Inflation; Still only a potential danger

The multiple crises in Japan, North Africa, the Middle East and the continuing problems in the aftermath of the economic downturn and massive debt problems have, once again, raised fears of inflation. Certainly, consumers have noticed real increases in the prices of food and gasoline. Even so, forces continue to bear down on the general level of prices and there are currently no signs of a let-up in those forces. While many prices have risen, inflation is usually defined as a rise in the general level of prices and here we find that the significant declines in real estate values and high unemployment keep the overall level of prices (often measured by the Consumer Price Index or CPI) at a low level that is not rising.

It's true that Governments are trying to stimulate the economy through fiscal policy and monetary policy, but, so far, those policies have failed to generate economic growth. Inflation will be a problem when economic growth really starts to grow, but that is not happening. And this is one of the major forces that prevent inflation. There are, at least, three important forces that are holding down inflation. First, is the poor demographics of the big economies that hold down demand. As populations age and retire, they tend to spend less and, at the same time, save less. And, with fewer young people entering the labor force, overall demand is restrained. Strong demand is needed for inflation to take hold.

Second, technology is helping to hold down inflation in two ways. It is good for productivity, thus keeping wage growth low and it has a tendency to drive down prices of technology products. The third force is the relatively low labor costs that still exist in the developing world such as China and India. Until incomes in those countries rise to an equivalency with those in the developed world, wage growth in the larger, richer economies will be restrained.

So, in spite of efforts of Governments to stimulate growth and Central Banks to print money, nothing much will happen over the next few months in this writer's view. That does not mean one should become complacent, because at some point, the excess money that is "sloshing" around the world will find an outlet in some market. So, keep an eye out for a developing bubble. Governments throughout the ages have tried to manipulate the money for their own purposes. That certainly happened in the Roman Empire as described in my book, The Fall and Rise. Usually, these efforts do not help and often result in unintended bad consequences. Watch out!