Signs of Inflation

– April 19, 2011 Reading Time: 3 minutes

Driving to the big city the other day, I noticed 2 billboards along the interstate highway that struck me as unique signs of the times. No, they weren’t ads for upcoming Justin Beiber concerts. They were ads for scrap metal buyers. One advertises “top prices paid” for metal by a company that deals in industrial type scrap like steel, aluminum, and copper. The other was more of a “cash for gold” pitch by a company looking for jewelry, coins, and other sources of the precious metals gold and silver.

Scrap metal companies have been around for a long time, so what’s special about them now? Well, I have a hunch that current frenzy of scrapping activity is directly attributable to the recent surge in commodities prices. And I mean frenzy! Elevated scrap prices are pushing scrappers farther afield, some even to theft. You’ve probably heard the stories about guys getting electrocuted trying to nab some live copper wire. Some states are even passing special laws to deal with a burgeoning metal theft crisis. But back to the high prices—where are they coming from? Perhaps it just might have something to do with the FED’s unprecedented fiat money printing operations. No matter how you slice it, there’s no getting around the massive recent increases in:

· the monetary base (consisting banks’ vault cash and their deposits of reserves at the FED)

· Currency

· Checking accounts

· Savings accounts

If this were the first time that rising commodities accompanied a massive run-up in consumer prices, perhaps it could be written off as mere coincidence. But the pattern is eerily similar to the last major inflationary episode in the US in the 1970s.

Metals prices boomed in the mid ‘70s and again in the late ‘70s, culminating in the gold and silver mania of 1980. But it must be remembered that this was merely part of a general run-up in commodities prices. We’re seeing a pretty similar pattern now in gold and silver of course, but again, it’s just part of a general commodities price boom. The only difference between then and now is that CPI inflation remains relatively tame compared to the 1970s, at least so far, allowing FED officials to confidently proclaim that inflation is only “moderate.” Looking at the inflation data, one thing that stands out is an apparent disconnect between commodities prices and consumer prices in recent years, whereas the two marched in lockstep in the 1970s. This could be taken as a sign that commodities prices don’t tell us much about monetary conditions. But look at the amazing rebound in commodities prices after the sharp, but brief, deflation of 2009. That fits pretty well with the monetary data seen above.

The monetary metals of gold and silver have served as an inflationary bellwether for ages. Their current high prices are indicating fear of inflation. Actual inflation of the money supply is providing a pretty clear rationale for this fear, and actual inflation in commodities prices is confirming it. It remains to be seen how high CPI will climb, but if the past is any guide, we’re in for a steep and bumpy ride.