while some market analysts have joined the deflationary camp, a funny thing happened: inflation returned. this is from david galland of casey research:

About That Whole Deflation Thing…

As you might suspect, a number of readers have challenged us on our conclusion that the current monetary inflation must, after a lag, resolve itself in a serious price inflation.

We are always polite in our responses and do try to see the other side. Yet we remain firm in our conviction, thanks in no small part to the observable reality that the governments of the world are reacting exactly as we have long predicted they would to this crisis. Namely trying to print themselves out of the mess they have created.

This week, despite the widespread expectation of further signs of deflation, it was inflation that showed up at the door. Starting with U.S. producer prices, which went up 0.8 percent in January. Then today, knock, knock, consumer price inflation stopped by, rising 0.3 percent month over month. The price of food, in particular, continues to rise at the rate of 10.1 percent annualized.

And the U.S. wasn’t the only country registering an inflation surprise. This from the Financial Times, under the headline, “UK inflation more entrenched than expected”…

Inflation is more entrenched than many economists had imagined, easing only marginally in January as the weaker pound pushed up the price of imports and offset much of the benefit of lower fuel and housing costs.

The consumer prices index rose in January at a year-on-year rate of 3 per cent, down from a 3.1 per cent rate in December, official figures showed on Tuesday.
But retail prices – the measure of inflation felt by most households – defied economists’ expectations of a contraction, registering a 0.1 per cent year-on-year rise in January as rising prices of household goods offset some of the impact of falling mortgage interest payments.

There is a combination of things going on. For one, commodities, which have taken a brutal thrashing (other than gold, of course) are now showing signs of a bottom. And that is to be expected, given that so many are now selling at or near the cost of production. A farmer doesn’t need to have a PhD to know not to plant crops that they are sure to lose money on.

For another, merchants, finding they have less business, are trying to make up the lack of volume with higher prices. I have seen that anecdotally in the local merchants and have heard it from other correspondents. And, as was mentioned in the case of the UK, the weakness of the pound means that the exports it must buy now cost more.

But all that is just window dressing for the flood of money just now beginning to enter the system, thanks to a global race to quantitative easing.

Even as they admit their surprise at the latest inflation numbers, government officials and the punditry are quick to pooh-pooh the notion that inflation can do anything but fall from here. While it would be foolish to expect that inflation can only rise from here, though that is far from out of the question, when you think about it, the government’s view that deflation is the primary problem is the only stance they can adopt.

That’s because to acknowledge the potential for inflation at the very same time they are adopting quantitative easing would be a serious disconnect. And, in the case of the U.S., it could scare away foreign dollar holders.

Thus, the official line is, “There can be no inflation.”

I wonder if the foreign dollar holders are buying it?

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