Prices in the U.S. may increase more than many expect this year, says David Rosenberg. That’s a 180-degree turn for the economist who not long ago correctly predicted a declining inflation rate, a view now prevalent among his peers.
“This deflation, disinflation, benign inflation story which seems to be everybody’s mindset is really yesterday’s story,” said Rosenberg, 53, chief economist and strategist at Gluskin Sheff & Associates in Toronto. The Federal Reserve, through efforts to spur growth, “is carrying out the mother of all reflationary policies,” he said in an interview. “My bet is the Fed will ultimately get what it wants, and then some.”
Such a scenario is out of sync with the consensus. Janet Yellen, the new chair of the Fed, has said inflation is running below policy makers’ 2 percent target and is unlikely to flare up soon. The median forecast in a Bloomberg survey of economists in January put inflation at 1.3 percent in 2014 and 1.8 percent next year.
Investors, too, are sanguine: The five-year breakeven rate, a market gauge of inflation expectations over the next five years based on trading in inflation-linked Treasuries, was at 1.92 percent yesterday, down from 2.32 percent last year at this time.
Rosenberg predicts wages and rents will head higher as the job and housing markets rebound, and as faster credit creation and record stimulus by the Fed stoke price pressures. He said it’s troubling that “whether you’re bullish or bearish on the economy, the one universally held view right now is that there is no inflation whatsoever.”
Known for his pessimistic outlook on the U.S. economy, the former Merrill Lynch chief economist for North America was among the earliest to warn of the housing bubble in 2005 and the recession that began in 2007, though he missed projecting the stock market’s rally since 2009, which enabled the Standard & Poor’s 500 Index (SPX) to appreciate about 170 percent.
Well, we are spoiled for choice given the consensus forecast of deflationary pressures in the West, Janet Yellen’s apparent calmness on inflation, and the worrying medium-term concern about China, articulated by Ambrose Evans-Pritchard of the Daily Telegraph, which I used as my leader article on Thursday.
David Rosenberg is usually worth listening to, not least because he is not afraid to go against the consensus, although his failure to see the stock market recovery commencing in 4Q 2008 and 1Q 2009 was a huge miss, and at least initially in line with the bearish consensus.
So who is right in the inflation versus deflation debate?
If there is a disorderly bursting of China’s credit bubble, and/or if Germany succeeds in hampering Mario Draghi’s reflationary efforts, both of which I regard as outside chances, then deflation will certainly remain a problem in many countries including the USA. It would also have a negative impact on corporate earnings for many companies, including the highly successful Autonomies. However, household inflation would remain a problem, with the prices for many goods and services continuing to outpace wages.
I think Rosenberg is early on his inflation call and wrong about wage increases, not least because of globalisation and the accelerating advance in technologies. Many companies can and will continue to replace both blue collar and white collar employees with smart machines, in order to stay competitive. Government sectors may hold out due to pressures from left of centre politicians and unions, but only temporarily because the tide of innovation is unstoppable.
Meanwhile, watch the market signals, not least US 10-year Treasury bonds, where a sustained break above 3% will indicate both a stronger economy and potential inflationary pressures. Also, while gold (weekly & daily) and silver (weekly & daily) can move for many different reasons, they have broken to the upside recently and some may attribute this to inflationary pressures. Decisive breaks above their 200-day MAs would confirm medium potentially lengthy medium-term upward scope. Inflation is already a problem in some developing economies, due to inefficiencies and somewhat faster GDP growth than we see in developed economies.
Inflation will certainly be rising when the global economy is synchronised in a period of clear economic expansion but that is probably several years off. Even then, I think wage inflation will still lag due to the march of technology.
(See also Wednesday’s Email of the day 1, on household inflation.)Back to top