Built In Inflation in Their Early Cycle

Let’s look at money growth graph in United States below

While Average GDP Growth for March 2006 to August 2008 around 2,5% p.a. and Average GDP Growth for August 2008 to February 2011 around 0% p.a.

Fed main strategy to prevent deep depression is creating money that abundance enough to ensure deflation do not occurring. When GDP growth and Money Supply created in the past, Fed effectively create built in inflation pressure.

According to Wikipedia, Built in inflation is a type of inflation that results from past events and persist in the present. The built-in inflation originates from either persistent demand-pull or large cost-push (supply-shock) inflation in the past. (For current cases, built in inflation created from excessive growth in Money Supply). It then becomes a "normal" aspect of the economy, via inflationary expectations and the price/wage spiral.

• Inflationary expectations play a role because if workers and employers expect inflation to persist in the future, they will increase their (nominal) wages and prices now. (See real vs. nominal in economics.) This means that inflation happens now simply because of subjective views about what may happen in the future. Of course, following the generally accepted theory of adaptive expectations, such inflationary expectations arise because of persistent past experience with inflation.

• The price/wage spiral refers to the adversarial nature of the wage bargain in modern capitalism. (It is part of the conflict theory of inflation, referring to the objective side of the inflationary process.) Workers and employers usually do not get together to agree on the value of real wages. Instead, workers attempt to protect their real wages (or to attain a target real wage) by pushing for higher money (or nominal) wages. Thus, if they expect price inflation - or have experienced price inflation in the past - they push for higher money wages. If they are successful, this raises the costs faced by their employers. To protect the real value of their profits (or to attain a target profit rate or rate of return on investment), employers then pass the higher costs on to consumers in the form of higher prices. This encourages workers to push for higher money wages.

In the end, built-in inflation involves a vicious circle of both subjective and objective elements, so that inflation encourages inflation to persist.

We believe current inflation pressures in an early cycle, which mean more inflation pressure will occurring.

Investment implications, investor who hold paper asset will lose their wealth value and investor who hold real asset will main their wealth value.