Is There A Real Threat Of Hyperinflation
It is not surprising as of late that “inflation” has been on the forefront of everyone’s mind as the US dollar is pummeled as oil, commodity and food prices rise sapping more than 22% of the average consumers wages. David Rosenberg has been adamant lately through several of his past missives that there can absolutely be no inflation when employment is running at such low historic levels, wages are suppressed due to job opening competition and the consumer is the midst of a deleveraging cycle. The inflationist’s, however, quickly point to the rising commodity prices as the real measure of inflation as it directly impacts the consumer and the consumer makes of 70% of the domestic economy when it comes to GDP. (See previous post “Let Them Eat IPads”)
Both sides can make valid and logical arguments. However, the question remains, do we have inflation or don’t we? Are we experiencing the 1970’s all over again as inflation kills the economy or is this truly, as in the words of Ben Bernanke, an era of low inflation and interest rates that will last for some time as the threat of deflation remains a prevalent enemy to the economic recovery? How will we know when it changes.
There are three legs to a hyperinflationary environment. Commodity price inflation is certainly one of them as it does immediately impact the consumptive capability of the average consumer. However, in order to see true pricing pressure across the economy that eliminates the threat of deflation two other factors are critical; 1)the velocity of money, or how fast money is flowing through the system from the banks to small businesses and ultimately consumers and 2) wage growth.
Why are these two factors so critical to overall inflation question. In the most recent NFIB survey only a small fraction of respondents stated that this was a “good time to expand” while the majority of respondents stated that their major concern was “poor sales”. If you are a small business, who coincidently creates roughly 70% of all new jobs, and you are worried about poor sales prospects and a weak economic environment, it is highly unlikely that you are going to leverage your business or extend credit to customers. Furthermore, if small business aren’t hiring then competition for jobs remains very high, as most recently noted by the 1,000,000 applications for part-time burger flippers and fry daddy’s at McDonalds, which suppresses wage growth. Lower wages means lower consumptive capabilities for consumers which ultimately translates into deflationary pressures on the pricing of goods and services. It is a vicious circle which is why deflationary environments are so dangerous and so hard to break.
Therefore, the Hyperinflation Index is an attempt to measure these three legs of inflationary pressures to determine if hyperinflation is prevalent in the current economic cycle or not. The index is equally weighted of the M2 Velocity Of Money, the Year Over Year (YOY) percent change in wages and the YOY percent change in the Consumer Price Index. The index clearly shows the hyperinflationary pressures that were prevalent in the 1970’s as the economy suffered real inflation and rapidly rising interest rates. Today, inflation has clearly come back but still remains well below the long term average of 11.63% on the index. What is important to note is that when the index is rising sharply the YOY Change in GDP declines. With the 1st Qtr GDP estimate coming in at a meager 1.8% down from the 4th Qtr you can see that the index rose sharply during that same time span. When the index gets above its long term average trouble for the economy usually ensues.
This index does not mean that the consumer is not getting hit where it hurts the most – right in the pocket book. However, rising food and gas prices are an additional tax on the consumer and does, in every real sense of the word, detract from the discretionary spending capability for the average American. This could not come at a worse
time as employment remains stubbornly low, consumers are trying to deleverage their personal balance sheets, 1 in 5 are trapped in homes that they can’t sell which limits their mobility to go find work in some other part of the country and small businesses are constrained by poor sales and a weak economic outlook. It all comes together as a very bad brew.
However, while inflationary pressures are definitely recovering from a deflationary bought in 2008 the levels are above the historical average where they begin causing very severe problems for the economy. Furthermore, with the Federal Reserve trapped in a box without the ability to raise interest rates to combat inflationary pressures on a short term basis they are left with hoping and praying that they can adjust stimulus programs enough to keep commodity prices under some sort of control. Most likely this is a losing battle and will either end badly or very badly. This index does tell us one thing with almost clear certainty – QE3 will be here by the end of the summer.