Thinking on Artificial Inflation
A quick thought on Inflation; A question has arisen in a small dialogue today of whether interest rates should be raised due to inflation? One thought, which kept coming to mind, was the delicate issues with the housing bubble. Some in the group did not believe it to be a meaningful factor others were worried that a rise in interest rates would be met with a big reaction in the stock market and also the housing markets in many regions in the United States?
Some of us were concerned that the inflation which was being witnessed was not due to strong consumer need in the market place where companies are able to charge more but because of artificial wholesale inflation caused by fuel prices which was artificially driving up costs of every thing else, already though we have had a steady decline in the diesel fuel prices for five straight weeks now it has been small with the average price nevertheless at $2.00 which is high by any relative historical perspective.
When inflation exists in items which are not consumer electives but rather regarded as necessities, things like food, milk, fuel, etc. which excursion prices up in the markets they effect such as restaurant prices, catering sets, hotel sets, private school tuition, etc. from food these are not consumer electives but perceived necessities, which also excursion up costs in non-electives. Now if you take out the ‘factored in’ costs of the food or fuel for the increases and the expectations of consumers to higher prices due to this fact for example the increased costs of fuels a 6.7% increase in cartage for good to market to offset fuel costs and let’s say that 25%-100% of that is fear factor or media hype scare to justify it. Then you could say the actual costs of the increase should have been 3.33% to 5.66% but due to the unknown character of the impending melt down of the Saudi Arabian government and royal family and companies fearing the worst the price increase would be much higher than the actual. Both to protect the transportation company from financial ruin with low earnings next quarter and because they can raise prices due to perceived civil war in that vicinity or further unrest as Iraq’s aspects are not fully turned on however. Such that already though for example diesel came down this week by 1.1% in line with a steady over all average decline from the high of five weeks the prior, would make little difference and although the most competitive companies in shipping will be lowering rates others may not as to make up for lost ground by being caught off guard when reserves ran low and having to buy high at the same time the US military save was stock piling in case of emergency and could not provide to let go any supply to the private sector to temporarily stabilize prices.
When you look at this artificial inflation caused by oil prices you have to take this into consideration in the over all inflation situation, and allow for things to re-stabilize things before raising rates to curb so-called inflation. The inflation rates must be modificated and taken out the inherent additional costs in everything due to the increased costs in fuel, a necessity.
So do you raise rates in times of unrest and fear and instability or do you wait for a bit and allow a few things to come back into perspective and stabilize in a free market setting. If you allow interest rates to slow the flow of monies in all parts of the country now, as many are not getting their fair proportion of the money flow, you will see regions come into harder times as they have not recovered like the areas of supreme money flows near and around Fed edges. Larger cities, which suck money in and allow it to flow in circles need to be modificated first and slowly, but not using inflation data, which is biased due to a spike in fuel. There are very few items, which are not effected by fuel. Also let’s look at water supplies and weather effecting food prices and spikes and factor that out too. Then we can find true inflation and I submit to you it is small enough to call for a stern warning of future scrutiny, but not a raise just however, but a warning to all it will come and could come at any time as needed or required by superior data and to give the Fed back another lever to move in the future if needed to re-stimulate, because as we know when fuel prices stay high for too long we get recessions. As per historical data. As China becomes a user of more fuel, we will see need go up and the supply play catch up and we are 10 years out for fuel cells and hybrids which can perform up to the abilities of reciprocating engines. Russian oil is seven years out, so there is a gap in supply issues and need issues which method we will have higher prices in the future and killing the housing market now is not good as interest rates could considerably do that and cause consumers and middle class America to continue to run redline in credit card debt and higher house payments, fewer use able dollars hurting retail, consequently hurting jobs. Meaning higher fall-out rates, distressed sales and serious issues with income to long-term and short-term debt ratios.
Raise in interest rates>? Maybe?> But be careful we are not out of the woods however. Perhaps a regional outlook might be better? Interest rates in larger growing areas could be raised slightly? for example DC, Boston, LA, Sacramento, Metro NV, PHX, Seattle, etc. But in other areas like Albuquerque, El Paso, rural TX, KS, rural heartland, etc. no raise. But the money will crosses boundaries so it would be imperative that the Fed and the government work together on this to see that low interest small and med sized business loans get to the sub standard markets, a one size fits all is dangerous and as I travel the country I have to beg to differ with some of the information put out in the Beige Sheets, some is incorrect and inaccurate and does not paint a proper picture, the United States is the United States and not the United Countries surely, but a regional outlook and decision should be part of an interim game plan with out flipping the board over and disrupt those areas which are just seeing light at the end of the tunnel. The light is bright indeed, but certainly they should be allowed out of the cave for some fresh oxygen long enough to show their efforts were worthy of a job well done. Pursuit of happiness is best served when you can taste it and understand what it really is once in a while.
Allow parts of America that need the juice to get their filling with a stair step approach to the problems, the real issues with real inflation. We must not continue to estimate inflation as it appears on the surface when the real inflation is much more nimble, different and hidden from view. A sharp pencil approach studied by vicinity to the dynamics of money flow is equally as important to the rise in prices due to the undercurrents of erosion returning Earth to Sea. I am sure when studied more closely you will agree. If not there is a place you can go to discuss such issues.