Inflation Frustration

You don’t have to open the Wall Street Journal to know that prices are rising. Just fill up your car at the nearest gas station, then do a quick shop at the grocery store and you will find that you have a few less bucks in your wallet than you might have had a few years ago. Still, when the front page of the nation’s premier business news source is emblazoned with a front-page headline, “Inflation, Spanning Globe, Is Set to Reach Decade High” (By Andrew Batson), it does catch investors’ anxious eyes.

Way back in 2003, when Alan Greenspan’s Federal Reserve was keeping interest rates at 40-year lows, there were some peeps from the inflation hawks. Their fears were that while the Fed was busy worrying about deflation, that they may be sewing the seeds of future inflation. During that time and well into 2004, Mr. Greenspan maintained that inflation is “not likely to be a serious concern” and therefore, the Fed can be “measured” in its approach to raising short-term interest rates. To some extent, he was right-inflation was not a concern then, but four years later, your dollar buys you less than it did at that time.

To understand how prices started moving up, it is important to consider how they stayed so low for so long. In essence, the advent of globalization was the champion of the low inflation years. The events that allowed India, China, and so many other countries to become part of the global supply chain for services and manufacturing, as well as the transformative nature of technology and economic integration, kept prices low and helped consumers in developed nations purchase lower cost goods from developing countries and expand their already-high standard of living. The drop in prices was a direct effect of competition and manufacturing advances from emerging (mostly Asian) economies.

But things are evolving overseas – demand is still strong, but the exported downward price pressures are abating. As a result, the International Monetary Fund recently said that “consumer prices in the U.S., Europe and other rich countries are projected to rise 2.6% this year, the highest inflation rate since 1995.” While the overall level may not be terrible yet, the message is clear: the fruits of globalization may be behind us, not ahead of us. That said, there are mounting cases of a new syndrome that is spreading: I like to call it “inflation frustration”. I have a feeling this malady will be with us for some time to come.