How Low Will “It” Stay … How High Will “It” Go?

John Dykema is President of Circle Packaging Machinery Inc. and Campbell Wrapper Corporation.  John is also a Board Member of Nicolet National Bank.

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If you ask bankers or other business people, most people have an opinion of what will happen to the general price level … inflation … over the next several years.  My sense is that the consensus (or at least the midpoint) of the predictions of the people I know is for it to be moderately high (let’s say 4-7%), with a not-too-insignificant contingent predicting very high (>10%) rates, not hyperinflation, but a serious problem. While I admit that I am not unconcerned about the possibility, I am of the opinion that inflation will remain in check, relatively consistent with recent history (1-3%).  I’ll list a few reasons I reach this conclusion:

Reason #1:  The Federal Budget Deficit Impact is Overblown (at least so far)

In the spirit of full disclosure, I am sickened by the growth in planned and actual federal spending of both the current and prior administrations; however … the “$1.4 Trillion Deficit” is not all it’s made out to be.  Don’t get me wrong, it is ridiculously and unnecessarily high, but nearly a third of it is TARP, one of the rare times a government “investment” is actually an investment; in other words, something that will be paid pack (actually paid back with interest).  TARP only adds to the federal deficit because of the cash based accounting fiction of the federal government.  Certainly the level of federal spending and the real deficit is a problem and will create inflationary pressure, but it’s not as bad as a $1.4 trillion deficit sounds.

Reason #2:  10% Unemployed, 17% Underemployed

Business people I know are continuing to drive profitability by cutting cost and making-do.  Nobody I know has built an operational plan around a “robust recovery.”  They expect modest but unspectacular growth.  With that expectation, businesses are not motivated to hire.  If the unemployment rate hovers for the next couple years at or near double digits, there will be no wage pressure on inflation; in fact, just the opposite.

Reason #3:  But What About the Free-Falling Value of the Dollar?

OK, I’ll admit this could be a problem, especially with its affect on the price of imports, particularly oil; however, as the economic situation the last two years has caused the American consumer to shift from a borrow-and-spend culture to a thrift-and-save culture, one thing we learned is that most Americans can live quite comfortably on 80% of what they used to spend.  When the American consumer spent a couple decades living beyond their means (to the great benefit of the American economy) it was not out of necessity … it was out of choice.  If oil goes back to $4 per gallon, the American consumer will adjust by using less and spending less elsewhere.  Inflationary pressure of oil will be offset by deflationary pressure of an un-purchased 3rd flat-screen TV or fewer meals out, or avoidance of other things consumers have come to consider extravagances, not necessities.

A final disclaimer:  Inflation, like most economic measures, is the result of many factors that interact and anyone that is absolutely confident what is going to be the “net” of these interactions is a fool or a genius.  Those that know me will tell you I’m definitely not a genius and I don’t want to be a fool, so I readily admit, I COULD BE WRONG.  What do you think?

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