Watching for Inflation Here, There, Everywhere
Airlines, automobiles, health insurance, energy, commodities, education, housing, and utilities.... these are a few examples of areas in the American economy that increasingly show up in headlines reporting price increases, sometimes with percentages in the double-digits. The co-authors of "Inflation Watch" regularly shared these headlines in emails for many months until this overwhelming evidence of creeping inflation convinced us to track it more formally. Inflation Watch serves as a reminder that even amidst the on-going fears of deflation and credit destruction, easy monetary policy, fiscal stimulus, and government regulation can generate inflationary pressures. Accordingly, one of our favorite quotes comes from Bill Fleckenstein: (October 5, 2009): "[I]n a period where fears of deflation rage and too much capacity exists for so many products, it is possible for government policy and money printing to produce inflation here and there. The only question is, when will we finally evolve to the point where inflation is here, there and everywhere?"
Of course, the Consumer Price Index (CPI) already tracks price changes across a wide array of goods and services (consumed by urban households). However, the CPI records the past. Inflationary pressures are ultimately controlled by expectations of future price increases. These expectations take shape based on the day-to-day inflationary pressures observed by consumers and producers. We believe that we can more accurately gauge the likely future direction of inflation by tracking these stories in real-time - even if the news is lumpy and disaggregated.
A sampling of items covered at Inflation Watch in recent weeks: a 15 percent increase in small business' health insurance premiums in the coming year; a 6.5 percent increase in college tuition fees this fall; higher prices for used and new cars; higher municipal fees for water and sewer services; a 50 percent increase in car rental prices during the past year; a 12 percent increase in the average price for basic funeral home services in New Jersey during the past year; an expected 15 to 25 percent increase in long-term care insurance premiums for California state retirees; and employers that cut their employees' pay, such as American Express, General Motors, and Advanced Micro Devices, that are now restoring pay to pre-recession levels.
Apparently, we at Inflation Watch are not alone. Even as the Federal Reserve (and most major central banks) insist that inflation remains "below target" and inflation expectations are well-contained, the prices for the inflation protection provided by assets such as gold and Treasury-Inflation Protected Securities (TIPS) continue a slow and steady march upward. Those of us who choose preparation have taken note and remain alert.