Inflation

Jim Rogers noted something about inflation in the United States which the government could be wrong about. Follow it at this link (http://blogjimrogers.blogspot.sg/2013/10/us-government-lies-about-inflation.html)

Inflation is Global

There is disturbingly frequent upward adjustment in prices where I spend my money. The price of a can of drink at a coffee shop now costs around $1.60 it used to cost lesser just 5 years back. To the careful observer, some can drinks are now packed to 310ml or 300ml vs traditional 330ml. Check it out.

Jim Rogers said something about inflation in the US which is also similar here. Anybody willing to observe will find inflation in other economies like, for instance, the Eurozone.

ECB Inflation Data

The table below is extracted from ECB. (http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/2-31102013-AP/EN/2-31102013-AP-EN.PDF). .

ECB Inflation Data

Table1. ECB Data

 Analysts are screaming for a rate cut as the number is below target. Who will this rate cut benefit?

Statistic is not Real

The metrics that official inflation measure is just a theoretical inflation figure. This theoretical figure is not applicable in most instances. Let me cite an example.

For instance, an office worker who cycles to work will not enjoy the drop in price of pump prices (i.e drop in crude oil prices), unlike another office work who is rich enough to drive to work.

This has to do with income level and wealth level.

Income and Wealth Distribution

Let us look at the Eurozone Income Distribution and Eurozone Wealth Distribution.

Table2. Gross Annual Household Income in Eurozone

In the Eurozone, the average household income is above the majority of the households (median) gross income. The report also mention that “the wealthiest 10% of households hold more than 50% of total wealth”. The report is available from this website (http://www.ecb.europa.eu/pub/pdf/other/ecbsp2en.pdf)

Its means that chances are citizens of the Eurozone are low income, and not wealthy. The numbers look better because outliers are distorting the average. The report also seem to point to it. These are extremely high income earners and extremely high wealth households.

ECB Inflation Weightage

When one “makes enough money to meet the needs”, it means money for food and shelter.

Look at the ECB Inflation Data in Table1 above, we learn that inflation for food is surprisingly under-weighted (193.7/1000).

Low income people don’t have much money to purchase services, but it is over-weighted at (423/1000).

It is counter-intuitive, even go against Maslow Hierarchy of Needs.

Above all else, isn’t cheaper energy better? Isn’t cheaper housing better? They lower long term set up costs of local labour, hence long term pressure on wages.

Interest Rate Cut

The way central banks uses interest rate as a policy tool to keep inflation in check does not necessarily works when it is used to encourage inflation. The rich and credit worthy can borrow, and borrow cheaply to buy assets like stocks, bonds, properties etc,, but others either can’t borrow or cannot not borrow cheap enough to benefit.

In this environment, rate cut creates inflation associated with wealth creation, like rise in investment asset prices like bonds, equities, housing but not necessarily inflation due to new income creation.

Businesses borrow to invest in capacity building when they see demand. If there is trepid new income creation, businesses will not want to invest to capacities and like jobs. Instead, they will want to maximise returns by merely moving money around.

Every one of us wants to create wealth, but in reality, the wealthy constitutes merely 10%. What is the chance of getting there as a nouveau riche?

Conclusion

The wealthy will like it, but is it right this time to cut rate for the sake of trying to stoke inflation?