country out this time.

The British monetary authorities are being reckless to a degree that in any sanely ordered dispensation would be considered criminal.

12:26 AM  
OpenID jokeridze said...

Stefan, there was a long discussion on your post "The Coming Return Of Inflation". Some of your arguments were:
"bank credit is expanding and not contracting (except relative the brief peak in late October that followed a 6% increase in bank credit in 6 weeks)"
but now we see that bank credit goes relatively stable in range 9760-9900 b$ in 2009, while it was in range 9880 - 9990 in Nov-Dec 2008
So we don't see expanding bank credit.
And as we see in latest reports Monetary Base stop growing since beginning of 2009. (growing monetary indicators was your another argument)

But you was right in main - now we already have seen small price inflation. And also we see inflation in stocks and commodities prices.

Do you think this would be a trend or deviation?
Are new initiatives of Bernanke enough to persuade households not to save the money, but to buy smth?

9:13 AM  
Blogger Wille said...

UK inflation up from 3% to 3.2% between January and February.
The reaction from most directions is shock.

In other news: Man shocked at 1+1 still equaling 2, and that an apple dropped will fall to the ground.

8:36 PM  
Blogger stefankarlsson said...

Jokeridze: I've always maintained that neither the monetary base nor bank credit are directly relevant. Their relevance is only indirect, which is to say, to what extent they influence money supply, which in turn is what matters for price inflation.

When I pointed out these errors, I only making a "matters of facts" correction as well as describing the cause of money supply movements.

As I described in this post, the monetary base/Fed balance sheet is again rising after a brief contraction, which will likely result in higher money supply growth, and as for bank credit, I described here why it has decoupled from money supply.

10:41 AM  

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