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Saturday, March 19, 2011

Inflation

After the stimulus bill was passed two years ago, I have been expecting a rapid rise of inflation. Then I found out that much of the money was not to be spent until 2010. This was a smart move politically. In the past, the effects of spending like this would be felt 6 to 9 months later. In other words, the fall of 2010 would see an improvement in economic activity and the inflation would not show up for another 6 months to a year after that. This has not worked out the way it was expected to. The economy has not reacted to the stimulus and inflation is only showing up in the commodities market. (So far)

I still believe that high inflation is coming our way. However, what some experts are saying is that what is holding it back is the high unemployment. After all, if a significant portion of our population is out of work, the amount of money flowing is curtailed. The goods are still available, but the extra supply of money is not reaching the population. Hence only a little inflation.

This concept has some merit, although even if true, this will only postpone the inevitable. Sooner or later, the spending has to catch up with us. What I suspect (And some experts also see) is that when inflation does start up, it will be very rapid. I had expected that it would start slowly with interest rates going up over a period of a year or two, then begin to take big jumps. Interest rates will probably be a lagging indicator. Commodity prices are an early indicator and they are already making upward moves.

If we are going to see a rapid rise in inflation, I would expect that it would begin sometime later this year or early in 2012. A year and a half to two years after the spending began to really kick in. It is difficult to tell if the rise will be so steep as to cause the problems that I wrote about in recent posts, but it should be enough to at least rival what happened in the late 1970’s. As with any prediction, I can be full of it. However, if you are worried about a rapid increase in inflation, it is best to begin to make your preparations today and plan to be ready by the end of this summer. Well, you can’t really be ready, but better off than you would be if you did nothing.

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