Is Inflation A Problem?

Is Inflation A Problem?

The short answer to this of course is "Yes it is". It has the power to devalue your money and erode your standard of living over time. Proof is in your purchasing power. It doesn't matter what you make if you are taxed heavily on extra income and the cost of products rises. I wouldn't say that inflation is in control at the moment but it certainly looks like it will begin to make an impact. Inflation hits certain areas at times and it may be contained there or it filters into other areas. For example Canada's housing bubble and the housing bubbles around the world. What happens is these housing bubbles continue to blow and then people take the profits out of the inflating asset and begin either spending it elsewhere or blowing up bubbles in other areas. It is a by product of cheap interest rates where the excess cash begins to find its way back into the market. The idea of course is to contain it.
     This is hard to do because you cannot control where people put the money. They may choose to put it into savings (unlikely) or they may choose to buy luxury products which in turn drives up prices in other areas.
      I think that stagflation is more the issue which I think is the goal of central banks. Stagflation is both a deflation and inflation simultaneously. You certainly have that now.
      However one wins out eventually and I suspect that inflation might prevail followed by heavy deflation. It should cause the markets to swing violently later this year.
      Gold is a hedge against deflation and interest rates may have no choice but to rise to cool the markets. I think one would be wise to own gold on a certain level and when the time comes you may wish to be short bonds in certain areas.
     Now that being said inflation can take off very quickly when it does happen. It becomes a big problem for central banks. You are never sure how fast of how far you have to raise interest rates in order to cool the overheating markets. Inflation usually starts to rear its ugly head in six months. It is a delayed effect. I can feel it ticking up though. The big problem is what do you do once you get it full force? Global debt continues to be an enormous issue. Raising interest rates too fast will cause a major calamity in the markets. Deflation will regain the upper hand very quickly in this scenario. So what do you do?
       I think that central banks are backed into a corner where they are dammed if they do and dammed if they don't at the moment. You have to be very careful because gold is no hedge against deflation. It will collapse along with everything else. I think the real estate market in the US has a ways to go yet but it could all unwind very quickly. Stay tuned.