The inflation debate is one of the most widely contested in the world of finance. Many believe the mainstream headlines, failing to truly grasp what is really taking place. The easiest narrative to buy is that the central bank simply prints money and hence price go up.
If that were the case, how come 20 years of QE in Japan never resulted in inflation. That country has seen serious bouts of deflation. It was only after the shutdown of the global economy along with the total upending of the supply/demand equation that prices started to rise.
This was true throughout the world.
To me, a large part of the equation going forward will be technology. How will this impact prices and, equally as important, wages.
In the US, wage growth was strong according to the latest reading. The projection for the economy throughout 2026 is also positive, over 5%. Of course, we will have to see if this turns out to be the case.
That said, there might be a disconnect upcoming. I wrote about the shift from labor to capital extensively. With automation, capital takes on a larger role. That means we can have economic productivity increasing while jobs (wages) decrease.
As we can see, there are many variables that enter the picture. This is a lot more than simply "money printing".
Many of the younger generation does not recall when things that are presently free carried a price tag. In many instances, it was a large one.
For example, it is taken for granted that people can call anywhere within a country for free. Using a mobile in many developed nations, there are no long distance charges. This was not always the case. It was not uncommon for households to have a $50-$100 bill if family was spread out. Businesses ran up bills much higher.
In other words, this use to be a major expenditure. Today, through social media applications and video conferencing tools, we can interact globally basically for free.
The government prints the official statistics for consumer and producer prices. These are the numbers that financial analysists and investors utilize. At the same time, the central banks produce their own numbers.
Over the last few years, a private, independent metric was created. This is called Truflation. Here is what it is:
The Truflation CPI Index utilize modern consumer and spending data sets along with cutting-edge technology to deliver the world’s only verifiable daily inflation indexes. Traditional century-old metrics lag an economy reshaped by Covid-19, money-supply growth, and fragile global supply chains, yet the markets continues to rely on old metrics established over a century ago.
This is a daily tracker as compared to the quarterly reports put out by the governments. At the moment, the inflation rate is listed far below the 2.7% rate the US government posted for the economy.
How is that made up? It tracks 27 different categories, providing a daily update.
Many feel that inflation is bad and deflation is good. This is driven by the idea of a decline in purchasing power as prices rise.
What is often overlooked is the wage component to the equation. If prices are increasing at a pace slower than wages, then it is not a problem. Often, this is not the case.
The problem is that deflation is a more dangerous animal. We only need to look at Japan and its "lost decade" for evidence. The country is now in its 4th lost decade. Things are stagnant, mostly due to demographics. Many countries are facing this same situation.
Technology will help on this end. If it weren't for AI and robotics, the discussion would center around the demographic driven economic collapse we are about to encounter. This will help to offset job losses due to aging.
However, there is another issue. If the economy is crashing, that is deflationary. The business cycle turns downward, driving prices with it. Unfortunately, wages tend to hit a ceiling, often moving down on average due to layoffs. Of late, we saw a lot of announcements regarding companies letting people go.
The present employment picture is mixed at best.
So where are we going? This is hard to predict. The administration will say the economy is doing well (they all say that). Many stock market proponents will echo the same sentiment, looking to push equities higher. Unfortunately, the markets seem to be heading in the opposite direction.
Of course, the markets are not the economy and they can often be disconnected. There are many reasons why they go down or up and fundamentals are rarely the major driver.
The US and China are the two dominant economies. How well is the latter doing is another question that is hard to answer. Like most governments, the Chinese want to hide any bad news so as to project strength.
We will get the next CPI read from the US government in April. That is a long time to wait. For now, Truflation has things crashing. It is worth watching this indicator to see if it reverses throughout this month.
