Sorry!! The article you are trying to read is not available now.
Thank you very much;
you're only a step away from
downloading your reports.

Different Shades Of Inflation


I gotta do without what!?!

In today's WSJ there is a somewhat cavalier editorial suggesting that the Federal Reserve should step up the pace of rate hikes to stem the rising inflationary tide, which it sees as the only real threat to the U.S. economy. In my opinion, this argument is unfortunately too simplistic for the kind of inflation we are beginning to see.

Inflation can be broadly categorized between "Cost-Push Inflation" and "Demand-Pull Inflation". The first is usually driven by accelerating increases in wage rates and rapid rises in raw material prices. The second is more a function of increases in the money supply, increases in government spending and, somewhat unrelated, rising prices abroad.

Aggressive interest rate hikes tend to work well against "Cost-Push Inflation" because they stunt the economic overdrive pushing rising prices. In an ideal scenario, higher rates cool the economy - and inflation - without doing too much damage to the demand side of the equation.

Higher rates also work against "Demand-Pull Inflation" but the consequences are more similar to forcing an addict to go "cold turkey": the withdrawal symptoms can do as much damage as the drug. An economy humming along on the presumption of the dual government spigots of money printing and money spending, often does not take too kindly to waking up to a dry well.

What we have today is an insidious combination of the two types of inflation, with easy money and easy spending supplemented by rising commodity prices (driven by a variety of exogenous factors), and a conspicuous absence of wage growth. Pulling the plug on easy money might leave the "easy money junkies" without their drugs AND with a call on their debt habit. This scenario might end up being far more unpleasant than the WSJ suggests.
< Previous
  • 1
Next >
No positions in stocks mentioned.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.
Featured Videos