THE " PRICE " OF INFLATION / SEEKING ALPHA ( RECOMMENDED READING )

The 'Price' of Inflation

June 28, 2010

By Brad Zigler

Real-time Monetary Inflation (last 12 months): -3.1%

Weekends are always exciting here at HAI. Partly, that's because of the excited reactions to each "Inflation Scorecard column." If you haven't come across the Scorecard, it's published in the Desktop space every Friday as a gift to data miners.

In each edition, we publish the week-over-week (Thursday-to-Thursday) changes in key indicators of the U.S. dollar's strength. A quick glance at the Scorecard brings you up-to-date on the greenback's value compared with other reserve currencies, the week's trend in gold as well as gold futures prices and supply gold bullion's correlations with mining issues and stocks in general, in addition to a plethora of other metrics. (As an example, see the June 25 edition, "Inflation Scorecard: Gold Backing And Filling.")

Not everybody's going to get excited about these weekly data points. But the figures do seem to agitate a few folks regularly. The excitement is usually stirred by the chart at the bottom of each Scorecard column. The chart alternates weekly between a long-term depiction of the dollar's monetary inflation and the representation of recent three-month Treasury bills adjusted for monetary inflation.

Notice I qualified the word inflation. We've created a daily metric for inflation of the monetary sort that is published at the top of each Desktop column. If you look at the subhead of this article, you'll see the inflation rate is negative. It's been negative since early May.

That's what gets people—some people—riled. A negative inflation rate just doesn't jibe with their lived experience. Here's what one reader had to say this weekend:

"Those negative inflation numbers are laughable! Have you gone grocery shopping in the last year? I bought a "value meal" at Taco Bell a month ago and it was over $7! Have you purchased gasoline? What about precious metals?

I think there is some serious inflation going on with the things consumers need for daily life; they just aren't being calculated or weighted enough in the official figures. Which is deliberate of course."

That was one of the more civil responses. The reactions from some other readers were more visceral; to wit:

"All the BS from the Government being actively portrayed as "real," without any caveat [sic]. Shame, Shame. Does HAI also buy into the "saved" jobs crap? Grocery, medical and pump gas all up over 10% YOY; my receipts don't lie like the BLS."

Now, about those inflation numbers ...

As much as people love to heap scorn upon the Bureau of Labor Statistics for its inflation calculations, the agency shouldn't be slighted for the numbers at the top of this column or for the pattern reflected in the Inflation Scorecard chart. Those numbers actually come from our proprietary monetary inflation index, which measures the U.S. dollar's global gold purchasing power. There's not a drop of government data in ‘em.

Real-Time Monetary Inflation Index

More important, price inflation isn't measured in the index. There's no basket of goods or services being gauged by these numbers. It's the dollar's world market value that is more directly tied to its relative abundance. In that sense, our inflation index meters the supply of dollars relative to another monetary standard — gold.

The fact that the number at the top of this column is negative reflects the fact that the monetary inflation index is lower than it was 365 days ago. The first reader's plaint about price increases in his local market isn't necessarily inconsistent with monetary disinflation. Changes in the monetary inflation rate regularly precede changes in the Consumer Price Index (see the chart of one-year inflation rates in "The Latest Odds On Inflation Vs. Deflation").

In fact, the last Inflation Scorecard column pointed to a moderation in near-term disinflationary velocity by recapping the week's trend thusly:

"One-year monetary disinflation eased to -2.8 percent from -3.6 percent."

There's a bit of grammatical yoga in that statement. An easing in the disinflation rate is equivalent to stating that the dollar's purchasing power fell for the week. Now, there's an awful lot of distance between the global gold market and a Taco Bell cash register. This minor shift won't make much difference to our reader.

Disinflation has been noted by other observers, too. John Williams of Shadow Government Statistics (www.ShadowStats.com) has reconstructed and monitored M3—the broadest dollar supply measure—since the metric was abandoned by the Federal Reserve in 2006. By his reckoning, M3's annual growth rate turned negative in December 2009 and has been plunging deeper into disinflationary territory by the month. Last month's M3 growth rate was -5.9 percent.

None of this is going to make our reader's value meal any cheaper. But at least he should know that the stage is set for a price break. All the other things likely to attend that break, however, may make his meal indigestible.