360 Degrees: Inflation
Aaron Task 5/17/06 9:14 AM EDT
Michael, my very unscientific survey data suggest the consensus view on Wall Street is that inflation is not a problem (repeat: not a problem). How else to explain the eagerness among market participants to embrace the "one and done" view for the past several FOMC meetings?
It seems to me that many are focusing on where inflation isn't showing up: wages (which is the biggest input, though creeping higher of late), textiles, electronics, etc.
And in all seriousness, I think the key question -- which I've put to Anirvan Banerji off-line -- is whether we're in a cyclical inflationary cycle in the midst of a secular deflationary cycle.Position: Now asking in public forum
Anirvan Banerji 5/17/06 10:04 AM EDT Yes, Aaron, we're in a cyclical inflationary cycle in the midst of a secular disinflationary cycle (deflationary in some sectors) -- but that cyclical upturn in inflation started a couple of years ago. The real question is not where we are, but where we're headed, and for an answer, it's no good looking at coincident measures of inflation, whether based on the CPI, core CPI, or core PCE deflator. This is why we look at ECRI's forward-looking Future Inflation Gauge, or FIG, which anticipated the cyclical upturn in inflation and kept rising through last fall. It has eased off a bit since then, but I'm keeping a close eye on it to gauge whether the easing in underlying inflation pressures is real and sustained. Position: None
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Howard Simons 5/17/06 10:08 AM EDT Michael and Aaron, as Bill Clinton would say, depends on what we mean by inflation. If the Chinese yuan continues to appreciate, we are going to be importing less disinflation in our consumer goods. And as yesterday's PPI showed, we already have higher costs in the pipeline. The expected inflation number embedded in the TIPS market is rising, but the term structure of inflationary expectations shows the Federal Reserve has a great deal of credibility on the issue. Credit demands are rising as evidenced by the increase in "real" interest rates, but the efficiency of monetary use as measured by the velocity of M2 is increasing as well. M2 is rising at a 4.9% annual rate, while nominal GDP is rising at 6.7%. This "on one hand, on the other hand" game can go on for a while. I think the Federal Reserve is going to get their hand forced into being more aggressive than they might like. Even though they've raised rates 16 times in a row, no one can say credit is expensive or money is tight. Anecdotally, I had to pick my son up from school last week. As Illinois ranks up there with California in gasoline taxes, I always fill up in Wisconsin. My little way of "sticking it to the man." Two stops, $100 bucks. When I first bought gasoline in 1970, I could not put $5 in the tank of a Ford Maverick (12 gallons, 28.9 cents per gallon!). I now can put $50 in a tank. That's a shocker, even for someone who has spent most of his life in and around the oil business. Good thing that doesn't show up in the core inflation data. Otherwise, I'd be concerned. Position: None
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