Inflation is caused by excess money chasing too few goods and services. A symptom of inflation is rising prices. Separating cause from effect isvery important if your goal is to understand something. Merely being
aware of something is often insufficient to take effective action(s);
it is only through understanding that specific tactics can be
properly assembled into a coherent strategy. So, let’s see if we can
move beyond awareness of rising prices and into understanding of the
causes so that we can properly prepare our portfolios, and communities,
for what’s coming next.
In this article we’re going to dissect, let’s begin with the title:
"World inflation fuelled [sic] by surge in farm, energy prices"
Well there’s our first problem right there. This title displays a
lack of understanding about inflation on the part of the editor,
journalist, or both. A better title would have been "Inflation reflected by surge in farm, energy prices." The word "fueled" implies causation. As in, "His anger was fueled by the waiter’s rude manner."
So I give this article low marks for perpetuating the myth that inflation is caused by rising prices.
Next, prices sometimes rise, and legitimately so, because of a shortage
in supply relative to demand. Certainly there’s been a relative
shortage of wheat (bad harvests) and corn (ethanol production), so
we’ll have to account for that in our assessment of world food prices.
But can this entirely explain food prices? For wheat and corn, I
suppose it could, but what about all the rest of the grain types?
Let’s see how the article ‘explains’ this dynamic to us (all emphasis below is mine):
PARIS (AFP, April 10, 2008) – A resurgence in worldwide inflation in the past several months has been principally powered by rises in the price of food and energy, exacerbated by galloping demand in fast-growing emerging market countries.
Nope. Again they go with the ‘explanation’ that inflation is powered by prices. That’s like saying a fast car is powered by its speed.
Persistent inflation is, everywhere and always, a monetary
phenomenon. Price spikes rooted in a supply-demand imbalance tend to be
short-lived as new supply comes to market in response to higher prices.
Our food and fuel situation is anything but short-lived at this point,
and so we must look to other causes.
The price rises reflect potent demand in emerging
market nations, where surging economic momentum requires more and more
basic commodities to meet production targets and to satisfy desires of
better-paid workers and consumers.
World-wide supply, hampered by constraints on resources and production capacities, is struggling to meet growing demand, sparking tension on international markets and a rise in prices.
Okay, here we get some explanation in the form of a supply-demand
statement. But, unfortunately, it does not include any helpful data
(such as information that would allow us to assess whether there really
is a shortage of, say, rice) that might help explain a nearly 200% rise
in prices over the past year.
So low marks here as well.
However, they do much better when discussing the impacts of inflation, as seen here:
In general, significant inflation complicates planning by individuals,
business and governments because of the extra difficulty in judging
future values and risk. Consequently it increases the costs of carrying
out transactions and is a disincentive to investment.
Experience shows that when inflation takes hold, consumers and
businesses begin to anticipate future price increases, thereby
accelerating the underlying inflationary pressures.
Monetary authorities fear in particular an "inflationary spiral"
that could have its start in emerging nations, the current drivers of
the world economy and where governments tend to favour growth over the
fight against inflation.
Great stuff there. By acknowledging that inflation is exacerbated
by the psychology of ‘expectations,’ we finally have an explanation for
why authorities work so hard to understate inflation and misrepresent
its causes. By telling people inflation is lower than it is, and by
offering up symptoms as causes, expectations can be kept "under control." This is actually important work, because once people lose faith in their currency, inflation that was merely painful can rapidly become hyperinflation.
My analysis is that there is still a strong disincentive within the
press to explain the actual causes of inflation. As the Crash Course
makes clear, inflation is not at all hard to understand; it is a
deliberate act of policy. Weak, short-sighted, self-serving policy,
perhaps, but policy nonetheless.
While I am not terribly surprised that the true cause of inflation is
consistently misrepresented in the press, it is not my intent to try
and fix that particular problem. Rather, I simply want you to be aware
of the reasons that we are in an inflationary spiral, so that you can
take steps to protect yourself and your savings.
In brief, those steps are all some version of getting out of a depreciating fiat currency.