Core inflation for January was 0.5%, the highest in over two years. That was at the producer level. Tomorrow, we’ll hear about the consumer level. We traditionally look at the core PPI, which ignores changes in energy and food costs. Tomorrow, we worry more about those costs at the consumer level.

So, is inflation coming? Yes, you cannot maintain such a high level of both fiscal and monetary stimulus, by deficit spending and quantative easing, without creating inflation. The question is when will it arrive? When the government and the Fed began their fight against the inflation, I suspected the inflation would get here in a few years, about now. However, I now think it will be another year or so before it becomes apparent.

There is a monetarist formula that MV = PT = GDP. In other words, if you multiply all the economic transactions (T) by the average price of those transactions (P), you can determine Gross Domestic Product (GDP). Likewise, if you mulitply the money suppy (M) by the velocity of money (V) which is the number of times a dollar is spent each year, you can also determine the GDP by this method.

The problem is that M has increased but V has decreased. The decrease in the number of times that consumers will spend a dollar during the year reflects their change in behavior. In other words, consumers were so traumatized by the global financial crisis that they are less reluctant to spend. This delays the onset of inflation. But, it is coming . . .