Many investors and global macro economists have been on vigil for a ramp up in global inflation spurred by immense central bank QE and other forms of monetary stimulus. All of the money printing from around the globe has helped keep the financial system functioning, and it continues to help weak developed economies get back on firmer growth footing. However, it has not translated to rapidly rising prices for goods and services that many expected. Yes, there have been pockets of high inflation, especially in developing markets (often related to food and energy items), but when you have had these price spikes, they haven’t lasted. In fact, many commodities have been trading near the lows of the past three years.
Continuous Commodity Index - Last 3 Years
Source: Bloomberg
Macro Forces At Work Keeping Inflation Under Wraps — For Now
At some point, we expect global prices of goods and services to accelerate, but as long as there are powerful forces working against monetary debasement, inflation has been delayed. Some of the forces holding prices down include a de-leveraging of banking systems following the financial crisis, labor slack in the developed world, relatively good crops, rapidly increasing energy production in North America, and a slowing rate of growth in China. This has led to the mixed bag of inflation numbers.
Speaking of the U.S, A Dovish Central Bank Seems Committed To Higher Inflation
Federal Reserve policy makers meet this week and one of the things they will discuss is that inflation is not rising fast enough. Some economists within the Fed are convinced that more inflation will go a long way towards helping the economy escape from a half-decade of sluggish growth, low wages, and high unemployment. Inflation bottomed in 2009 at about 0 percent, but is now mired in the low to mid 1’s according the Consumer Price Index (CPI), well below the central bank’s target of +2 percent.
Janet Yellen, President Obama’s nominee to lead the Fed starting next year, is among the Fed economists to argue that a little more inflation is particularly valuable when the economy is weak, as it can help improve wages, help borrowers repay debts, and give companies some pricing power. Inflation has also typically encouraged people and businesses to borrow and spend, which is needed to spur the moribund economy.
It’s not just the Fed that believes in a prescription of higher prices, however. Other influential economists are calling for more inflation-inducing action. Harvard economist Kenneth S. Rogoff, wrote recently that “Weighed against the political, social and economic risks of continued slow growth after a once-in-a-century financial crisis, a sustained burst of moderate inflation is not something to worry about — it should be embraced.” Professor Rogoff even suggested that the Fed is not being aggressive enough. He says that inflation should be pushed as high as 6 percent a year for a few years.
To the monetary hawks, this sounds blasphemous. They warn that the Fed could lose control of prices as the economy recovers. As inflation accelerates, the benefits can quickly be overcome by consequences of people hoarding and rushing to spend money. High inflation is particularly tough on the poor and on retirees living on fixed incomes; not to mention the fact that it can lead to more speculation and less lending and long-term investing. The hawks argue that inflation is already a problem, and they cite that over the past 10 years gasoline prices are up over 121 percent. Healthcare is up 81 percent, college costs are up 61 percent, and milk is up 29 percent.
Nonetheless, CPI remains tame, and the hawks seem to be outnumbered by the doves.
Watch the Guild Basic Needs Index™ For Signs That Inflation Is Back
As our regular readers know, in 2012, we started the Guild Basic Needs Index™. Our index tracks the prices of four categories of primary and essential living needs: Food, Clothing, Shelter, and Energy (that is needed for basic heating, electricity, cooking, and transportation). We suspect that inflation will show up in these items before it shows up in the CPI data. This can give investors an early look into what is percolating below the surface. Since the start of 2000, our GBNI of basic, essential needs has risen over 85 percent while the CPI is up less than 40 percent.
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