The world awaits US inflation figures in the US this morning at 8.30am EST: while many decry this recent global surge, some have asked what might be GOOD about inflation? Remember in the US we experienced almost an entire year of LOW inflation - below 1.5% - and now we are experiencing a massive global economic re-awakening. At least 56 countries around the globe currently have inflation above 4%. In 1974, US inflation was 11.05% and in 1982, 13.55%. It was 3.84% in 2008.
It is important to note that rising inflation is not exclusively happening in the US......it's rising in almost all parts of the world. What causes inflation? There are three types: demand-pull inflation, cost-push inflation, and built-in inflation.
1. Demand-pull inflation occurs when the demand for goods and services increases quicker than the economy’s production capacity. The price of goods and services increases when there is higher demand and lower supply. CHECK!
2. Cost-push inflation occurs as a result of the increase in the cost of production. For example, if the raw materials used to create a good increase in price, the price for the final good is higher. The same happens if the cost of labor to produce the good increases. CHECK!
3. Built-in inflation occurs due to adaptive expectations. As the prices of goods and services rise, labor expects to be paid more to maintain their cost of living.....resulting in a rise in labor costs, prices for the goods or services that labor produces or provides also increases. This creates a cycle of price increases. (TBD)
The big question that needs to be answered now: Are we experiencing all three or just two of the three types of inflation as the economy around the globe surges back to life, fueled by cheap credit and government stimulus? There are beneficiaries in inflationary times:
1. Savers. Cash earns more in banks as interest rates rise.
2. Fixed mortgages. Those who tapped into a low rate over the long term.
3. Builders about to complete something, where they have paid for most of their materials and labor already and have low rate financing.
4. Workers who may earn more and find jobs more easily, although these gains can be easily eaten up by higher cost of living.
5. Reduced unemployment creates less reliance on government assistance.
6. Owners of all types of real estate. Rents often rise with inflation. Not unlike gold, real estate usually weathers inflation well. In some areas of real estate we are seeing HYPER inflation.
Inflation theoretically helps increase production. More dollars translates to more spending, which equates to more aggregated demand. More demand, in turn, triggers more production to meet that demand. Inflation around 2% can be good......its when inflation soars over the long term that it can be unhealthy. High inflation is damaging to the poor and those who don't own assets - like homes - to ride valuation increases.
Remember: Core inflation is the index of all items less food and energy. An alternative inflation measure, which excludes only the cost of housing services (shelter), usually gives a very different answer.
