The old economic bogeyman known as inflation is suddenly haunting investors and others again. News websites are suddenly full of headlines like “Inflation is Back” over at CNBC.
The CNBC headline was prompted by a .6% jump in the Consumer Price Index (CPI) in January and a 2.5% rise in the same metric in 2016. That is not exactly that high especially when one compares it with the hyperinflation plaguing countries like Venezuela.
Even though it is low, the sudden inflation uptick is worrisome in an age of wage stagnation and income inequality. Just a small rise in a few prices like fuel would be disastrous for many low income, elderly and working class people.
Inflation probably won’t Affect Average People until Next Year
My prediction is that inflation will not affect most people until next year for two obvious reasons. First the price increases are evenly distributed across the CPI, and second there was only one really big jump in costs.
This breakdown explains my thinking:
- The biggest increase was in energy prices 4%, note this was largely driven by increases in petroleum product prices. Including a 7.8% rise in gasoline prices and a 3.5% increase in fuel oil prices. Energy prices increased by 10.8% during 2016.
- Food prices increased by just .1% after staying the same for nearly six months. Grocery prices actually fell by -.2%. All food prices fell by -.2% in 2016, meaning food deflation continued.
- Prices for other consumer goods are not rising. Prices for nonfood and energy commodities fell by -.2% during 2016. Prices for personal care items only increased by .1% and the cost of durable goods only rose by .3% in January.
My take is that the lower costs for food and consumer items will offset the cost of energy for the next few months. What we have to worry about is a sudden spike in energy costs, which seems unlikely given the glut of oil in the world. A large drop in oil prices driven by increased production is more likely.
Some Inflation Numbers we need to Worry About
There are some inflation numbers we need to worry about. Unfortunately they’re buried towards the bottom of the U.S. Bureau of Labor Statistics’ hard to read CPI press release.
Scary inflation numbers include:
- The cost of medical care commodities (I imagine this means drugs) increased by 4.7% in 2016. That’s bad news for seniors who use more medical care commodities.
- The cost of medical care services increased by 3.6% in 2016. That’s also very bad news for seniors and working people that have to cover medical costs out of pocket.
- Housing costs increased by 3.5% in 2016. That is bad news for the working poor whose income has been decreasing in recent decades.
- The cost of all services increased by 3.1%.
- The cost of transportation services increased by 3.2% which is bad news for poor people that do not own cars and elderly folk who cannot drive.
- The cost of clothing increased by 1.4% in January 2017 and one percent in 2016. This might be driven by increased production costs, or by the retail apocalypse which has caused mass closings of brick and mortar apparel retailers. Fewer shopping choices might mean higher clothes prices, particularly for those who do not shop online.
The major problems here are the increases in housing, transportation, services and medical costs. They’re growing faster which means if inflation comes those costs are likely to be much higher than others. At that point, lower food prices will not compensate for those increases.
So yes inflation is a growing problem and it is hitting the most vulnerable Americans hardest. Yet it will not become apparent for most consumers until next year, which will be bad news for Republicans because 2018 is an electoral year. Inflation will hurt the GOP if pundits, the media and Democrats start blaming on President Trump – which they will.
An Inflation Indicator to Pay Attention to: Bitcoin
There is one inflation indicator we need to pay attention to: it is bitcoin. The cryptocurrency has become one of the world’s most popular hedging mechanisms. Many investors are using it as a safe haven to protect assets from inflation.
Bitcoin’s price is a good metric of popular fears about money and vitality. A bitcoin was trading at $1,111.52 on February 21, 2017, according to Coinbase. That means the digital currency has exceeded the high price of $1,069.40 it hit back on January 4 by $42.12.
That shows us that a lot of people are worried about inflation and looking for an alternative to currencies. Although it should be noted that it is foreign demand for bitcoin, mostly in China and India that is driving the price spike.
This might affect the US dollar if the fears about currencies overseas spread to America. The yuan’s collapse and demonetization in India are sowing serious doubts about currencies that are likely to spread to American and drive fears of inflation here.
A major problem is that the mainstream U.S. news media largely ignores foreign economic news. That generates fears because information about foreign currencies gets filtered through investment and political websites; many of which have an agenda hostile to paper currencies. A lot of them are financed by advertisements for gold.
The incomplete information drives panic buying and selling which favors instruments like bitcoin. It also indicates a growing lack of faith in paper currencies that governments are not willing to deal with in a meaningful way.
Expect inflation to slowly get worse and bitcoin prices to slowly rise over the next year. Also expect inflation to hurt lower income people and increase the growing civil and political unrest in the United States.