Is inflation hurting Maine people and businesses?
Inflation is the overall general upward price movement of goods and services in an economy. Normal citizens like you and me measure it on a personal level as we go to the gas pump, grocery store, or shopping.
The federal government and its report of core inflation would have you believe the current inflation situation is just fine. But average citizens do not realize that core inflation is a figure that does not include the cost of food, energy and, thanks to “hedonistic factoring,” even items we really like. Yes we now swap goods in and out of the calculation if we like them too much! As a result, we find the inflation of items we purchase daily is much worse than we are being told.
We all know more money is going out for the same items – things are costing more. As a result, the federal reports aren’t consistent with that feeling we experience weekly at the grocery store and the gas pump.
This disconnect is thanks to the 1996 Boskin Commission, which advised that Congress change the calculation of core inflation and it began to diverge downward from the Consumer Price Index. To do this they removed food and energy products from the “core’ calculation.” They did this because these items are considered volatile — they move up and down quickly.
Today, 15 years later, we are at the brink of some of the largest and most rapid increases in food prices in the history of modern economic times. To validate, just look at food commodity prices today – all-time highs, and that’s a fact. Get ready, because the trip to the grocery store is going to get ugly.
Simply put – it’s going to hurt.
The same concerns apply for oil as well.
Ongoing natural disasters and wild weather, rising oil prices and a growing population are causing the inevitable rise in food costs. Oil has been on the same trend and is affected by many of the same factors. It is also affected by volatility in the Middle East.
To remove them from the calculation of core inflation because of volatility is an economic sham – if year-over-year increases are considered volatility and not a trend, then my MBA and continued study of economics must be from another planet.
The only core item going down is housing, and that is the one we want to see go up! But in reality, housing can’t go up because it’s still overpriced. That’s the case even after four years of decline. That’s a 29 percent decline, 4 percent more than during the Great Depression, and we still see that housing prices are overstated relative to incomes and debts.
Meanwhile we are confused as economic pundits and the Fed tell us it fears deflation – prices going down. Believe it or not: The Fed chief’s concern is that short-term interest rates, which are near zero, are too HIGH, given the state of the economy. This should concern you because it means Ben Bernanke is out of options. He can’t reduce rates any further and he is printing money as fast as he can.
So is inflation a concern for Maine people and Maine businesses? You bet it is! And in 2011, beware as the inflation beast will begin to feast, we just can’t hide from rising food and oil prices which affect everything.
Once that happens, Bernanke’s near-zero rates can only go one way: up! Then it’s a double whammy – interest costs and the price of consumer goods both increase aggressively. But then the economy falls and prices go into limbo as demand sags.
But wait a minute. If that happens that means demand on all items goes down and maybe prices actually slow their increase or flatten. Perhaps there is something to be said for letting the natural path of things take their course …
Joshua Hayward has worked as a financial strategist for 19 years and can be heard Monday Mornings at 7 on the George Hale & Ric Tyler Show, 103.9 FM Bangor, 101.3 FM, Augusta. He can be reached at firstname.lastname@example.org.