The Great Price Lurch of 2008: Inflation Reigns

It seems that we have really entered a new era. At the time we were worrying about Y2K, it seemed like purchasing power was rising for us as consumers. The Costcos of the world were making shopping cheaper, computing resources were becoming cheaper, electronic devices were becoming cheaper. Nearly everything was becoming cheaper. China was not yet a word on the tip of everyone’s tongue, but its low wage workforce was helping make everything cheaper. With the end of the dotcom fantasy, the Fed brought short rates into negative real territory for a considerable period. Commodities took off immediately on what is now a bull run entering its sixth year. Housing prices went parabolic. We are now at the end of the housing fantasy. But commodities are still making new highs as billions of people enter the modern world.

The money powers were sanguine about this because they believed they had won the war on inflation and that inflation expectations had become contained. But that containment is just about at an end I think. The Economist had an interesting piece last week about how inflation expectations were ratcheting upwards in Great Britain. Most people I know also are starting to believe inflation will rise as well. Just in the past few days I have been notified that the data I use for trading was going to increase in price by 50%, I got a bill for electricity that was double my normal monthly winter amount, and I was notified my gas bill would be increasing as well, more than just the normal amount for higher gas prices. Groceries have become noticably more expensive. The Supreme Court made a little remarked ruling in the last year that producers of goods could exercise more control over pricing at retail. This used to be considered an antitrust transgression. It will mean that more things will become more expensive as pricing power tilts away from discounters toward manufacturers. The result of the housing bubble is that either or both housing prices must fall, or wages must rise in order for people to be able to afford homes. It is going to be both. And wage demand pressure will not just rise here. It will rise in the newly enfranchised countries like China. And as the effect of these workers becomes less to lower wages than to increase consumption, increasing demand for everything will mean pressure for rising prices.

The normalization of the price of labor around the globe will ultimately be a good thing as the delta between the higher wage countries and the lower wage countries narrows. But it will mean that a source of pressure that helped keep the prices of goods and services low will start to disappear. And so prices will rise. Whether this is strictly inflationary or not I do not know. I tend to believe that inflation is a monetary phenomenon, as taught by Friedman. But what I do know is that the prices I encounter while leading my life have become disturbingly high and rising.

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