At first, inflation feels really good.
Money is cheap, so everybody has some. And if they don’t, they can always borrow it — because inflation usually comes at the end of a virtuous cycle of strong growth and low interest rates.
All that cheap money makes corporate profits look bigger, and those low rates encourage further expansion — of both business investment and consumer debt.
Then things get ugly.
Inflation usually first shows up in commodity prices — the stuff business use to make the stuff we buy. You know: Oil, steel, metals, etc. Rather quickly, having money doesn’t feel as good as it did just a short while ago, because everything costs more. To make matters worse, the Fed has to respond by jacking up interest rates — so now, not only does everything cost more, but it costs you more if you need to borrow money to buy stuff.
So for a while, we get in a rut where everything is more expensive, and nobody has the money to buy anything, anyway.
Inflation is the crack cocaine of the economy.
Over at The Daily Reckoning, some folks worry that right now, we might be feeling the great high inflation gives on the first hit. Read:
Consumer prices rose a half of a percent in March. This puts the annual rate at 6% – if March levels persist. That is a lot more than the 1.7% reported last year and nearly twice what economists expected. But it certainly wouldn’t impress anyone from Zimbabwe. Even in America, a few years from now, we’re likely to be nostalgic for it.
The rise in inflation levels should be good news. It means demand for goods is increasing so much, supplies can’t keep up. Or does it mean that supplies of money are increasing so much that supplies of goods can’t keep up?
Nobody seems to know.
Yesterday, investors couldn’t make up their minds. Business profits that are ‘better than expected,’ higher exports, more jobs…and now rising inflation rates – is this cause for celebration, or suicide?
They’re right, nobody does know — it’s just too soon to tell. And to be honest, TDR is devoted to professional doomsaying. But sometimes, the doomsayers are right.