Under Pressure

It's the terror of knowing
What this world is about
Watching some good friends
Screaming 'Let me out'
--David Bowie/Queen

Amity Shlaes cites historical instances where prices stay subdued in light of inflationary policies, then suddenly take off. There have been other times (e.g., US in the 1920's) where monetary expansion never moved consumer prices significantly. Instead, booming money and credit supplies may lift prices of other categories, such as real estate or stocks.

Since the early 1980s, the US has witnessed a gargantuan expansion of money and credit (the original definition of inflation). For most of that period, cheap credit has fostered borrowing, much of which has gone into capacity addition. Capacity is another word for potential supply.

As such, if artificially cheap credit has spawned massive increase in capacity, then why are we eyeing consumer prices for signs of increase? After all, ECON 101 suggests that we should expect consumer prices to remain soft in the face of increased supply. Only after the excess supply is absorbed should we expect upward pressure on prices to a significant degree.

Right now capacity utilization remains below long term averages. Unless the federal government starts sending money to people in boxes (which can't be totally dismissed), then perhaps the 'CPI' remains subdued until utilization rates move higher.

But, as Ms Shlaes observes, there's enough monetary expansion in the system that, when they're ready to move, prices may likely explode higher.