This is not the 1970s folks. In the 1970s, even the prices charted by auto repair shops surged at nearly a double-digit average at an annual rate. That price surge had nothing to do with the price of copper but everything to do with sagging productivity, powerful unions and tremendous labour power on the part of the proletariat (largely, if not completely, absent today ― outside of investment bankers, hedge fund managers and professional athletes) so that Cost-of-Living clauses ensured that the inflation would be widespread as opposed to contained within the resource space.
The key to the outlook for inflation is not commodities ― it is the labour market. We have a situation where wages in nominal terms are running at +1.7% on a year-over-year rate and productivity is running at +2.0%. So we have unit labour costs fractionally deflating as they have been consistently since 2009 Q1...
commodity prices are far from a leading indicator of inflation. Investors that relied on this to make their bond bets over the past 20 years must be an extremely rueful bunch.
...commodity inflation does not translate into generalized inflation unless a lot of other things are happening, such as expansion in credit and household balance sheets. Credit is actually still contracting and balance sheets are getting smaller, not bigger. Wages are decelerating. Add on to that residential real estate and credit, and there are still significant pockets of deflation, which in my view, remains the primary trend line. Even commercial real estate values seem to be peaking out and rolling over again...
At issue is the sustainability or durability of any commodity-led inflation. Something else has to happen ― credit, housing, wages, and productivity. Commodities alone are not sufficient. Not only that, but look at the microscopic levels we are coming off of ― all the Fed measures of inflation that attempts to strip out the volatile noise shows inflation about 1% and that’s with a lot of the effects of food and energy costs percolating through the system...
It is very important to make the differentiation between levels and rates of change. Commodities are measured in dollar levels ― $13 for wheat, $7 for corn, $4 for copper, and $100 for oil. But inflation is a rate of change. Did you know that we have oil today at $100 a barrel and a headline inflation rate of 2.2%? This is the exact same inflation rate that existed in June 1997 when oil was sitting at $20 a barrel...
And the notion that there is a direct link or even an indirect link from fiscal deficits to inflation is completely off base. In 2000, the U.S.A. ran its biggest budget surplus in recorded history and inflation rose from 2.2% to 3.4% ― a nine-year high at the time (core inflation rose to 2.4% from 2.1%). In 2009 we saw an unprecedented fiscal deficit of $1.47 trillion (more than doubling from 2008), and yet inflation swung from +3.8% to -0.3%, the first true experience with CPI inflation since 1955. Core inflation in that massive deficit year also slowed to 1.7% from 2.3%.
---4/6/11
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