August 2013 Index

September 19, 2013

Inflation in the Developed Economies Remains Muted — But Globally Appears to Have Turned Higher

We, along with many others, have been expecting that all of the monetary debasement in recent years would create inflationary spikes. In the U.S., Europe, and Japan, some of the most aggressive debasers — inflation has been stubbornly low. In spite of the many calls for rising inflation, it has been held in abeyance by deleveraging in the developed world’s financial system. The developing, faster-growing economies, however, have been experiencing rising inflationary pressure for years. India, for example, seems always to be fighting high inflation.

In our research, we are seeing more data suggesting that a turn is at hand. Credit Suisse recently wrote that “Global inflation continues to pick up gradually in recent months…”

Global inflation turned higher in recent months…

Their report added that there are “signs of a bottom in core inflation” in the U.S.

After declining for more than a year, U.S. core inflation (which excludes food and energy) inflation picked up this past summer. Based on your GBNI data below, inflation including food and energy bottomed sooner.

When Inflation Picks Up, Will it Look Like the 1970s?

The Economist recently printed an article discussing how inflations and inflationary cycles differ. The article discusses that the 1970s super-inflation in the U.S. may have been the result of U.S. demographics (and the desire to have full employment), rather than the result of loose monetary policies. The truth is probably a combination of the two. The U.S. economy grew into the 1970s at a pace that exceeded its productive capacity. U.S. productivity had stalled from earlier decades — and of course cheaper imports from overseas were not as plentiful as they are today. The bulge in the U.S. workforce (baby boomers in their most productive working years), and the boomers’ desire to spend their wages created a cycle of rising consumption that exceeded the economy’s output efficiency. Prices of goods and services rose almost twice as fast in the 1970s as they did in the prior decade and in the following decade.

In the 1970s, Rapidly Rising Prices Triggered Hoarding and Asset Price Speculation

By 1981, price increases were ameliorating. Among the factors that helped end the 1970s inflationary cycle were the tight monetary policies and high interest rates under Fed Chairman Paul Volcker, cheaper imports, and the advent of the computing age which kicked off decades of improvements in efficiency.

Many of the economic growth, labor pressure, and productivity drivers of the 1970s are absent in 2013. What do we have? We do have QE and other forms of money printing from around the globe; we do have very low interest rates in the developed world that could fuel asset price specluation. We do have a global, interconnected economy with capital sloshing around the world in massive quantities; and we have hundreds of millions of new consumers in the developing world. We also have had enough health crises around the globe to make people uneasy about the health of the financial system and thus drive them into real assets. These are different ingredients than those that drove the 1970s inflation. Therefore, the next cycle of high inflation will look different than the inflation of the 1970s.

We also have had enough crises around the globe to make people uneasy about the health of the financial system and thus drive them into real assets. These are different ingredients than those that drove the 1970s inflation. Therefore, the next cycle of high inflation will look different than the inflation of the 1970s.

2013 — With an Ageing Population in the U.S., Can Inflation Stay Low?

Another point made by the Economist article is the notion that aged populations do not have the same consumption habits of the young and optimistic, and therefore there is less demand-driven inflation in mature economies with ageing populations. This is evidenced by the current low inflation rates in “mature” societies like Europe, Japan, and the U.S. Meanwhile, higher inflation rates can be found in the “younger” emerging economies. Eventually, we expect that inflation will rise in the U.S., but it will be substantially less virulent and more external cost-induced than internal demand-driven.

What To Look For, So That When Inflation Comes Roaring Back, You Can Be Prepared and Modify Your Investment Strategy

One way we watch inflation is by tracking the prices of underlying, basic, essential needs. As we watch the official inflation bottom, our Guild Basic Needs IndexTM (GBNI) has been flashing yellow for some time. The Guild Basic Needs Index tracks certain fixed food, clothing, shelter, and energy components, and includes items that are consumed by all Americans every day. Since 2000, this index of basic, essential needs has increased about 86.1 percent. Meanwhile the often adjusted basket of goods contained in the Bureau of Labor Statistics’ Consumer Price Index has risen by about 39 percent since January 2000.