For the permabulls one thing is certain: the printing of money leads to inflation, always. And then ultimately hyperinflation. This has been the constant refrain from the permabulls.

Thus, if we assume that money printing (QE or central bank balance sheet expansion) has been happening on a regular and extraordinary basis since 2008, then where is the inflation? On almost every metric, from almost every university and study inflation has not performed as many gold permabulls suggested it would.

Price levels have remained stubbornly low, in fact too low, for many central banks – hence the extraordinary measures. But why is that and how does this undermine the argument from the gold permabulls that money printing is always inflationary?

How is Inflation Defined?

The first thing to do of course is to look at the definitions. What is inflation, and how can it be defined? The Oxford English Dictionary defines inflation as…

“a general increase in prices and fall in the purchasing value of money”

For basic goods and services this has not been the case, it seems. This can be partly explained by the growth of, and dependence on the rise of China. China’s low-cost production capability has essentially exported deflation to its clients in the West. Additionally, technology has greatly reduced the cost of many goods and services. But as Shakespeare asks in Romeo and Juliet – what’s in a name? Is the changing definition of inflation why we no longer see it?

CPI V RPI

Inflation is usually measured in two ways mainly CPI or RPI. CPI stands for the Consumer Price Index. RPI stands for the Retail Price Index. On the surface, these are both meant to measure inflation, i.e. the general level of price rises in the economy and the purchasing value of a currency as defined above. But as always with statistics, it is rarely that clear.

What do these different metrics include and exclude? And what is controversial about them?

RPI vs. CPI inflation: who pays the price?

This excellent article sums up the differences succinctly. RPI is generally 1% higher than CPI. Governments have been accused of inflation measure cherry-picking to suit political needs. But even with a difference of 1% this does not explain why aggressive monetary policy has not led to significantly higher inflation.

Yet. Perhaps it’s a timing issue. But as we can see, regardless of definition, so-called money printing or quantitative easing or asset purchases by central banks have not overall flowed into inflating the cost of living.

So, what has happened instead? Where has this additional money gone and why hasn’t it flowed back into the system creating significantly higher inflation as the permabulls predict?

Assets rather than Essentials

Despite all this extra money being available, or because of it, the risk-free return on cash has been lowered to almost zero. That means, unlike in the old days, investors and savers were awarded for just keeping their money in the bank without investing in companies, or in financial products, or in bonds or commodities – the default option was just cash. Cash actually had a yield, usually above inflation. And with no risk! – besides inflation itself.

But with the new world of low or negative or zero interest rates money looking for a return to beat even low inflation has had to move away from cash. Now it has flooded into the stock market, the bond market, the property market, into gold, into Bitcoin, and into every non-cash asset that is available.

This can be seen in the price appreciation and valuations of these assets over the last 10 years. Almost all of these assets are very expensive compared to historical averages. The flows of the additional cash from central banks seems, at least at the moment, to be confined to financial assets.

Of course, property prices rising so much have a direct effect on living costs but these aren’t so well represented in statistics. Property prices have moved higher but mortgage costs have gone lower. Rents on the other hand, especially in large cities have become extraordinarily expensive. Perhaps this is the only major manifestation of inflation that feeds down into real living costs. Though there are more subtle ones….

Shrinkflation

Another way inflation can manifest itself is shrinkflation. This is when the size or quantity of the good decreases while the price remains constant, or goes down but less in percentage terms than the reduction in quantity. Sometimes it even goes up. This fulfils the definition of inflation as it means that the purchasing power of the currency is decreasing. The below graphic from the BBC and Brand View  demonstrates this phenomena:

Not Yet

The ultimate argument as to why there has been no inflation is just two words. Not Yet. While this feels a flimsy argument at first it has some credit. It takes time for the excess cash to circulate.

The economy and the world have suffered with the 2008 crisis, been affected by deflationary forces of technology and demographics like never before, and now are in a battle against a pandemic. There is little optimism for most people and while there is euphoria in financial markets this represents only a minority of people globally. In addition, commodities have struggled to perform well in the last decade also holding back inflation.

If things really do get better and the global economy drags the whole population out of the slump, then the conditions are prime for the permabulls predictions to turn into reality.

So maybe inflation is coming. It’s just taking longer than expected.