Are Fears Of Future Inflation Justified?

Excerpt from Raymond James Economist Dr. Scott Brown's latest economic commentary:

Inflation, as Milton Friedman told us, “is always and everywhere a monetary phenomenon.” However, money supply measures actually tell us little about the threat of inflation. The Fed watches for inflation pressures through resource utilization. There is currently a huge amount of slack in the U.S. and global economies. In the labor market, nearly 12.5 million people were reported to be unemployed in February and another 5.6 million would take a job but aren’t officially counted as unemployed. This pool of available workers is rising sharply. Labor cost pressures, the widest channel for inflation pressures, ought to remain relatively subdued in this environment. In manufacturing, capacity utilization fell to the lowest level since the Fed started keeping records in 1948. Production constraints aren’t going to fuel inflation anytime soon.

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Commodity prices have firmed recently. The price of crude oil has moved back above $50 per barrel. Yet, with the global economy expected to contract for the first time since the Great Depression, it’s hard to imagine commodity prices moving substantially higher. There is still a fundamental story about increased long-term demand from China and other emerging economies, but that has been put on the back burner amid global economic weakness – there appears to be a disconnect between commodity prices and the global economy. A weak dollar could add inflation pressure. However, other central banks are expanding their balance sheets too.

Comments

[Larry House:]

I think one of the surprises of the coming quarters is that inflation will take longer to ignite than many think. One reason for my opinion is that so many are convinced that inflation will result from the Fed actions--it virtually has to--but inflation will be held in check just because the global economy is so weak--weaker than most think. For that reason I think corporate bonds of 2-4 years are very attractive right now--more attractive than equities, but equities should not be ignored.

Mar 26 03:04 PM

[Jimbo:]

Commentators, such as Dr. Brown and Mr. House, are overlooking the prospects for stagflation. Stagflation destroyed Jimmy Carter's presidency. I am a retiree. My barber raised the price for a haircut 25% after raising it 20% three years ago.( I have purchased a kit for my wife to begin cutting my hair. ) My electric utility received permission to raise electric rates 25%. Real estate taxes are not declining, but the market price of my home is declining. The prices of food products are rising on a broad scale (we have now started an extensive garden in our large back yard). Recent legislation by Congress has mandated union level wages, al a the Davis Bacon Act. This raises costs on recovery projects but reduces the scope of those projects. This is a form of legislated inflation since some will benefit but but others will not. Persons on static incomes are being forced to cut back on consumption to cope with higher prices and costs. Prices continue to rise while large segments of the population are unable to pay. This strikes me as stagflation.

Mar 27 10:33 AM

[Mad Hedge F...:]

You bet they're justified. As I have been vociferously arguing in these pages for months, US Treasury bonds are witnessing the final stages of an overinflated bubble, and you don’t want to be anywhere near this asset class when it bursts. Take out the flight to quality and year end balance sheet window dressing bid from this market, and you have an accident begging to happen. Take in the long term inflationary impact of Obama’s plans, and you have a 30 year contract which peaked at 142 last week that is really only worth 70. It’s just a matter of time before massive government issuance buries largely foreign buyers. Throw in the 50:1 leverage offered by a long bond futures contract, and the profit potential of a short position is so enormous, there are not enough zeros on my calculator to total it up. Buy the Lehman 20 year plus ultrashort bond ETF (TBT). Unfreezing of the debt markets will move the prices for every other type of debt off of their current throw away levels. Buy corporates of every grade with a heavy weighting in junk, or fixed income securities backed by REIT’s, emerging markets, credit cards, student loans, or subprime loans. A convenient way to do this is to buy the ETF’s for the Lehman High Yield Bond Fund (JNK), the PS Corporate High Yield Bond Fund (PH, and the iShares iBoxx Fund (HYG).

Mar 27 11:46 AM

[fireball:]

yes. in my lifetime decimation is a very conservative estimate of what has happened. inflation is the nature of fiat monies as is eventual failure.
who cares if a loaf of bread costs a billion euros or a billion dollars?
it may take 6 months or 3 years but the outcome is misery for all. at least the poor won't envy the middle class which will cease to exist.
"change?" anyone one got spare change. budy i just need a couple billion or a sandwich and a beer.

Mar 27 01:40 PM