Today’s inflation surprised to the upside. I see almost no bright spots, inflation rose across the board, and only one component, recreation, has a trailing 3-month annual-adjusted rate below 2% – recreation price is growing at only 1.6% annual rate. On the other side transportation cost is growing at 22% annual rate.

Do we need a better illustration that people spend money on what they need and cut on things that they want but don’t need? Recreation business has absolutely no pricing power.

Whenever we speak about inflation we need to recall what great economist David Rosenberg said:

Inflation is first and foremost a lagging indicator

It means that today inflation is echo of last year economy. Today’s state of the economy has no effect on inflation whatsoever.
Inflation is impossible without solid growth of real income and/or borrowing. Nobody has any damn interest what the producer cost is, the only thing that matters for inflation is do people have money or not.

While income growth was good but not great the borrowing was still exceptional. Look at personal consumption expenditures: growth was choking in October and December. Look at the compensation cost data: the rate of growth is getting slightly slower. Look at MEW: people continued to tap the home equity at alarming rate in Q4’07.

Based on above my prediction about inflation is following. Take this graph of MEW from CR post:

MEW

Once this graph falls into normal historic range of 2%-3%, few months later all the inflation will be gone. Completely.

Another angle to look at the inflation is like that: inflation means money get cheaper. Look at today Russ Winter blog: the main topic of this post is that price of money is going up. Mortgage rate is up, the cost to insure mortgage bonds is up, cost to finance the car is up – i.e. there will be less money in the economy once all borrowers will have to scale down on how much they can afford to borrow.

I give inflation another year, and I think I’m very generous

Of course, if our government manages to completely debase the currency the inflation will not only increase but it will turn into hyperinflation. When I see that happening I will change my mind