Why, one may ask, are we concerned with forecasting the possibility of an inflationary cycle? There are a number of sound reasons. From a personal standpoint, we should consider how we invest our savings when inflationary or deflationary cycles are on the horizon. Inflation is simply a devaluation of currency, so normal savings, basically consisting of currency, will lose value...perhaps rapidly. On the other hand, investing in commodities, instead of currency, can pay off big.
Our business institutions must be able to plan and budget for the future; inflationary pressure will force them to adjust payroll, prices, and expenses. The very survival of the business may depend on how accurately they forecast and how quickly they adjust.
In extreme instances, such as what happened in Zimbabwe in recent years, currency becomes totally valueless and society returns to the barter system to survive. In more "normal" inflationary periods, the middle class simply loses its wealth slowly and steadily while lower income earners are completely crushed and forced into abject poverty. Wealth is no longer available for investment and production, so unemployment skyrockets and products become scarce, which quickly adds to the inflationary pressure (lack of goods increases price).
One might then ask, viewing the statistics below, why we are not yet seeing significant inflation already? We see that commodities are becoming more expensive rapidly...so why is it not obviously reflected in the retail markets?
Mainly we are currently being "saved" by businesses willing to liquidate inventory at past prices, and to hold down new pricing by laying off workers and increasing the work load of remaining workers without additional compensation. They are struggling to survive, and whether they make it or not, they end up dumping product onto the market at prices reflecting the costs of production from the past. If they do survive, however, and have to regenerate inventory at some point to keep surviving, they will discover that the price of materials is going up. No one in the supply chain can stay in business long by charging less than the cost of replacement...they have been trying to do so, but the end of such frugality is growing nigh.
Along with the pressures of rising commodities prices, we can see from the chart that employment in the public sector is growing and government spending is going up. These are both highly inflationary moves, both flood the market with currency while producing no goods to balance out the increase in money. The necessary increase in taxes takes additional currency from producers, which again reduces production and again increases the number of dollars chasing after a reduced volume of goods and services. This artificial increase in money supply, and reduction in products, drives costs up the demand curve...result...inflation.
So, not to sound alarmist, but all the science of economics tells us that without some dramatic changes in the market place, inflation is on the way. Take some time to consider your personal situation and plan ahead.
Sources:
(1) U.S. Energy Information Administration; (2) Wall Street Journal; (3) Bureau of Labor Statistics; (4) Census Bureau; (5) USDA; (6) U.S. Dept. of Labor; (7) FHFA; (8) Standard & Poor's/Case-Shiller; (9) RealtyTrac; (10) Heritage Foundation and WSJ; (11) The Conference Board; (12) FDIC; (13) Federal Reserve; (14) U.S. TreasuryJanuary 2009 | January 2010 | % chg | Source | |
Avg. retail price/gallon gas in U.S. | $1.83 | $3.104 | 69.6% | 1 |
Crude oil, European Brent (barrel) | $43.48 | $99.02 | 127.7% | 2 |
Crude oil, West TX Inter. (barrel) | $38.74 | $91.38 | 135.9% | 2 |
Gold: London (per troy oz.) | $853.25 | $1,369.50 | 60.5% | 2 |
Corn, No.2 yellow, Central IL | $3.56 | $6.33 | 78.1% | 2 |
Soybeans, No. 1 yellow, IL | $9.66 | $13.75 | 42.3% | 2 |
Sugar, cane, raw, world, lb. fob | $13.37 | $35.39 | 164.7% | 2 |
Unemployment rate, non-farm, overall | 7.6% | 9.4% | 23.7% | 3 |
Unemployment rate, blacks | 12.6% | 15.8% | 25.4% | 3 |
Number of unemployed | 11,616,000 | 14,485,000 | 24.7% | 3 |
Number of fed. employees, ex. military (curr = 12/10 prelim) | 2,779,000 | 2,840,000 | 2.2% | 3 |
Real median household income (2008 v 2009) | $50,112 | $49,777 | -0.7% | 4 |
Number of food stamp recipients (curr = 10/10) | 31,983,716 | 43,200,878 | 35.1% | 5 |
Number of unemployment benefit recipients (curr = 12/10) | 7,526,598 | 9,193,838 | 22.2% | 6 |
Number of long-term unemployed | 2,600,000 | 6,400,000 | 146.2% | 3 |
Poverty rate, individuals (2008 v 2009) | 13.2% | 14.3% | 8.3% | 4 |
People in poverty in U.S. (2008 v 2009) | 39,800,000 | 43,600,000 | 9.5% | 4 |
U.S. rank in Economic Freedom World Rankings | 5 | 9 | n/a | 10 |
Present Situation Index (curr = 12/10) | 29.9 | 23.5 | -21.4% | 11 |
Failed banks (curr = 2010 + 2011 to date) | 140 | 164 | 17.1% | 12 |
U.S. dollar versus Japanese yen exchange rate | 89.76 | 82.03 | -8.6% | 2 |
U.S. money supply, M1, in billions (curr = 12/10 prelim) | 1,575.1 | 1,865.7 | 18.4% | 13 |
U.S. money supply, M2, in billions (curr = 12/10 prelim) | 8,310.9 | 8,852.3 | 6.5% | 13 |
National debt, in trillions | $10.627 | $14.052 | 32.2% | 14 |
