Inflation and Price Declines

Rain keeps falling
Rain keeps falling
Down, down, down
--Simple Minds

Peter Boockvar presents a case for why inflation is not dead. Among his many salient points, I wanted to discuss his first one here. Classically defined, inflation is expansion of the supply of money and credit by bureaucratic edict. Although people commonly associate inflation with increases in general prices, this is not necessarily true.

If the newly minted cash flows into creating capacity for more consumer goods, then it is possible that expansion of the money supply can drive declines in general prices. When producers are primary early users of cheap money and credit, they will be prone to build more capacity than they otherwise would. Consequently, that newly created supply potential goes underutilized, putting downward pressure on prices.

This is precisely what we see in the data. Capacity utilization has been declining for decades and is coincident with the long term downtrend in interest rates promoted by the Fed's easy money policies. As Boockvar observes, current utilization rates remain significantly below the long term average.

When the supply of goods and services is goosed by inflationary monetary policy, prices are prone to go lower, not higher.