[FoRK] Is Inflation really at 10%?

Bill Stoddard < bill at wstoddard.com > on > Wed Dec 6 08:32:57 PST 2006

Simon Wistow wrote:
> Read this, don't know enough economics to comment on it, thought I'd 
> throw it open to discussion. 
> 	http://www.clairewolfe.com/wolfesblog/00002320.html
> I mean money's /kind of/ like religion ... :)
Not everyone has the same definition of inflation.  And most people 
don't know that their definition of inflation is not the only definition 
of inflation.

If you are really interested in the topic, dig into Mish blog archives:

Also Check out John Mauldin's  "Outside the Box" article (link not 
handy, google it). The part I post here is directly relevant to your 

Volume 2 - Issue 46
August 7, 2006

The Invisible Hand's
Impressive Work
by Louis-Vincent Gave


*3- The Third Piece of the Puzzle: Discontinuous Inflation*

The ever-optimists in us want to believe that, for any given problem, 
the market, when left alone, will typically find a solution. The good 
news is that the birth of the platform company model, and the trend 
whereas Western companies say "we take the profits, you can have the 
jobs" has been so recent, and yet so powerful at the same time, that 
most governments have not had a chance to react to it (yet?). The market 
has been left free to do what it does best: adjust to new realities.

Assuming that we are right in our statement above that "the rich keep on 
getting richer". Then it follows that whatever the rich buy should be 
going up in price much more rapidly than what poorer people buy (for 
there will be more competition for the goods/services that rich people 
buy). Incidentally, this has been one of the longest running themes of 
GaveKal Research (Charles first started grumbling in 1999 that "it has 
never been so expensive to be rich"!).

As Anatole wrote last summer: "At its simplest, therefore, the 
disagreement over "true" inflation simply reflects people's tendency to 
focus on prices that are rising and forget about the ones that are going 
down. But the extent and persistence of the divergence between service 
and goods prices in the past decade also suggests a less obvious and 
more important story in three parts.

The first part of this story relates to China's entry into the global 
economy. By becoming the workshop of the world, China has pushed down 
the prices of all mass-produced manufactured goods. The virtually 
limitless supply of cheap labour and capital in China, and the chronic 
mis-allocations of capital will ensure that manufactured goods continue 
to get cheaper, not only in Britain but around the world.

But the relentless downward pressure on manufactured prices from China 
has resulted in a second effect which is less widely understood, even 
among economists: cheap imports from China have actually pushed up the 
prices of many goods and services which the Chinese cannot or do not 
produce - either because they lack the resources (for example, oil) or 
the legal infrastructure (financial ser vices) or simply because some 
things cannot be traded (for example, housing, healthcare and education).

People who see China purely as a source of downward pressure on prices 
forget that overall inflation in any economy is essentially determined 
by the availability of money. If monetary policy is successfully run (as 
it is in Britain) to produce an overall inflation rate of 2%, while the 
prices of manufactured goods are persistently falling by 3 or 4%, prices 
elsewhere in the economy must rise faster to maintain the 2% average 
inflation rate.

In this sense *the ever-cheaper consumer goods from China have created 
more leeway for other prices in the world economy to go up.* This effect 
has been particularly visible in the prices of goods and services which 
the Chinese are ravenously consuming but cannot produce themselves - for 
example oil, financial services and luxury property around the world.

Which brings us to the third, and most surprising, part of the inflation 
story. As the prices of financial *services and luxury goods are driven 
persistently higher, service-producing countries such as Britain get 
richer relative to countries which specialize in manufacturing*. And 
within Britain, the rich, who tend to work in high-end service 
industries which are relatively unaffected by competition from Asia, get 
richer, while the poor, who tend to work in industries more exposed to 
cheap-labour competition, get relatively poorer. For the lucky bankers, 
lawyers and, yes, even economic analysts, who are benefiting from this 
seismic change in the structure of the global economy, there is, 
however, a sting in the tail. While we are getting richer, the high-end 
services, most obviously housing, travel and private education - on 
which many of us spend a disproportionate share of our incomes are 
becoming more expensive, because of the very same global trends which 
are making us relatively rich.

That is why, even as inflation remains almost nonexistent, the talk in 
London's bars and restaurants is of galloping prices. As Charles has 
claimed for years, being rich has never been so expensive. And *staying 
rich is going to get more exorbitant by the day*."

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