The Great ‘Flation’ Debate– Pick Your Poison: Inflation, Deflation, Stagflation, Hyperinflation… or, Dreaded Panflation….

Inflation is when you pay fifteen dollars for the ten-dollar haircut you used to get for five dollars when you had hair. ~Sam Ewing

Like everything else in the economy, it works until it doesn’t. And then bad things happen. ‘Flation’ by itself is not in the dictionary. However, when adding prefixes to ‘flation’, various words are created which appear often in economics, for example: inflation, deflation, stagflation, mass inflation, hyperinflation… and the dreaded panflation. 

Inflation has a corrosive effect on business performance, undermines profits, encourages under-investment, and distorts resource allocation. In the article ‘Why Companies Should Prepare for Inflation’ by Ulrich Pidun, Daniel Stelter, and Katrin van Dyken write: Despite near-term deflationary pressures in at least some developed economies, especially those that are carrying high levels of debt, we think that today’s business leaders should really be  worrying about the threat of inflation. In many respects, the current economic condition is a perfect breeding ground for inflation.

The loose monetary policy of many central banks, extremely low-interest rates and unprecedented quantitative easing schemes that have strongly inflated the monetary base and central banks’ balance sheets. At the same time, ongoing fiscal-stimulus packages have left many governments with huge debt levels, which they may be tempted to inflate away.

Although, higher inflation rates can appear to be beneficial but, on the contrary; continued inflation destabilizes the economy, discourages productivity growth, leads to inefficient capital allocation, depresses company valuations, and carries the seeds of future recessions. That’s why senior executives need to start now, to think through the consequences of inflation on their business, understand the company exposure, and prepare for an inflationary scenario that may materialize sooner than many expect…

In the article Which Flation Will Get Us?” by Gary North writes: There are five flations to consider: deflation, inflation, stagflation, mass inflation, hyperinflation, and we had better consider all of them. We should always keep in mind the fact that there are two ways to define flation: (1) as a change in the money supply; (2) as a change in the price level. Most of those who forecast deflation have in mind price deflation.

Price deflation can come through the free market, and it results from steady increases in economic output in an economy with stable money: More goods chasing the same amount of money. On the other hand, monetary inflation produces price inflation. If the central bank expands the money supply, prices will rise. The expansion of money by the central bank is the source of economic booms, and specific asset bubbles.

The expansion of money briefly lowers the interest rate, and for as long as the Federal Reserve creates money, we will have price inflation. But before we get to this, we will suffer from stagflation. This was the burden of the 1970’s. There was monetary expansion and massive Federal deficits. That combination of events was dubbed stagflation. The potential for economic stagnation in today’s world is obvious. Just about every mainstream economist and forecaster is predicting slow economic growth next year.

The mass inflation phenomenon appears when the Federal deficit cannot be covered by private investment and purchases by foreign central banks.  Mass inflation is defined as double-digit price inflation above 20% but below 40%. No industrial nation has seen this except after a major military defeat. The worst-case scenario is hyperinflation, which ‘Ludwig von Mises’ called the crack-up boom. It cannot last long because the currency system is rapidly destroyed, and it no longer serves as a tool of economic calculation.

Just think about it (or maybe don’t); the value of money becomes worthless. No modern industrial economy has suffered this since the recovery after World War II. Now, these are the options; pick your ‘flation’…

In the article The Devaluation of Everything–The Perils of Panflation by ‘The Economist’ writes: Price inflation remains relatively subdued in the rich world, even though central banks are busily printing money. But other types of inflation are rampant, thus we have ‘panflation’. Panflation needs to be recognised for the plague it has become, for example; take the grossly under-reported problem of  size inflation, where clothes of any particular labelled-size have steadily expanded over time.

Estimates by ‘The Economist’ suggest that the average British size-14 pair of women’s trousers is now more than four inches wider at the waist, than it was in the 1970s. In other words, today’s size-14 is really what used to be labelled a size-18; a size-10 is really a size-14. (U.S. sizing is different, but the trend is largely the same.) But when three out of four American adults and three out of five Britons are overweight, the danger is that size inflation reduces women’s incentive to eat less.

Meanwhile, food-portion inflation has also made it harder to fight the flab. Pizzas now come in regular, large and very large. Starbucks coffees are Tall, Grande, Venti or (soon) Trenta. Small seems to be a forbidden word. Inflation is also distorting the travel business. A five-star hotel used to mean the ultimate in luxury, but now six and seven-star resorts are popping up as new hotels award themselves inflated ratings as a marketing tool.

