Wednesday, July 15, 2009

So Much for No Inflation

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

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The monthly PPI and CPI came out yesterday. Even the government's highly manipulated figures indicate that inflation has suddenly resurfaced (you can assume that inflation is actually a lot worse, see for a more accurate set of numbers). But don't worry, the mainstream media assures us that "inflation is not expected to be a problem any time soon given a severe recession which is keeping a lid on wage pressures". Of course, they also said the same thing last month before inflation zoomed this month. They will probably also still be saying the same thing when you are paying $50 for a loaf of bread.

The PPI yesterday was the real shocker, rising 1.8% month over month (expectations were for it be up by 0.9%). While the media blamed this on a rise in energy prices, the core rate, which excludes food and energy prices, was up a substantial 0.5%. Media reports assured us that this was nothing to worry about though because PPI was down 4.6% year over year. The core PPI however was UP 3.3% year over year. This huge discrepancy indicates that the PPI went down because of falling energy prices. According to the media, a drop in inflation caused by falling energy prices is important, but a rise in inflation because of energy prices increasing is irrelevant. Those of you who are capable of basic logical thought may not think this makes any sense.

The CPI report had consumer prices up 0.7% last month. The core rate was up 0.2%. As with the PPI, the media said it's nothing to worry about because its all because of energy prices going up. However, the price of food, clothing and medical care all went up as well. While the price of almost every necessity went up, some luxury items like airline travel went down in price and this helped moderate the reported inflation rate. CPI was down 1.4% year over year, while the core was up 1.7%. Once again falling energy prices accounted for the drop.

What is causing inflation is that the U.S. government is printing a huge amount of additional currency. Since commodities are priced in dollars, in the long term it is going to take a lot more dollars to buy a given amount of oil, food or any other commodity. Prices have to go up. And it doesn't matter if there is a recession, or excess capacity in the system. This was the case in the U.S. in 1974 and prices zoomed. It has also been the case in every incident of hyperinflation throughout history.

NEXT: CIT DOA; Liquidity Injections Rally Market?

Daryl Montgomery
Organizer,New York Investing meetup

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

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