The Non-Linearity of Inflation Psychology and the Present Danger of Stagflation

by John Butler
Gold Money


Ever since the 2008-09 global financial crisis there has been a lively debate between those anticipating a prolonged deflation and those predicting a transition to inflation. In certain respects, both sides of the debate have been correct, if sometimes confusing monetary, credit and price inflation. Recent data indicate, however, that the terms of debate are now shifting decisively in favor of those expecting price inflation or, more precisely, stagflation. Not only is US core CPI trending higher; the dollar uptrend has given way to a downtrend, implying the end of low headline CPI. The result could be CPI above 4% by 2017. The psychological effect of 4%+ CPI, combined with timid action by the Federal Reserve on rates, could represent a ‘tipping-point’ in public inflation expectations. Once this occurs, there is a risk that economic behavior changes in unpredictable ways that can damage real potential economic growth. Investors should prepare accordingly.

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