Price Inflation Getting More Headlines

Frank Shostak has written a piece for the Mises Institute on price inflation.  He is predicting that price inflation will pick up this year.  He makes the assertion that "it takes about 36 months before changes in the money supply generate a visible effect on the prices of goods in general."  This would mean that the Fed's more than doubling of the monetary base in late 2008 and 2009 would only begin to show up this year.

Whether you agree with this or not, there are certainly a lot of arguments in favor of higher price inflation in the somewhat near future.  The monetary base has gone up like never before and even though much of this new money is sitting at the banks as excess reserves, there is that looming threat that it will be released and massive price inflation will hit.

The most fascinating thing right now is that price inflation is making a lot of headline news, even in the mainstream media.  CNBC has had several segments talking about inflation in the little bit of time I have watched it.  I have also seen stories on popular financial websites talking about inflation.  I will also see the occasional opinion article saying that deflation is actually our biggest threat, but even this is insinuating that most people are viewing inflation as the bigger threat (despite what Bernanke says).

Normally I would be a contrarian and believe the opposite of what the mainstream media is saying, but in this case my contrarian view is that even though many are predicting an uptick in price inflation, I don't think they understand just how bad it could get.

If the banks start to loan out those excess reserves, prices could move higher very quickly.  In addition, the velocity of money or the speed at which money changes hands will play a big role.  Velocity has been low as Americans are fearful of the future and have been trying to save more and spend less.  If people start to perceive that prices will continue to move much higher in the near future, then it gives an incentive to buy "things" right away before losing purchasing power.  This drives prices even higher and can be a bad cycle.

At that point, the Fed will have to slam on the monetary brakes or risk hyperinflation.  I am reasonably sure that the Fed will stop creating money and allow interest rates to rise (a lot).  Then we will experience a very harsh depression and DC will be forced to cut back severely (which won't be depressing at all).

Get your investment ducks in a row now.  Make sure that you are ready for high price inflation.  Make sure that if price inflation hits 20%, that your investments will do well enough to keep pace.  This means that you must have some investments (such as energy and precious metals) that will do really well in a time of double digit price inflation.  And do not count on wages keeping pace with inflation, at least in the near term.