Tuesday, April 20, 2010

Prices Surging in Britain Likely Foreshadow the Same in the U. S.

Bloomberg.com reports that U.K. March Inflation Accelerates More Than Forecast. Here are some details:

Consumer prices climbed 3.4 percent from a year earlier, compared with a 3 percent increase in February, the Office for National Statistics said in London today. . . On the month, prices increased 0.6 percent. . .

“We have upward pressures from commodity prices and we have yet to see full impact of past weakness of sterling filtering through,” Nick Kounis, chief European economist at Fortis Bank Nederland NV in Amsterdam and a former U.K. Treasury official, said in a telephone interview. “We’re going to see above target inflation persisting in coming months and our base case is for the Bank of England to raise its rate in August.” . . .

Inflation accelerated due to higher prices for gas, fuel, air transport and food, the statistics office said. Transport costs rose 11.3 percent in March from a year earlier, the most since the series began in 1997. Overall inflation has exceeded the central bank’s 2 percent target for the last four months. . .

Core inflation, which excludes costs of energy, food, alcohol and tobacco, unexpectedly accelerated to 3 percent in March from 2.9 percent in February.

The U. S. has been following the same policies following the same sort of housing-centric financial bust as the U. K. The U. S. leading economic indicators were reported yesterday to be at a record, and up more than anticipated. Fed and Federal economic policies remain pro-growth. Why should we not expect the same sort of price increases here that Britain is now seeing?

To that end, gold is rebounding on schedule from its options expiration swan dive two trading days ago. Growth precious metals such as silver and platinum are up more than gold on a percentage basis. Over a full boom-bust cycle, structurally gold is signaling that it will end up stronger than those metals, which are already up much more from their 2008 lows than is gold. Short-to-intermediate term, however, gold:silver and gold:platinum ratios on a 5-10 years trading basis favor silver and gold.

In the 2009 book "Animal Spirits" by Akerlof and Shiller (Democrats), these noted economists continue to promote the benefits of price illusion in keeping the proletariat content. In other words, a wage increase of 2% with general price increases of 4% is supposed to be better accepted by the great unwashed than a wage decrease of 1% and a general price increase of 1%.

This is of course absolutely true for debtors when the principal is unadjusted for inflation. The problem of course is the floating interest rate and the general need of U. S. debtors to stay in debt; thus in effect the principal tends to float as well.

The main point though is that government policy is favoring inflation from a variety of directions. Interest rate increases are coming. The longer they are delayed, the more the precious metals have a tailwind.

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