An Economic Mystery

Something has been going on for years in the economic realm that is unexpected and unexplained. It is really important and no one – and I mean absolutely no one – has a clue why it is happening. This mystery is a surprisingly subdued consumer price inflation. It is a world-wide phenomenon, except of course in countries like Venezuela that have sadly mismanaged their economies. One sometimes reads purported explanations by economists but they always fail one crucial test. What they predict will happen next never does, and indeed often the exact opposite occurs.

Even now, when producer prices are generally rising and developing economies are prospering, this condition remains essentially unchanged. It is always about to change “tomorrow”, but tomorrow comes and either nothing changes or the gap becomes even more pronounced. Take the euro zone for example. In May, the year-over-year producer prices rose 4.3%. But simultaneously in May the year-over-year consumer prices actually dropped from the April level of 1.9% to 1.4%.

The Fed is perplexed. The financial community is unable to predict future conditions so it is constantly having to defer long-term commitments. The bond market is becoming schizophrenic.

No one like inflation. It can ravage assets. But when inflation appears to have miraculously disconnected from the supply/demand cycle, all the classic economic rules of thumb go overboard. This leads to the worst possible condition: uncertainty.

Personally, I think that some as-yet undiscovered factor or confluence of factors is acting like a dam, holding back the normal flow of economic consequences. This will eventually burst and we will get a sudden spike in inflation just as we did in the 70s. Whatever is the case, this situation is clearly unstable.

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