‘Deluxe’ rooms have been devalued, too; many hotels no longer have ‘standard’ rooms, but instead offer a choice of ‘deluxe’ (the new standard), ‘luxury’, ‘superior luxury’ or ‘grand superior luxury’. The value of frequent-flyer miles is also being eroded by inflation. Some other strains of inflation have more serious economic effects. One example is academic grade inflation, in Britain the proportion of ‘A’-level students given ‘A’ grades has risen from 9% to 27% over the past 25 years.

Yet other tests find that children are no cleverer than they were. A study by Durham University concluded that an ‘A’ grade today is the equivalent of a ‘C’ in the 1980s. In American universities almost 45% of graduates now get the top grade, compared with 15% in 1960. Employers are themselves distorting the jobs market with job-title inflation, which has recently accelerated because a fancier-sounding title is cheaper than a pay rise.

Firms are awash with an excess of chiefs and directors, such as Director of First Impressions (receptionist) and Chief Revenue
Protection Officer
 (ticket inspector). This is not just a laughing matter. Job-title inflation has economic costs if it makes the jobs market more opaque and makes it harder to assess the going pay rate. Inflation of all kinds devalues everything it infects. It obscures information and so distorts behaviour.

A former German central banker, Karl Otto Pöhl, compared inflation to toothpaste: easy to squeeze out of the tube, almost impossible to put back in. The usual cure, monetary and fiscal tightening, will not work for panflation. Women will never squeeze back into their old clothes unless they reject size inflation. Instead, it is time for everybody to tighten belts (literally) and fight all sorts of inflationary flab.

In the articleDirector of First Impressions, Startbucks Trenta and the Inflation of Everything by David Nelson writes: An article in ‘The Economist’ titled ‘The Perils of Panflation’ writes; consumer prices and waist-lines are not the only places where inflation is a concern. From the article, here are my favorite examples of non-price inflation:

  • Grades: In U.S. universities almost 45% of graduates now get ‘A’s, compared with 15% in the 1960s.
  • Beverage Sizes: Starbucks recently added the ‘Trenta’ size, which is almost one full liter of coffee. According to the ‘National Post’ this is larger than the capacity of the average adult stomach.
  • Job Titles: Doesn’t it sound cool to be ‘Director of First Impressions’? Better than ‘receptionist’ at least.

In the article “China Has a Pork-Flation Problem by Uri Friedman writes:  The news that China’s government will try to tame inflation by releasing pork reserves from freezer facilities, and subsidize live pigs in large farms might reasonably strike you as bizarre, but as The Wall Street Journal explains, the move actually makes sense. China, after all, is the pig capital of the world.

The country is the world’s biggest pork consumer, with the average Chinese person eating about half a grown hog each year, and China produces more pigs than the next 43 pork-producing countries combined. Furthermore, volatile pork prices are perhaps the most important contributor to inflationary pressure in China. Because China’s favorite meat is, by one estimate, the single largest component of China’s Consumer Price Index (or, as some call it, the China Pig Index), which measures the change in price of a basket of typical household consumer goods.

The government is now trying to boost supply to meet demand, the Journal notes, but its stockpiles represent a tiny fraction of China’s annual pork consumption of 50 million tons… If China can’t get inflation under control, it risks undermining economic growth and social stability…

Bad things happen when a lower dollar fosters inflationary pressures and, according to some economists, rising inflation and rising interest rates are likely to become a rally killer sometime soon. A chief measure of price inflation is the inflation rate, which is the annualized percentage change in a general price index (CPI) over time.  

Economists generally agree that high rates of inflation and hyperinflation are caused by an excessive growth of the money supply. Views on which factors determine low to moderate rates of inflation are more varied. However, the consensus view is that a long sustained period of inflation is caused by money supply growing faster than the rate of economic growth.

According to some experts: The U.S. dollar is turning into dust– Gold and silver prices have soared. Gas prices are outrageous. Yet, ‘official’ inflation is said to be low, and the government keeps printing money and running ever so increasing deficits. But, policies designed to fight inflation, unemployment usually clash. Right now, unemployment is high and inflation (real inflation: money supply growth) is essentially non-existent.

Some experts suggest;  It would be best for the Fed to ignore inflation and pursue policies to benefit unemployment. Then, if inflation begins to get out of hand, it can easily be reigned in once we’ve seen an improvement in employment. What we don’t want to see, though, is a period of stagflation, where the Fed loses control of inflation while the economy stagnates. High unemployment coupled with inflation are the death knell for any economy…

We live in an interdependent world and we must reckon a balance between developed and developing markets, and between revenue growth and managing inflation.