With no bonds and no stocks…
In your little safe deposit box…
You can never be affected by inflation.

If you enjoy Broadway theatre, starred in your high school’s drama club or are a fan of the original 1933 “talkie” then you certainly recognize these lyrics from Sunny Side to Every Situation – one of the many magnificent musical numbers from 42nd Street.

While this makes for a catchy musical number it holds no truth in economic reality.  The lack of owning “stuff” doesn’t mean you can escape the impact of rising prices.  The point is so obvious that the only logical conclusion for The Fed’s delusional “all is well” mindset is the turning of a blind eye. 

If you drive a car then you know prices are higher.  Pain at the pump is something all of us feel.  According to the US Energy Information Administration the average price of gas for the week beginning 4/25/11 was $3.879/gallon representing an increase of $1.03/gallon year-over-year.

Our bodies need fuel too and we’re paying higher prices for the privilege of providing it.  The US Department of Agriculture is forecasting a 6.5% year-over-year rise in beef prices.  Pork prices are projected to be 7.5% higher.  Non-carnivores are in equally bad shape with retail corn prices currently at $7.70/bushel up from $3.49/bushel in July 2010.  Back in February wheat prices surpassed their 2008 highs.

And yet The Fed tells us there’s no inflation.  Sadly they’re not wrong – at least academically.  Economists speak of two inflation measures – the nominal or “headline” rate and the less volatile “core” rate.  Food and energy prices tend to be volatile so the headline number can be skewed.  As such economists prefer the core rate as it’s deemed more reflective of general price levels.

That’s all well and good in a classroom but in the real world where we are dependent upon our cars to get to and from work and food to sustain our existence.  Ignoring food and energy to claim there’s no inflation is at best naive and at worst a blatant lie.

Current inflation goes beyond the volatile food and energy sectors.  Consider the following:

  • COPPER:  Prices that ended 2008 at $1.30/lb are currently at $3.40/lb.  Unlike gold and silver – the so-called precious metals – copper is an input to a variety of household goods from electrical wires to plumbing and HVAC components.
  • PAPER GOODS:  Procter & Gamble has raised wholesale prices for Pampers brand diapers by 7%.  Kimberly-Clark plans a similar increase for Huggies marking the third such move since March.  P&G is similarly pushing through a 5% list price increase on Charmin toilet tissue and Bounty paper towels.
  • SHIPPING/DELIVERY:  UPS plans to raise fuel surcharges by 8% and 14% respectively for ground and air shipping.

And so we have a conundrum.  Look at core inflation and The Fed is right – inflation is negligible.  Look at the headline number, however, and prices are rising.  Why?

Traditional “demand pull” inflation (loosely defined as “too much money chasing too few goods”) is the supply-demand dynamic with which we’re all familiar.  That’s not what we’re facing and one possible reason The Fed tells us all is well.

Less typical is “cost push” inflation – a condition that exists when suppliers face higher input costs and rather than accept lower profits pass costs onto end users.  This is exactly what we’re facing and yet The Fed continues to tell us all is well.

The reason?  Because The Fed is the cause of the inflation and they don’t want to own up to it.  The now infamous QE and QE2 programs – electronic versions of printing money – have crushed the Dollar and eaten away at purchasing power.  Apollo has railed against these programs over and over as printing money to lower rates is an ineffective solution.  High rates are not the cause of America’s economic instability.  Overspending and wasteful spending by our elected officials is where we should be pointing fingers.

Whether The Fed is right or wrong about inflation is an argument in academic semantics.  Prices for the things we need and use everyday are clearly higher.  There’s no debate.  What we should be debating is what policy actions are necessary to implement a strong Dollar policy (instead of the lip service paid to it by every Treasury Secretary) to stem the decline of our currency.  Serious issues call for serious people and serious measures.  Until we’re ready to be serious we can enjoy The Fed’s zero inflation joke.  The problem is the joke is on us.