Just about every man and his dog has been asking when price inflation will begin in the US, where monetary inflation at the M0 and M1 levels are soaring, and even M2 is still growing.
You'll note that even at the broadest M3 level, money supply didn't begin contracting (have negative growth) until late last year -- when M1 growth accelerated again.
Last year I correctly predicted that price inflation will hit the US hard as a result of the massive currency creation by the Federal Reserve. Of course I was correct in my prediction, but may have been slightly off in my timing. But what's a couple of years in the greater scheme of things?
I saw that February inflation was running at a healthy annualized 2.1%, thanks mainly to higher oil prices. Excluding oil and food (which the Fed likes to do to show that there really isn't much inflation) prices rose at an annualized rate of just 1.3%. This would have been closer to zero if it hadn't been for the 14% rise in the price of used cars. We can thank the idiotic Cash for Clunkers program for that boondoggle.
However, if the economy really has bottomed and is in recovery, one would expect inflation numbers to start climbing. Especially with Ben Bernanke at the helm.
BUT. There are two huge deflationary forces that still haven't worked their way through the system.
Since last August, the price of shelter (rent, house purchases, hotels, etc) has been falling in the US each month. In February it was down 0.4% from a year ago and there's simply no end in sight for this one.
Housing sales are still falling, hitting the lowest level in February since records began in 1963. And I'm not talking about value. That's the total number of houses being sold in the month -- and back in 1963 the US had a population of 189,241,798, or less than 2/3rds of what there is today.
And the overhang -- unsold inventory -- has climbed back over 9 months' worth at around 3 million homes.
2. Trade prices
The basket of consumer goods (ex- food and energy) includes a bunch of imported goods. Actually, apart from cars, just about everything in the basket is imported because nothing is actually produced in the US anymore except for Google ads and America's largest export item: US dollars.
But back to consumer goods...
The world's largest trade sourcing company, Li & Fung, last week announced that for 2009, export prices fell a whopping 9%. That's for goods sourced in Asia and exported to the US, Europe, and other high income countries.
This whopping 9% drop resulted from changing the sourcing base from higher cost centres such as southern China to low cost places such as Bangladesh. In fact, they're sourcing from Bangladesh rose 20% last year. This is a great time to convert your USD into Bangladeshi taka!
Li and Fong expanded its margin by just 1.3%, which means the other 7.7% was passed on to importers.
And while Li and Fong said that they've recently been paying slightly higher prices (Chinese companies have been mandating 11% pay rises to get workers to come back), these higher prices aren't being reflected in US import prices. Indeed, February non-energy import prices fell 0.3% in February compared to the previous month.
As a result, it looks like reported CPI on the basket of consumer goods will be pretty stable for the rest of this year. And with unemployment hovering at around 20% there isn't much chance of the price of services rising much -- except Obamacare of course.
So, what's this mean then?
Basically, our mate Helicopter Ben Bernanke, the Head of the Joint Chiefs of Doller Devaluation, will be able to continue to point to the low inflation numbers and scream, "We gotta fight deflation."
The fact that deflation is a good thing -- it increases the value of your savings and your salary -- is completely irrelevant because banks don't like it. And let's face it, banks run the US.
So, over the next year, the Fed will be maintaining low interest rates and will be looking for more ways to create inflation. Perhaps buy some more toxic debt or another bundle of US treasuries.
With CPI numbers virtually guaranteed to be low and commercial banks buying treasuries by the trillion, there's really no chance of interest rates rising at either end of the curve.
Worse, while the US dollar SHOULD be losing value against the US dollar index, have a look at the weightings:
· Euro (EUR), 57.6% (falling apart as Greece heads to bankruptcy, Portugal downgraded by Fitch last week from AA to AA-)
· Japanese yen (JPY), 13.6% (already just an AA rated government -- same as Portugal was -- with debt to GDP ratio approaching 200%, second highest after Zimbabwe)
· Pound sterling (GBP), 11.9% (in a worse situation than the US)
· Canadian dollar (CAD), 9.1% (a much better managed currency, but hardly a weighting to speak of)
· Swedish krona (SEK), 4.2% (a socialist government like the US, except it socializes profits as well as losses, and much better off without those crappy Saabs)
· Swiss franc (CHF), 3.6% (where my money will be going when the dollar becomes toilet paper).
In all, the only thing that's clear is that the Fed still has PLENTY of room for more monetary inflation without leading to CPI inflation. Watch those printing presses crank up.
You'll know when he gets tired of printing money, because this chart will have normalized:
That will take another few $trillion of crisp fresh notes.
Meanwhile I've been loading up on silver and gold.