Inflation Consensus?

Barron’s Mike Santoli writes:

"It’s fashionable on Wall Street to strike a maverick’s pose and carp that "nobody" recognizes the real threat of inflation that’s being papered-over by the supposed deceit of government data pushers. Yet the just-released Merrill Lynch fund-manager survey for June shows a net 47% of respondents saying core inflation will be higher in the next year, up from a net 11% in March.

So, looking for more inflation is anything but a contrarian stance. And if there’s a buildup of inflationary danger, it’s in the process of being absorbed by the market."

Mike raises an interesting point here about the crowd’s view of inflation: What once was the subversive contrary stance — Inflation is stronger than reported, and the BLS data is "uninformative" — has gained traction amongst alot of the crowd.

As he notes above, most of Wall St economist’s think inflation is low and going higher. 

My view is the precise opposite of that: Inflation HAS been high, and its likely to go lower as the economy decelerates.

I’m not sure why that cadre of economists thinks core inflation is going up — unless they are convinced the 2H acceleration is on schedule (despite the recent CFO survey saying they are cutting back on Cap Ex and hiring).

Perhaps its due to China, the supposed exporter of Deflation, is now exporting Inflation

The very obvious slowing of GDP should certainly shave off some CPi/PPi inflation pressures — but that doesn’t change the reality that inflation is higher than has been reported. And if the crowd has finally discovered that, well, its about time.

I never attempt to be contrarian for its own sake — but I do like to know how "built in" my views are. And Mike raises a valid issue . . .


Liquid Courage?
Barron’s, June 18, 2007

 China’s Inflation Accelerates,  Adding Rate Pressure
By Nipa Piboontanasawat,
Bloomberg, March 13 2007

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What's been said:

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  1. REW commented on Jun 20

    In the classical model, inflation is a monetary process. The inflation that BR has so correctly identified is still working through the economy, and the bulk of it has YET to hit the CPI, which lags the inflationary signals of gold and precious metals by years.

    BR makes a nice crack at the idea that we can blame China for these issues. The Chinese yuan is still very tightly connected to the US dollar. If inflation is a problem in China, it is because of the inflated dollar. But that requires us to admit that the Chinese aren’t evil and our own central bankers are ineffective.

  2. lewis commented on Jun 20

    The other factor here is inflation perception, and the dark science gets pitch black here. We were in an era of understated by the official stats measured inflation and perception of inflation was extremely low. Now the numbers are coming in higher because they can only do some much to make them lower (.149 shows a certain desperation) but perception is definitely getting out of hand. And where perception goes is tough to measure, but I know when I fill my gas tank I am perceiving something.

    I think that perception thing is what is going to be really hard to handle. The official figures have long lost credibility, I have never seen Ben with a cigar, and I think that part will turn out badly, which will probably outweigh any actual slowdown in inflation due to the economy.

    Sometimes it ain’t the facts, its what people think, and I say this with an election one year away.


  3. diogene commented on Jun 20

    As usual Mr Kasriel provide for a good analytical and quantitative view on inflation, the outcome is statistical CPI(as defined), on a trend basis is going down.
    When looking at the components of the study, it looks more like the make up of a “very slow growth”.
    When reading the central banks they are like demiurge chasing for their past mistakes (excluding the new FED) excessive money supply compensated by artificial depression of long term yield in 2005/2006 artificial leverage of the stocks markets 2006/2007 and rising the long term yield.
    Great speculators risk free !

  4. Fred commented on Jun 20


    “My view is the precise opposite of that: Inflation HAS been high, and its likely to go lower as the economy decelerates.”

    I agree with your comment. It would seem that the market does as well, looking at the 90 day T bill. It is strongly suggesting a coming rate cut. I made this comment the other day and was scoffed at.

  5. super-anon commented on Jun 20

    People will never get it – in order to have real inflation (like the 70s) you have to have wages rising rapidly (as they did then).

    US consumers aren’t magicians that can conjure money out of thin air – somebody has to give it to them.

    Barring that, if the price of essential items goes up, the price of discretionary items has to fall until we have steep cut backs in production; hence, the declining core inflation rates.

  6. Stuart commented on Jun 20

    The ever increasing debt obligations of the Federal Government all but guarantee a future move into hyperinflation. Inflation is first and foremost a monetary phenomena. With the ballooning national debt, about to redefine the term “ballooning” as the 60-70 Trillion dollar unfunded National VISA bill (oh that’s the NPV btw) comes due in installments next year, we will in the same manner as measuring processing capacity for oil refineries have the same need of measurement for Helicopter Ben’s printing presses. Yes, the economy will slow down due to the weight of housing on consumer spending, no question, but at the same time, unless these unfunded liabilties are legislated away, good luck with that btw, our interest debt and accumulated debt charges will accelerate forging the perfect chart of what compounding pain means. This is not going to end well, especially as foreign creditors fail to renew treasuries at expiration. US Greenback – RIP.

  7. super-anon commented on Jun 20

    My view is the precise opposite of that: Inflation HAS been high, and its likely to go lower as the economy decelerates.

    BTW, I strongly argee with this. But I would also add that since much of this past inflation came from excessive borrowing, not rising wages, the hangover is likely to be unusually severe.

    And though I think the price of energy and other essentials may rise as the dollar weakens, I don’t see this as inflation because we live in a rich country where the necessities are wrapped in layers and layers of discretionary purchases.

