For years we’ve been waiting, and now we need not wait any longer; inflation has finally arrived. As long time readers and listeners will remember, we’ve been on the lookout for inflation for quite some time. Our premise has been that, with the economy recovering from Great Recession of 2008, and with so many newly-printed dollars now in the system, it was just a matter of time until we began seeing the first ripples of what would likely become a tsunami of inflation washing through the US economy.
And now, it seems the water is rising.
According to Economic Research released by the Federal Reserve Bank of St. Louis, M2 Money Supply (and keep in mind, this is not the broadest measure of money supply, M3, which the Fed conveniently stopped reporting years ago) has grown by close to 7% over the past year. Granted, this is more measured than the 8.5% growth seen in 2012 and the 10.5% growth during 2011, but still a relatively high growth rate.
Over the same time, the United States’ nominal Gross National Product has grown by just 3%, even slower than the 5% growth achieved over 2012.
Inflation, as an economic term, is relatively subjective. Quite often, its definition varies based on the economic school of thought subscribed to by the author. Some point to money supply, others point to prices. However, one thing taught in just about every college ECON course is that inflation occurs when money supply grows faster than the economy grows (as measured by GNP).
With money supply now growing more than twice as fast as GNP, the pace at which money supply is circulating (called “money velocity) has been falling – more than 3% over 2012, closer to 5% the year before.
Since more dollars are circulating and the economy is now smaller compared to money supply, there are more dollars chasing the same number of goods. As a result, prices rise – this is the most common symptom of inflation, and the one the American public cares about most.
The real problems arise as velocity recovers during an economic expansion. As has been widely publicized – and politicized – the Federal Reserve has printed mountains of new money, reflected in the increase of M2 Money Supply. This growth in the money supply has outpaced economic growth, measured by GNP, with a result that money velocity has slowed.
In other words, dollars aren’t turning over in the US economy at the same pace they were one year – or two years, or ten years – ago.
However, as we’ve written before, the US is on the verge of a major economic expansion. When GNP in this country begins to grow faster than money supply (assuming the Fed doesn’t begin pulling money out of the economy, forcing money supply to shrink – which is highly unlikely and potentially devastating for our economy), the velocity of US money supply – with all of those brand new dollars – is going to accelerate. When that happens, American consumers will really begin to recognize the inflation already occurring.
However, there’s plenty we can point to now which demonstrates that inflation is already here. In the Midwest, farmland prices rose 19% between the first quarters of 2012 and 2013. US home prices are up 8.5% already this year. Per the St. Louis Fed, the Consumer Price Index (CPI) among Urban Consumers is growing at the quickest rate since 2008/2009.
Granted, the price of oil has fallen under $97/barrel after having been over $100 (prices at the pump are often used by consumers for inflation indicators), but that is mostly due to market conditions rather than monetary policy. In the past several months a number of major users have announced planned shifts to natural gas, trucking firms and railway companies (some of the largest users of petrol-products) among them.
The recent decline in oil prices has led some investors to state categorically that oil can never fall below $90 barrel, as that is the approximate cost to produce shale oil. Obviously this is a faulty argument, and mirrors what investors used to say years ago, that oil couldn’t fall below about $45/barrel, because that was the price threshold required to make oil drilling in the Canadian tar sands profitable.
Of course, the price of oil did fall below the threshold required to make the tar sands feasible – on more than one occasion. The price of producing a good has absolutely nothing to do with the price the market is willing to pay for it.
Oddly enough, despite all this data pointing to the arrival of inflation in the US economy, the price of gold bullion – the most tracked, and also the most easily manipulated measure of inflation – is down over the past year. And why wouldn’t it be down, when the world’s central banks seem so committed to introducing every conceivable degree of uncertainty in the world’s metals markets. There’s a game afoot – but who is winning?