US inflation moderates as Europe deflates

deflated balloon

by Chris Becker

Last night saw the release of two key important metrics in the ongoing fight against deflation in the Northern Hemisphere by the ECB and the Fed.

First, following some very lacklustre Euro-wide consumer confidence figures (something that’s been repeated worldwide), the very closely watched German CPI print for September came in as dead flat – no change, with the yearly figure remaining at a paltry 0.8%

Up next was the Federal Reserves preferred inflation gauge, the price index for personal consumption expenditures (PCE), which is up only 1.5% over the year to August, in a definite downtrend and over two years in a row below the Fed’s target level at 2% – heres the chart from the WSJ:

usinflation

Now, why is this a problem? Lower consumer prices should constitute good news, but the reality is at a macro level this indicates a stark absence of aggregate demand – a harbinger of structural unemployment and/or inability for the economy to grow at a meaningful pace (i.e not just a headline GDP print, but actual prosperous growth)

It seems the central bank mantra of being scared witless by inflation – particularly the ECB which seems to have an overhang of the events in the Weimar Republic given its German-centricity – is pushing them into what could be even worse, deflation.

What is causing this lack of inflation? Wages, where in the US, median incomes have not moved – and former President Bill Clinton knows why:

From CNBC:

“Median income hasn’t gone up for three reasons,” Clinton said. “One is the labor markets aren’t tight enough, and we haven’t raised the minimum wage as we should. And the second reason is we haven’t changed the job mix enough, to raise the median income and have more poor people working into it. The combination of jobs has to pay, on average, higher wages.”

“Gross domestic product growth doesn’t lead to growth in median incomes because company after company takes more of its profits and spends it on dividends, stock buybacks, management increases … and less on sharing it with the employees broadly,” said Clinton …

RealHousehold2013

Slick Willy is on the money. Perhaps the focus shouldn’t be on whether or when to raise rates to stifle the hereforeto absent inflation monster or providing speculators on Wall Street a new $200K car every year, but instead consider how to increase aggregate demand by putting all those unemployed Europeans back to work and paying the middle class of the United States what they’re worth.

 

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Comments

  1. It is a real problem because the rates are under the cover of net interest margin (circa 2.5%) in a credit based money system

    So there is not enough new money (credit) being created to pay the interest bill each year.

    Someone is losing…

  2. “….the reality is at a macro level this indicates a stark absence of aggregate demand….”

    Or maybe….just maybe…..it is a massive lack of confidence in the people who are supposedly guiding us all out of this ‘lack of growth’ problem.
    I reckon folk have had a gut-full and have bailed up…and I don’t blame em. All this economic jargon is all bullshit really. People with no work have no money. People with no trust in a system opt out or give up…and the morons who run the show…….just…..don’t……get it!

    • Without Trust – There Can Be No Transaction! Foundation of selling 101.

      Even a used car salesman does a better job of polishing turds than these losers!

    • “….the reality is at a macro level this indicates a stark absence of aggregate demand….”

      Given world demographics, this is entirely believable … peak demographics, peak prosperity, peak demand ….

      • peak demographics arent that re;evant. marginal decline means less product, so everything should be stable in a per capita manner.

        it’s income distribution, more going to the rich. Every metric shows this.

        if it’s purpose was they are more valuable, thus deserve to be rewarded more, thus consume more, aggregate demand wouldn’t budge.

        That’s not the case, it’s wealth being distributed from those that would consume, to those that hoard, thus the claim on product.. aggregate demand, is diminishing.

      • Yes wealth distribution is a major problem but not necessarily the only one.

        I would argue that demographics matter because the consumption of various age groups is vastly different with the average consumption of younger generations being far higher than those of older generations (child rearing, household formation, education etc etc). 100K people with median age of 65 with have a very different consumption pattern 100K people with median age of 27.

      • The consumption pattern doesn’t matter. It is still demand, it still is the driver behind jobs.

        The quantity of what we create sustains us all, the choice of what we produce is the consumption pattern.

        The claim on what we produce is driven by the cmbination of income and access to debt.

        The punter cannot claim enough of what is consumed, the rich have the claim, and elect not to.

        Thus we won’t continue to produce the margin of what the rich wont claim. We will lose jobs.

      • The consumption pattern doesn’t matter. It is still demand, it still is the driver behind jobs.

        What if the consumption pattern is that aggregate demand is falling? We are at the other end of the biggest population growth period in history.

        The quantity of what we create sustains us all, the choice of what we produce is the consumption pattern.

        What we create is what someone else consumes and vice-versa.