    I don’t have to go to Starbucks 8 times a week. They really could cut the price of that iced mocha by 50% if things in the economy fell apart. And these types of purchases make up a huge part of the US economy.

  8. michael schumacher commented on Jun 20

    Inflation going down as the economy cools??

    Corporations will have to raise prices to eke out all that guidance they have force fed wall street. Rising costs do not lead to lower inflation…just like printing dollars and handing them over to the broker dealers does’nt raise the value of the dollar.

    Rate cuts…….now that’s funny.


  9. LAWMAN commented on Jun 20

    Hey MS:

    It is clear that you are expecting the world to end. I’m curious where your money is. I don’t need names, but are you long anything? Is your money in foreign currencies? Or is your money in a tin can buried in your backyard.

    Is your money where your mouth is?

  10. ManhattanGuy commented on Jun 20

    This market is on crack .. don’t bet on it

  11. ManhattanGuy commented on Jun 20

    “money safely stored in a tin can buried in his backyard” .. lol that’s probably where you will find MS’s money

  12. me commented on Jun 20

    Bad news for Ben. Inflation expectations are what the FED watches so he will less inclined to cut rates. The longer he waits to cut, the more likely for a recession.

  13. Stuart commented on Jun 20

    yes, very bad news for Ben indeed. Talk about being in a box.

  14. michael schumacher commented on Jun 20

    why is it that you people are fixated on where my money is….none of your damn business.

    You never address any of the issues just “how big is your wallet” and ” I told you so”.

    Please use your right to ignore….Fred seems to have understood this while the rest of you have not.

    Worry about where YOUR money is …not mine.

    Effing sheep.

  15. Sweeny Texas commented on Jun 20


    It seems to me the only corporations that will be able to raise prices are those that produce our basic necessities. And they have already been doing it. If the health of our economy depends only on how rich the stockholders of oil companies and drug manufacturers are getting, we’ll be just fine. But I ain’t counting on it.

  16. m3 commented on Jun 20

    i think i’m going to side with MS.

    the 70’s have proven that a slowing economy will not necessarily reduce inflation.

    a contraction in credit will reduce inflation, not the other way around. i thought milton friedman settled this debate long ago.

    BR maybe right that core may go down, but the real inflation rate will probably not.

  17. rebound commented on Jun 20

    “…Corporations will have to raise prices to eke out all that guidance they have force fed wall street…”

    Maybe not.

    After too much stimulus and there is too much manufacturing capacity which has come online (China comes to mind) and consumers have over spent (America comes to mind), inflation could drop quite a bit … as in deflation.

    In a correction, consumer would slow spending because they are tapped out. Businesses slash prices and have fire sales to move inventory. Rinse, repeat. Vicious cycle.

    Hopefully inventories are not too high right now. I haven’t checked the numbers in a while.

    Of course this might not happen, and there could just be a correction. I’m just trying to say there are market mechanisms which could cause inflation to drop. Just like Real Estate Inflation has stopped.

  18. cm commented on Jun 20

    REW: “the bulk of [inflation] has YET to hit the CPI”

    Well, it certainly has already hit the grocery store shelves. But maybe that indeed hasn’t been the “bulk” yet.

  19. Henry commented on Jun 20

    I believe inflation is just a monetary event. More money are chasing only limited goods. China, Japan and other asian countries hold our IOU before. Now they are using our IOU to buy (diversity from $). At the same time our customers may purchase less. Just do some calculations on the plus and minus, you will get the right idea.

  20. wally commented on Jun 20

    Perhaps it is time to redefine the ‘core’ yet again and exclude Chinese-made items. That should keep things steady.

  21. Estragon commented on Jun 20

    Fred “…looking at the 90 day T bill. It is strongly suggesting a coming rate cut.”

    To me, it looks like the 90 day is seeing money coming out of longer durations. Why do you believe this strongly suggests a cut?

    Not scoffing, but…

  22. Fred commented on Jun 20

    I don’t have a link to the work, but Hays Advisory showed a chart that displayed rate cuts every time 90 day bills fell to 10% below the FFR (and stayed there for a few weeks). It may have actually been Yardeni’s work…not sure. I believe Navellier has also been noting this historical “cause/effect”.

    Note….it has moved back (slightly) above 90% of T Bills at 4.74%. So cut are not a lock. Something to watch, however.

  23. blam commented on Jun 20

    The long term pressure is, and has been, deflationary. That’s what all the printing press has been about. When growth in real wages lags productivity growth or when high wage consumers (US) are replaced by low priced peasants, consumption and thus, GDP, sag, putting downward pressure on prices.

    The Fed has to create a credit bubble so that borrowed money can be spent to prop up consumption. Fait Accompli.

    But, the excess business profit is spent, increasing supply. Also fait accompli with the construction of a complete supply chain in China and surrounding areas.

    Fake money eventually creates a credit crisis and the bubble breaks. More high wage consumers (US) put out of work collapsing consumption. Low wage, non-consuming peasants get tough and lower prices further.

    Bubble bursts. The golden goose has been slain and eaten. Deflation (depression) wins. At least it did in the only modern period in which the financial playing field mostly resembled the current one.

    Hopefully, I am wrong. The world’s number two has been mired in a bubble-burst-induced depression for 10 years.

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