The case for – and against – Inflation.

Readers of this blog are well aware of my views on inflation. Sometimes, I even feel like chicken little, because the case for inflation seems rather weak, and it may sound to others that I am saying "the sky is falling." Recent articles, including the St. Louis FED President’s message, point to a lack of credible evidence for inflation. However, in the following paragraphs I will again argue the case for inflation.

James Bullard, President and CEO of the St. Louis Federal Reserve Bank, provides insight into Fed thinking in his message “Does Low Unemployment Signal a Meaningful Rise in Inflation?” In this message, he provides arguments against the case for inflation in that, although low unemployment typically implies higher inflation due to the Phillips curve, there are calculations that show a much “flatter” relationship between unemployment and inflation than in the past. In his conclusion, Bullard states “… there seems to be no strong case for being preemptive with respect to inflation simply because the unemployment rate is low.”

The case I will be making for inflation is based on observations of current economic conditions, albeit I must temper my conclusions with the admission that my observations are based totally on local conditions (I live in the Los Angeles metropolitan area). My first observation is with respect to housing. Rents are up throughout the area, and most local real estate markets are selling at prices higher than the 2006 peak. My second observation is with respect to durable goods, in particular automobiles. US car sales (units) hit a record 17.6 million in 2016, and the average cost of these vehicles is an all-time high of $35,309, per Kelly Blue Book. My third observation is food costs. Whether you are eating out at a restaurant, buying fast food, or making dinner at home, it is all costing more. Has anyone noticed the price of avocados lately? I’m not even that big of a fan (with the exception of a good guacamole dip), and I can readily see that prices have doubled or more in recent years.

I do realize that energy costs, in the case of the gasoline I put in my car, is not quite as expensive as it was a few years ago, but I also know that my electricity and natural gas bill rates only go in one direction (up!). Also, technology costs have come down, with respect to how much you pay for computing power (more capability and memory is being put into each system), but you still wind up paying $1000 for a new laptop. So, how does that make up for the everyday costs of living? It doesn’t. In other blogs I have related inflation to zombies, because you think it is dead and behind you. But look over your shoulder and you will see – he is right behind you and gaining ground….

inflation zombie