        The punter cannot claim enough of what is consumed, the rich have the claim, and elect not to.

        Depends on your definition of rich…the 0.5% then no. The 10% then yes…but the 10% are by and large the nature of our economy and recent history the elderly.

      • What if the consumption pattern is that aggregate demand is falling? We are at the other end of the biggest population growth period in history.

        well that leads to this statement…

        What we create is what someone else consumes and vice-versa.

        Correct, if the population growth is ending, marginal aggregate demand is declining, but so is marginal aggregate supply, due to population (dis)growth not bringing labour to facilitate supply.

        It’s still a per capita equation, sans-money distribution.

        Depends on your definition of rich…the 0.5% then no. The 10% then yes…but the 10% are by and large the nature of our economy and recent history the elderly.

        OK, bit instead of us producing cars for young men, we’re producing colostomy bags for boomers.

        Jobs just reallocate.

        Aggregate demand falling is when we stop producing cars, and then don’t take up producing colostomy bags.

        Boomers will always latently demand colostomy bags, real demand will fail to arise if they can’t afford it, which once again is an income distribution thing.

        if they can afford it, then no jobs are lost, just reallocated.

      • Correct, if the population growth is ending, marginal aggregate demand is declining, but so is marginal aggregate supply, due to population (dis)growth not bringing labour to facilitate supply.

        Yes, gotcha. However there is a time scale (similar to demographic dividend) when the labour supply will exceed the falling demand (resources for colostomy bags << resources for making car). Essentially boomers still working but consuming lot less. Should give rise to high youth unemployment, atleast in theory. I believe we are at or near this period.

        Once we are past this, then yes I agree.

      • RP is correct on the income distribution, however I would like to add to that.
        The danger we face here is that much of the world has become accustomed to unsustainable levels of growth ( some would call it waste) and it is from this high plateau that we are sliding. A large percentage of people have designed their lives around this false level of activity. Reality will educate many.
        Demographically, the rich are not a large enough cohort to pick up the slack and that is where RP’s comment is accurate….we will lose jobs.
        I am in two minds here……..first up, it is a very healthy thing to have much less growth, even no growth would be good….in a resource conservation kind of way. Then the other thought is on the humanitarian angle….that is a biggie. The chain is so interlinked that the risk is the whole edifice of a stable society will be sorely tested.

        I do believe that many are willingly opting out of the system. People are not stupid, foolish at times , but not stupid. They can see the tears in the financial fabric and are preparing for the worst. That behaviour does not help your ‘aggregate demand’….it destroys it, and it ain’t coming back until the fools at the top start batting for the plebs at the bottom.

  3. Lower consumer prices should constitute good news, but the reality is at a macro level this indicates a stark absence of aggregate demand – a harbinger of structural unemployment and/or inability for the economy to grow at a meaningful pace (i.e not just a headline GDP print, but actual prosperous growth)

    There’s another factor to consider. It’s probably too early for it to be showing up just yet, but the strong dollar, if maintained, is going to kill whatever paltry inflation there currently is. At the same time, it could raise consumption spending and stimulate overall activity in the economy, despite a worsening trade balance. If this scenario sounds familiar, it’s exactly what underpinned the US economy prior to the financial crisis (although we’re unlikely to see the same excesses in the immediate future).

    I get the feeling the Fed will face in an almighty conundrum in the coming years. With China cooling and attempting a structural adjustment, and in so doing dragging down a number of EMs, there’s going to be a strong international impulse to revert to a dependence on US demand. China especially is facing a nasty hangover if it is forced to absorb the losses of its debt binge domestically; external surpluses would help it ‘grow out’ of its debt burden.

    In the US, a strong dollar and widening trade deficits will offer a welcome relief to long-suffering poorer households. But it will require rising foreign debt, which someone in the US must incur, if it is to avoid manifesting as higher unemployment. Aggressively lifting interest rates in the foreseeable future (above market expectations) will result in a rampaging USD bull market, which means more debt or more unemployment (short of some miraculous surge in US productivity) but failing to so may itself foster dangerous bubbles of some description.

    A most unenviable position to be in, I reckon.

  4. Also there is a structural change underway where the marginal profit curve has had two additional layers pushed in between current structure and more local labour.

  5. Peak demographics is absolutely the reason for latent demand. Why? The small group of people who studied this decades ago picked this time in history as a major downturn – and they have siginificantly detailed research based on spending patterns of different age groups…

    That coupled with of course debt dynamics which really just serve to amplify the cycles greatly

    • I think that the debt loosening was in response to the coming slowdown and probably got a bit out of control.