Inflation that Still Isn’t

Hearing about inflation I kept arguing there is almost none. Intellectuals kept yelling inflation, then quieter, and quieter, finally they are silent. So after a few days sailing I find even Jim Jubak agreed today in “What happened to inflation?”

First he talks about all the traditional things which used to be suspected of causing inflation. “The world’s central banks have flooded the global financial markets with cash — and they’re still hooking up more and bigger hoses. The Bank of Japan alone now promises to add $80 billion to the global money supply each month.

And yet there’s no inflation. There’s no sign of inflation. Investors aren’t afraid of inflation. And inflation hedges such as gold are sinking like a stone.” Finally he asked if this makes any sense?

Yes it makes lots of sense if we understand what causes inflation.


Inflation Examples

Inflation is caused when demand outpaces production. With the amount of US workforce out of work and idle production capacity there is no inflation, demand is far from meeting capacity let alone exceeding it.

I for one am delighted to see the price of gold falling. With many of my friends using the price of metals to point out how the value of the dollar is diminished (inflation) relative to metals, this makes my point nicely. Demand for gold went up right with the expectation of inflation increasing demand. Today with market highs and little/no inflation, demand for gold is falling…and along with it, the price.

Once again to the argument Quantitative Easing now underway for over four years, is devaluing the US dollar and causing inflation, the answer is NO. Inflation occurs when demand exceeds supply, nothing more, nothing less. But in this case more importantly I simply have to ask; what inflation?

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