Blog : Inflation? What Inflation?

by Ed Zwirn on September 13th, 2013

The thing about paradigms is that they eventually become obsolete.

Many of us grew up hearing our parents understandably gripe about inflation. The dollar wasn't worth what it had been, they would tell us as we were bugging them to buy stuff even as they were attempting to pay their bills.

If you're old enough, like me, to have had parents who experienced the Great Depression of the 1930s, you may have also heard this gripe while begging for candy money: "When I was your age, I could buy a whole bag of candy for just one penny. If I had asked him for a dime, your grandfather would have looked at me like I was crazy."

However tempting it may be for us to look back on that penny bag of candy (or that penny stock we could have bought way back when) with nostalgia, as in fact many old geezers do, it is sobering to recall that the 1930s were a time of great suffering, particularly when one bears in mind that that same penny was exponentially harder to obtain than would be the case today, and the fact that prices declined throughout much of the decade was not viewed then as a cause for celebration.

Inflation is caused by too much money chasing too few goods. The eight decades since the Great Depression have seen the money in circulation rise exponentially as economic growth caused arguably the greatest sustained growth seen by any major economy in modern history.

But the reverse can also hold true, as this morning's producer price index illustrates. Although the PPI rose by a higher-than-expected 0.3% in August, after showing no growth in July, experts agree that the numbers behind this headline reveal a tendency towards disinflationary price trends.

The reason for this becomes apparent if you look at the so-called "core" inflation figure, which stayed absolutely flat in August, the first time it had done so since October 2012. The core number, which excludes the more volatile food and energy PPI components, stayed flat while the headline number increased largely due to the 0.8% rise in energy costs which occurred in August, spurred by rising concern over stability in oil-producing parts of the world.

Penny stock investors take note: The lack of evidence of any inflationary pressure on the slow growing U.S. economy casts further doubt on whether the Federal Reserve will cut back on its expansive monetary policy when it issues its next policy announcement next week, pulling the rug out from under everything from penny stocks to blue chip investments. Recent evidence has also reinforced this level of doubt, particularly as jobs growth remains weak.

And the next time you find your pockets bulging with excess spare change, count your blessings, and give your kid $5 for that jumbo candy assortment. Dentists, after all, need money for their penny stock portfolios just like anybody else.