Tuesday, April 12, 2011

"Inflation? What Inflation?"

The Ritholtz contributor REALLY doesn't like the 'inflation' talk.

Lotsa charts. Most interesting one? The one that matches the CRB (commodities) Index almost 1-1 for the Fed's QE1 and QE2 cash injections.


J. Strupp said...

So of all the information in that report, the only chart that interests you is the CRB and QE2 correlation?

You do realize that the CRB strongly correlates with the resurgence in growth in the Far East correct? Which one do you think impacts commodity prices more: Chinese/Indian/Far East expansion or a couple hundred billion dollars of asset purchases over a 6 month period by the Fed.?


Dad29 said...


"Growth in the Far East" (or PRC) is an interesting topic. Computer hardware sales have been tailing off for at least a quarter (see Ticker's reviews). Imports to the US were flat or down for quite a few quarters--only recently are they up again.

Evidently PRC experienced a reverse in the last month or so, AND its central bank has tightened, so in the next few months we should see a diminution of demand.

As to why the demand is there: You say "growth," I say "gummint subsidy."

All that simply to say that what appears ain't necessarily 'real.'

Now, then. I'm willing to accept the 'no inflation' claim on Barry's blog, but I did find VERY interesting that correlation of QE and prices.

Further, the "no inflation" claim largely rests on the horrific DEflation of housing prices--not of other goods and services.

As to labor rates: he's out on a limb. with 15++% under/unemployment there will be no "labor rate" inflation, nor "housing price" inflation.

But there IS food- and fuel-inflation, which to most people in the USA is far more important.

J. Strupp said...

I hear ya.

The broader question is to what extent the BRICS nations are influencing food and fuel prices right now. I'm of the opinion that strong demand for food, fuel and raw materials in these nations are more of a driver of inflation than asset purchases by the Fed. You add in Middle East turmoil and one of the worst crop production years in recent history, and you have quite a bit of upward pressure on commodities regardless of Fed. policy.

That being said, I'm with Rosenberg. The biggest medium term headwind facing our economic recovery is deflation and not inflation. I honestly see no scenario over the next 10 years that leads to significant core inflation. The output gap is going to keep a lid on wage/income growth for the forseeable future and the personal savings rate is still well under our historic average. The only thing keeping consumer spending moderately strong is debt financed spending by the American consumer. That can't hold without wage growth or a hefty increase in the savings rate.

I seriously doubt that net exports and/or business investment will be able to fill the void either. And we all know where public sector spending is headed now that our President is a born again fiscal conservative. All this adds up to flat or falling prices and lackluster growth for years.

Dad29 said...

The only thing keeping consumer spending moderately strong is debt financed spending by the American consumer.

Sorry--but there IS no growth in consumer credit aside from College Loans. Revolvers are going straight south, and term-loans are flat, at best.

Curious, no, that while there is no real consumption, prices continue to move up?

You say BRIC countries are increasing demand for food. How? Are their PEOPLE's incomes up THAT much?