Where Is Inflation Hiding? In Asset Prices
The comments below are an edited and abridged synopsis of an article by Jesse Columbo
Those who believe in the low inflation myth are being fooled by the fact that inflation in this central-bank-driven economic cycle is concentrated in asset prices rather than in consumer prices. By holding interest rates too low for too long, a massive asset bubble has inflated, and will inflate even further, as long as economists and central banks continue to buy the low-inflation myth. Unfortunately, the bursting of this asset bubble will throw the US and the global economy into another depression.
Belief in the low inflation myth stems from rigid reliance on conventional inflation indicators, even though we have been in an unconventional economic cycle since 2009 (because of record-low interest rates and trillions in QE). Such an environment requires thinking outside the box and considering all information available, but most economists are still stuck in the past, as if we are in a garden-variety 20th century business cycle.
Columbo discusses the Fed’s preferred inflation indicator; the financial media’s most commonly referenced inflation index; wage growth (low since the Great Recession); inflation being concentrated in asset prices rather than consumer prices; consumer price inflation remaining low while asset price inflation has exploded; the Fed’s aggressive, unconventional monetary policies; ZIRP and QE; the Fed’s aggressive inflation of stocks and other assets creating a dangerous bubble in US household wealth; and the real inflation rate (10%).
In summary, the US has a real inflation problem, but it’s not where everyone is looking. The pervasive but mistaken belief that interest rates should remain at ultra-low levels will only serve to further inflate the asset bubbles that the economics world is ignoring/in denial of. These bubbles will eventually burst, and they will cause an economic depression. We should not expect a different outcome when the same characters who completely missed the housing bubble’s obvious warning signs are still employed at the Fed, the big banks, investment firms, academia, and financial media.