Yes, more money in the system is inflationary. We can already see that happening with all asset classes and commodities. They are all already up by 30% to 80% since early March 2009. At the same time, we see the supply side is crumbling for want of demand and credit at reasonable cost.

Unfortunately the actual inflation does not get reflected in the official inflation indices. Firstly, no assets are measured in inflation index. Secondly, the weightage for base commodities in inflation index are very small.

Let us look at the US. The CPI has over 30% weight for housing and rentals. So long these items are under downward pressure, it will neutralize the positive impact of base commodities in the index. With consumer demand being weak, manufacturers also will find it difficult to pass on the increase in raw material cost to consumer. Services are major items and this sector is also suffering from over capacity and so there is no way of demanding a higher price for their services, even when they are making losses.

So the official index will continue to remain comfortable and everybody will be celebrating the achievement of easy money policy. But it is only until such time that they find out that more jobs are lost and more manufacturing facilities are shut down. The first will contain consumption while the later will reduce supply.

Wide spread inflationary impact will be felt only when the supply side adjust itself to levels that could sustain higher price for the finished goods and services. In US a full fledged impact of inflation will be felt only when over supply in housing sector also gets adjusted. That means it will take a while before you actually see the real inflation in figures. It is this factor that is helping speculators to push stock prices even higher, although all of them know that most corporate revenue and profitability growth will be lower or even negative.

This is what I call as the condition of co-existing inflation and deflation. The real danger is people in helm of affair do not want to speak about it! The professionals controlling the market want everybody to be blind to the situation. If anyone raises the issue they dump them as amateurs.

The only way they can rectify the situation is by channel the additional money created in to new economic activities that could generate employment and keep the existing supply side alive by providing cheaper credit. They neither get money nor what little is available is cheap. With asset prices jumping 10 to 15% a month, it continued to soak up all the money that is pumped in to the system. This is not just US specific. That is the situation in Europe and Japan as well.

–Kumar