Libertarian Leanings

Consumer Spending Hasn't Caught On To Inflation

Hot Air reports:

[Reuters]then manage to misreport the real DPI, which is defined by the BEA as “DPI adjusted to remove price changes,” in order to account for inflation:

When adjusted for inflation, spending nudged up 0.1 percent last month after gaining 0.1 percent in March.

No, it went down by “less than 0.1%,” not up.  Inflation on all prices rose 0.3% in April, and in “core” prices by 0.2%.  The overall PCE index has risen 2.2% over the last 12 months, which isn’t a bad rate of inflation if the economy was actually growing significantly.

So is tepid consumer spending holding prices down?  What will inflation look like at when consumer spending takes off?  Of course, that will depend upon whether or not anybody can get a job.  Chances seem slim as long as Obama resides in the White House.

INFLATION

Arthur Laffer predicts inflation.  It's all about the money supply.

'About eight months ago, starting in early September 2008, the Bernanke Fed did an abrupt about-face and radically increased the monetary base -- which is comprised of currency in circulation, member bank reserves held at the Fed, and vault cash -- by a little less than $1 trillion. The Fed controls the monetary base 100% and does so by purchasing and selling assets in the open market. By such a radical move, the Fed signaled a 180-degree shift in its focus from an anti-inflation position to an anti-deflation position. The percentage increase in the monetary base is the largest increase in the past 50 years by a factor of 10 (see chart nearby). It is so far outside the realm of our prior experiential base that historical comparisons are rendered difficult if not meaningless. The currency-in-circulation component of the monetary base -- which prior to the expansion had comprised 95% of the monetary base -- has risen by a little less than 10%, while bank reserves have increased almost 20-fold. Now the currency-in-circulation component of the monetary base is a smidgen less than 50% of the monetary base. Yikes! [...] It's difficult to estimate the magnitude of the inflationary and interest-rate consequences of the Fed's actions because, frankly, we haven't ever seen anything like this in the U.S. To date what's happened is potentially far more inflationary than were the monetary policies of the 1970s, when the prime interest rate peaked at 21.5% and inflation peaked in the low double digits.'

If the chart above is a true indication I don't see how we're going to avoid inflation.  According to Mr. Laffer the big jump in the money supply is from a huge increase in bank reserves which he says are "excess reserves."   That means those reserves won't languish in bank vaults but will hit the street as loans, increasing the currency-in-circulation.  The impact is likely to be huge. Update: Russia may unload some U.S. Treasuries from its reserves and replace them with International Monetary Fund bonds. Alexei Ulyukayev, first deputy chairman of Russia’s central bank, said some reserves may be moved from Treasuries into IMF debt, reiterating comments made last month by Finance Minister Alexei Kudrin. Ulyukayev’s remarks were confirmed by a Bank Rossii official who declined to be named, citing bank policy. Treasuries fell, pushing 10-year yields toward the highest level in seven months, in response to Ulyukayev’s statement. The dollar fell against the euro on speculation that Russia will reduce its holdings of U.S. debt. The government is going to pay higher interest rates in order to finance Obama's unprecedented yet planned massive deficit spending.