Inflation Unchained: Part One

inflation chart
Gold Market Discussion

Inflation: Prices are Rising All Around Us

They deny it.  They suppress it.  They even ignore it.  

Then it bursts out into the open and suddenly it can’t be ignored any longer.

I’m talking about rising prices.  Those of us that watch the economy like a hawk keep a close eye on things like the consumer and producer price indices.  We pay attention to the money supply figures and Fed finagling.  The statist economist tell us there’s no inflation, even while the rising costs of healthcare, insurance, education, and especially taxes are on display wherever you look.

As the saying goes, who are you supposed to believe, the government or your lying eyes?

But when inflation bursts out into the open in other venues, it’s time to believe your own eyes.  

A couple of examples this week:

The cost to mail a letter will jump 10 percent later this month.  The Postal Service is hiking the price of a first-class stamp from 50 cents to 55 cents.  The average price of Priority Mail will climb 5.9 percent.  

But that’s an old-fashioned government service.  It’s snail mail, a remnant of the pre-digital economy.   

What about the new economy?

Prices are going up in the new economy as well.  Netflix is raising prices across the board.  Its standard plan is going up 18 percent.  And that, by the way, is not the plan that snail mails DVDs to your home and therefore has to raise prices because of higher postal rates.  No, that is an all-digital plan for HD video.  

Other pent-up price hikes will follow.

Rising costs of food and goods

Now, what does the government say?  It says inflation is tame and cites the new producer price index numbers reported this week.

Let me unravel this just a little.  Even though food prices took a pretty good jump, energy prices were lower.  Gasoline, as you may have noticed at the pump, is sharply lower.  So, thanks to lower gas prices, the overall index is lower.

If the price of a single good or service goes up or down, it is not inflation or deflation.  If the price of asparagus goes up it may be because of the weather, a flood, a poor crop, an infestation, farmers switching to more profitable crops, or for some other reason.  But it should not be called inflation.

By the same token, if energy prices fall it is not disinflation.  It is simply a lower price, in this case thanks to increased US production and the easing of restrictions on Iranian exports.  

Real inflation is a monetary phenomenon, a policy consequence of the authorities.  But confusing the definitions helps the guilty parties, the monetary machinators, escape blame for their malpractice. 

 When we say the price of gold is rising, we would be more accurate to say that the purchasing power of the dollar is falling.  After all, as a monetary standard, the dollar is just a flash in the pan, compared to gold, the monetary standard of the world for a very long time (and incidentally still the real reserve currency of the world. For evidence of that look no further than the rush of central banks to build their gold reserves ahead of the coming crisis).

In fact, the dollar is about as reliable as a monetary standard as an elastic yardstick or a rubber band ruler.  Consider that a hundred years ago a dollar bought roughly 0.05 ounces of gold.  Today the dollar buys only 0.00077 ounces of gold.  

Something changed, but it wasn’t the gold.

You might see a trend there.  

This erosion of purchasing power is not limited to the dollar alone.  Failure is the ultimate fate of paper money everywhere and at all times.  More on that in my next post. Inflation Unchained:  Part Two.