Signup for our free newsletter:

Inflation in (Mostly) the Wrong Places

Written By Brian Hicks

Posted February 15, 2011

It is often claimed that inflation is a benign, even positive, force. People assume that prices, wages, and assets will all rise together…

In the real world, inflationary episodes don’t play out that way.

Wages don’t keep up, and bubbles form in unexpected (and unwanted) places.

In America, compensation is clearly stagnant.

And the outlook for future pay raises is not good, as this chart from David Rosenberg shows:

stagflation wages and lack of raises

Contrast that with this next chart, which shows the percentage of companies planning to raise prices:

price increases and stagflation
Combine stagnant wages and slow growth with high unemployment and rising prices, and you get a recipe for stagflation.

This scenario is being played out around the world.

In the UK, consumer prices rose 4% in 2010. As noted by the Financial Times, wages aren’t keeping up:

The prices of everyday goods and services are rising about twice as rapidly as average wages, Tuesday’s inflation figures confirmed — which means that the standard of living of many Britons is already falling.

According to the Bank of England, average pay at the end of this year will be able to buy no more than it could in 2005. It is the first time that the purchasing power of earnings has fallen so far since the 1920s.

I expect this trend to continue as long as the Fed’s mad experiment is ongoing.

The thing about Central Bank “easing” is you never know where inflation will pop up…

Easy money will always fuel speculators, who have little skin in the game, to find another bubble to “invest” in.

Silver, gold, oil

With printing presses switched “on” for the foreseeable future, we remain bullish on precious metals.

Silver is holding above $30 today and could hit $37.50 on the next leg up.

Coal, oil, and natural gas investments should continue to do well. And as my colleague Nick Hodge of Energy and Capital says, “Buy it if it burns.”

If you’re not yet convinced that Fed printing is directly related to rising commodity prices, examine the following chart. (The solid blue line represents the Austrian Money Supply (AMS), and the solid teal line represents commodity prices (IMF Commodity Index)):

federal reserve commodity inflation

Note: The version of money supply shown (AMS) is the Austrian, True, or Rothbard (named for its creator, Murray Rothbard) Money Supply.

Austrians use a different means to gauge money supply than hiveminded mainstream economists do.

One thing is clear: With data like this coming out, it will become increasingly difficult for the Fed and its apologists to defend loose money policies.

But defend they will. So the ponzi goes on, for a while.