U.S. inflation has remained remarkably tame in the eyes of those who during the financial crisis expected the Federal Reserves unprecedented monetary response to be massively inflationary. The Fed increased the U.S. monetary base by $1 trillion over the span of just a few months… yet both core and headline inflation has been trending downwards and remains near the Federal Reserve’s target level.
Calafia Beach Pundit admits he’s been wrong so far on the inflation front, but explains why he’s still concerned that far higher U.S. inflation is ahead.
But first, we thought it interesting to show his take-down of those who believe U.S. inflation numbers are fake:
If you don’t believe that the Bureau of Economic Analysis is staffed by professionals that do their best to measure inflation accurately, then this post is not for you. I’ve been working with the BEA’s numbers since 1980, and I have never managed to turn up evidence of gross or chronic error in their numbers. It’s fashionable to say that the government is systematically understating inflation, but as the Boskin Commission found, the CPI, for example, may actually be overstating inflation (the CPI is calculated by the Bureau of labour Statistics).
Still, there many signs of potential inflation outside of actual consumer prices, and it could be only a matter of time before the U.S. experienced the lagged effect of its unprecedented monetary stimulus.
I remain concerned that the risk of a significant rise in inflation is much greater than the risk of deflation. The evidence of an effective oversupply of dollars is already out there: the dollar is very weak, gold prices have soared, and most commodity prices have risen substantially. Plus, there is growing evidence that the demand for dollars is weakening on the margin, as this chart of M2 demand (the inverse of M2 velocity) shows:
It remains to be seen whether the inflationista’s will be vindicated, but I’ll just say this — the day that U.S. inflation perks up and becomes the subject of market concern is the day that we look back and reflect on how silly it was for markets to think that America could become Japan.