A few weeks ago, everyone began to agree that the US was headed for a decade of Japan-style deflation. The banks weren’t lending, consumers weren’t borrowing, the Fed’s desperate attempts to create inflation weren’t working, the country was awash in excess manufacturing and labour capacity, and so on.
And most of those things are true. In the United States.
But the world’s not just about the United States anymore.
Several billion people in China and India and elsewhere have recently discovered the joys of capitalism, and, as a result, they’re getting richer by the day. They’re also not up to their eyeballs in debt, the way Americans are. And their economies are humming along, so there are plenty of jobs. And the jobs are making them richer. And as they get richer, they buy more stuff. And as they buy stuff, the price of that stuff–and the raw materials used to make it–goes up.
In other words, now that the global economy isn’t collapsing anymore, the rest of the world is buying more stuff.
And that demand is driving the price of raw materials sky-high. (See chart below).
Will the the soaring prices of raw materials eventually lead to real inflation in the United States, even with our crappy economy, comatose banks, deleveraging consumers, enormous unemployment, and excess capacity?
Actually, it might.
Because as their input prices go up, companies will try to pass those cost increases through to consumers to preserve their profit margins. And consumers might pay the higher prices, at least some of them. Even if they have to borrow more to do it.
Alternatively, consumers will have to swallow the commodity price increases, which will result in lower profit margins. This will lead to stagflation. And it won’t be good for the stock market.
In any event, as the chart from CRB below illustrates, commodity prices are inflating rapidly. So be VERY sceptical about the sudden consensus that we’re headed for deflation. If this trend continues, we’re likely headed for stagflation…or a stock-market collapse and a lower standard of living.
The chart was forwarded by reader David Jensen, who adds the following:
The onset (return) of inflation in raw materials in the CRB Spot Index is visible in the graph below.
The bovine scatology re. “deflation” and that Fed policy is not inflationary because the banks aren’t lending or monetary velocity is low is just that. Note that many components of the spot index are non-futures traded and thus paradoxically less vulnerable to price manipulation.
Photo: Commodities Research Board
Now take a look at the rising prices of some of the components of the index >
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