Inflation and yield

What’ going on with inflation?

The U. S. Fed and some other world major central banks haven been printing money since the starting of this financial crisis in 2007. Many economists and central bankers worried inflation and inflation expectation. Market had pushed the price of gold, typically as hedge of inflation, to record high last year. Gold prices have since came down over 10% as the crisis subsiding.

Inflation numbers in North America, as I am familiar the most, have been incredibly low and stable around the 2% targets thanks to the effort by the central banks’ policy. However, virtually all of the people I have talked to about the inflation feel that the inflation is high. So why the inflation measures do not agree with what people’s feel of inflation pressure?

First of all, as I pointed out in an early note, the financial crisis and the ensuing economic recession would have created a huge deflation if there had no rescues from the central banks via exceptionally easy monetary policies. The depression in 1930s had almost 50% deflation within less than five years. As a result, the accommodative monetary policies counteracted the deflation we would otherwise experience.

Second, although overall inflation measures are low and stable, there is a tilt of inflation in various consumer products. For example, inflation in food is relatively high; however, some electronics have low inflation and some automobiles are even deflationary. I bought a car at price $37,000 last year. The same model cost me $39,000 ten years ago.

Third, some inflation is hidden in the sense that we pay the same price on a same product but with less quality. Quality product in the past has yielded a lot of margin to producers today so that they sell them at the same prices with reduced effort.

In conclusion, there is a disconnection between the inflation as measured and the real inflation. The inflation we measured has been stable. Therefore, I do not worry about inflation as far as the number is concerned. To protect yourself from suffering real inflation, buying gold may not be the smartest way. If we can take advantage of the tilt in inflation, then investing in brand retail stores might be a better choice.

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