Inflation this year

I wanted to write an article about will we have inflation or deflation. But the reality is there is little debate as to which we will have. Please watch the video in this post on that subject as it is interesting for an economic video. Inflation will start to pick up a bit. It will be uneven as I think agriculture, energy and health care prices, the three largest variable cost of any household, will be greater than consumer prices as a whole. My inflation rate forecast for 2011 is 3.5% but it will feel like 7% because of food, energy and health care increases.  The reasons  inflation is coming is:

  • Rising oil prices. Oil is the most basic commodity which goes into every thing we buy. Everything from transportation cost of merchandise to running machines to produce the things we consume.
  • The Federal reserve is printing money or quantitative easing as it is now called. This is the last resort for banana republics and failed economic regimes. I do not think America is doomed at all, but I do think there is too much fiat money in the air.
  • The US central bank is afraid to raise interest rates as the recovery is fragile. Politically this would not be good for anyone in power and seeing reelection in 2012.
  • Inflation is good for the debt – Inflating the currency reduces the debt and can increase exports based on a falling dollars. It is a subtle form of taxation.
  • Stagflation does happen. I remember it in the 1970s. Do not be fooled into thinking just because we have low growth we can not have inflation. In fact I think this is often the rule. I do not believe in the Phillips curve which showed increases in prices to be inversely correlated with growth rates.
  • Exceptions drive prices. Right now exceptions are for inflation and this will be a self fulling prophecy.
  • In a Knut Wicksell model I think the the marginal productivity of capital is higher than the interest rate. Read about the amazing ideals of the cumulative process of Wicksell.
  • The government has an interest to keep housing prices afloat

Inflation or Deflation video

What this video and tell me what you think. It is song my Merle Hazard and Bretton Woods. Of course these are a play on words. I do not know if this price change will be a one time increase this year or we will have a sustained increase.

Forget the CPI and government statistics, let me know in your own observations have prices increased on basic things you buy. What is your forecast or prediction of the inflation rate? I have noticed food, my biggest variable cost, increased the most. I feel a bit poorer even though I am making a bit more. I am also more cautious with my money.  I just want to make sure that we do not get hit with an economic tsunami and things are stable before I go out and spend my disposable income on more gadgets. One more thing, if given a choice between deflation and inflation I would choose deflation.