Wednesday, February 2, 2011

Nostradamus was not an Economist, but he could have been---Inflation is a Self-fulfilling Prophecy...

Inflation is not a problem in the  The question amongst economists is what is the root cause of current inflationary trends around the world.  Is it demand driven because of scarcity of resources? Are price increases in one area off-set by price decreases somewhere else in the economy, rendering the overall effect neutral? Or is it "too much money chasing too few goods", the classic explanation of inflation?  My opinion is it is a combination of the first and second reasons, with the first one taking precedent.  I have read too many articles lately about the world-wide demand for resources to not give it credence.  Here is another one excerpted below. What do you think?

WSJ: Companies Stock Up as Commodities Prices Rise

""Companies contending with rising commodity prices are stockpiling rubber tires, cotton clothing and other goods, a maneuver that is aimed at insulating them from inflation but also could contribute to it.""

""Purchases made more because of perceived inflationary pressures than a response to demand are important because they signal that inflation expectations are climbing. Economists often focus on inflation expectations, because they can spur people to speed up their purchases, in turn driving prices higher.""
"The price increase then becomes a self-fulfilling prophecy," said Zach Pandl, an economist at Nomura Securities. Once the cycle ends, prices can collapse, he said.""
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