All cats are animals, but not all animals are cats. Pretty simple logic.
All inflation causes price increases, but not all price increases are caused by inflation. Same logic.
The past few weeks I’ve seen several friends have Facebook freak-outs because gas and food prices were going up because of “inflation”. It isn’t inflation. It’s supply and demand.
There’s less oil coming from the Middle East because of civil war in Libya. There’s strong potential for civil war in other countries, so speculators are bidding up the price of oil too. And Saudi Arabia is attempting to bribe its citizens into complacency with $93 billion in handouts (that’s the demand), and they are passing that cost on to American consumers (we’re the supply).
Food is similar. The cost of food depends strongly on the cost of energy. When energy goes up, food goes up. The supply of food has been reduced by severe weather conditions in Russia, China, and Australia (Tennessee wasn’t the only place with bad weather last year). And consumers in developing countries like China are starting to include more meat in their diets, like Americans, which puts further pressure on food reserves.
People are biased towards things they purchase more often. People buy gas every few days, and prices have been going up every few days. So it’s hard not to notice. On the other hand, people don’t buy houses very often, and the past year the price of houses has been falling like a brick. Inflation affects all assets, so why is housing falling? Because it isn’t inflation.
So why am I being so picky? Because if people keep complaining about “inflation”, Congress is eventually going to feel they must “do something”, and then we’re really screwed. The cure for inflation (raising Fed rates) will kill you in a depression.
In 1929 the US stock market crashed. By 1937, things were improving and government raised Fed rates to stave off “inflation”. The economy promptly crashed again, and didn’t recover until World War 2 (the ultimate fiscal stimulus program).
In 1991 the Japanese real-estate market crashed. On multiple occasions their economy started to pick up, and their government raised rates to stave off “inflation”, and guess what happened? Their economy is in the 2nd decade of their so-called “Lost Decade”.
So we have two periods of well-documented human misery caused by premature calls to do something about “inflation” when the economy was still in depression. And we’re in a depression now. And people are starting to complain about inflation. And we have a Congress full of politicians who wouldn’t recognize a history book if you threw it at them.
You can’t stop politicians from being short-sighted idiots. But you can teach someone something new. And maybe I’ve given you a little something to think about.