Inflation Picking Up Globally Leading to Stagflation

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.

Britain shocked the markets on October 18th when it reported an inflation rate of 5.2% for September. This was up from 4.5% the previous month and well above government projections. Inflation isn't just rising there, but higher prices are a global phenomenon.

The world seems to be entering a new period of stagflation similar to the 1970s. Stagflation is high inflation and low GDP growth. This is very evident in the UK where GDP growth for the second quarter was only 0.2% — a full 5% lower than the current CPI (the difference between the UK Retail Price Index is even greater).  The only surprising thing about the UK inflation rate is that the official rate is so low given the amount of money printing done through quantitative easing in 2009 and 2010.

Despite the low growth and high inflation that has resulted from it, the Bank of England (BOE) has just started another round of QE. BOE Governor Mervyn King recently stated, "Without monetary stimulus  — low interest rates and large asset purchases — there is a risk that growth will stall and inflation fall below our symmetric 2 percent target." As of September, the UK inflation rate has been above the bank's target rate for 22 months in a row. This is happening even though unemployment is also at a 17-year high. Central bankers have consistently maintained the inflation can't be elevated if the economy is weak. They have apparently managed to do so because they don't let real world observations intrude on their thinking.

Inflation is also rising elsewhere as well. On the European continent, the official EU rate rose from 2.5% in August to 3.0% in September. GDP increased by 0.2% there in the second quarter. Inflation has already been elevated in China and India for some months. China's inflation rate in September was 6.1% with food prices increasing at 13.4%. The price of necessities is rising faster there than the price of other goods. This is a common pattern in a number of countries. The yearly inflation rate in India was 9.0% in August.

In the U.S., the CPI for September indicated a 3.9% year over year rise in consumer prices.  This rate severely underestimates actual inflation. According to the alternative numbers produced by Shadow Stats, the current U.S. inflation rate is approximately 11% (Shadow Stats calculates its numbers with the formulas utilized by the U.S. government in the 1970s and this is the only way to get valid comparisons of U.S. inflation numbers across time). Official U.S. GDP growth for the second quarter of 2011 was 1.3% — well below even the government's reported inflation rate.
Even though a clear picture of stagflation is emerging globally, expect this to be continually denied by mainstream news sources. Even yesterday in its reporting on U.S. producer prices, one of the major news services stated, "the strong rise in wholesale prices last month is unlikely to prompt a broad increase in inflation pressures given the weak economy." This is actually pure misinformation. There is a long, long history of high inflation throughout the world during periods of low economic growth or even severe decline. One of the most recent cases historically was in the 1970s when inflation skyrocketed in 1974 during the worst economic downturn since the 1930s depression. Both  Fed Chair Ben Bernanke and BOE Governor Mervyn King were around at that time, but apparently can't seem to recall it. Perhaps if central bankers had better memories, they wouldn't be repeating the mistakes of the past today.

Disclosure: None

Daryl Montgomery
Author: "Inflation Investing - A Guide for the 2010s"
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. There is no intention to endorse the purchase or sale of any security