Wednesday, July 11, 2018

Stat of the Day: Good and Bad Inflation

Inflation can be a good thing, when the timing's right. In fact, it's what the Fed has been trying to create (to the tune of 2% annually) ever since the 2008 recession.

Rising inflation is considered a good thing when it's in response to an expanding economy and all that goes with it (higher wages for example), and when it inspires/allows the Fed to gently raise interest rates to keep it from becoming bad (high) inflation, while building the platform (higher interest rates) from which to do battle (reduce interest rates) with the inevitable next recession.

Rising inflation, alas, is a bad thing when it comes by way of government(s) meddling with the private sector (read protectionism). Protectionism is ultimately the artificial (not market related) raising of certain prices in an effort to redirect resources to benefit a group(s) with special connections to the powers that be. Inflation that comes in this manner runs the risk of killing the economic environment that leads to what many economists consider good inflation. "Stagflation" is a commonly used term that describes a state of rising inflation amid stagnant economic conditions.

Here's Bespoke Investment Group describing today's Producer Price Index report:   emphasis mine...
Today’s PPI report came in pretty hot, with PPI Final Demand, Ex Food & Energy, and Ex Food, Energy, & Trade Services all beating expectations. Ex Food & Energy hit the highest level since 2011 on a YoY basis. That bodes well for the overall trend in inflation, and is also a reflection of both tightening labor markets and the impacts of tariffs on intermediate and final goods.
A "tightening labor market" is a telltale sign of a strong economy. Inflation due to the "impacts of tariffs" is, well, really really bad inflation! I.e., today's read on producer price inflation is both good and bad.

Per our earlier post on copper, commodities traders are presently focusing on the bad...

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