DBCooper
25th August 2010, 03:00 AM
It is not inflation but more disinflation and ultimately deflation that lie ahead in the 2010s.
Inflation worries remain a major part of the market backdrop, and the past year has brought new price stability concerns to investors. During that time, we have written about inflation fears, deflation risks, and the relationships between price trends and monetary policy, fiscal policy, Treasury debt levels, foreign debt holdings, and various other issues. We have argued that rising inflation will not be a threat in the coming years and that disinflation and some deflation are the real worries. Our position remains unchanged.
1. Why It Will Be Very Difficult for Inflation to Accelerate in the Next Few Years
The dominant influence on price trends in the near future and for years to come will be the deflationary influence of chronically high unemployment. The economy not only has gone through a deep recession but also has entered a contained depression, a long period of substandard economic performance, chronic financial problems, and generally high unemployment. The contained depression is likely to last about a decade; it will end in the latter half of the 2010s at the earliest and could stretch into the 2020s
In the years ahead, chronic high unemployment will weigh heavily on labor costs; chronic economic weakness will tend to keep profit margins under pressure and firms focused on cost control; and global instability and large areas of depression (contained or otherwise) will reduce upward pressures on prices of imported commodities and are likely to cause these prices to fall much of the time.
Even if imported commodity prices, most notably oil prices, rise sharply at times, they will not have a large, lasting effect on inflation as long as labor costs are decelerating or actually falling.
Labor costs are the dominant inflation influence not only because they are the single biggest component of prices, but also because labor costs are heavily affected by compensation rates, which fuel consumer spending and are therefore tied to the ability of firms to pass on inflationary price increases to consumers.
By contrast, oil prices, which are widely believed to be a critical inflation signal, have a weaker relationship to inflation over time, although they can be an important short-term influence. Labor cost inflation will remain subdued or even negative as long as unemployment remains high, and the prospects for a real recovery in labor markets are poor. A tightening labor market—a falling unemployment rate—would at some point trigger inflationary pay increases. Conversely, any unemployment rate that is substantially above such a trigger point indicates excessive competition for jobs and a tendency for pay raises to shrink—or pay cuts to become larger and more common. The trigger point, which varies from one business cycle to another depending on a variety of circumstances, is by any reasonable estimate far below the present figure of nearly 10%.
http://www.levyforecast.com/recent-publications/docs/Widespread%20Fear%20of%20the%20Wrong%20Kind%20of%2 0Price%20Instability.pdf
Inflation worries remain a major part of the market backdrop, and the past year has brought new price stability concerns to investors. During that time, we have written about inflation fears, deflation risks, and the relationships between price trends and monetary policy, fiscal policy, Treasury debt levels, foreign debt holdings, and various other issues. We have argued that rising inflation will not be a threat in the coming years and that disinflation and some deflation are the real worries. Our position remains unchanged.
1. Why It Will Be Very Difficult for Inflation to Accelerate in the Next Few Years
The dominant influence on price trends in the near future and for years to come will be the deflationary influence of chronically high unemployment. The economy not only has gone through a deep recession but also has entered a contained depression, a long period of substandard economic performance, chronic financial problems, and generally high unemployment. The contained depression is likely to last about a decade; it will end in the latter half of the 2010s at the earliest and could stretch into the 2020s
In the years ahead, chronic high unemployment will weigh heavily on labor costs; chronic economic weakness will tend to keep profit margins under pressure and firms focused on cost control; and global instability and large areas of depression (contained or otherwise) will reduce upward pressures on prices of imported commodities and are likely to cause these prices to fall much of the time.
Even if imported commodity prices, most notably oil prices, rise sharply at times, they will not have a large, lasting effect on inflation as long as labor costs are decelerating or actually falling.
Labor costs are the dominant inflation influence not only because they are the single biggest component of prices, but also because labor costs are heavily affected by compensation rates, which fuel consumer spending and are therefore tied to the ability of firms to pass on inflationary price increases to consumers.
By contrast, oil prices, which are widely believed to be a critical inflation signal, have a weaker relationship to inflation over time, although they can be an important short-term influence. Labor cost inflation will remain subdued or even negative as long as unemployment remains high, and the prospects for a real recovery in labor markets are poor. A tightening labor market—a falling unemployment rate—would at some point trigger inflationary pay increases. Conversely, any unemployment rate that is substantially above such a trigger point indicates excessive competition for jobs and a tendency for pay raises to shrink—or pay cuts to become larger and more common. The trigger point, which varies from one business cycle to another depending on a variety of circumstances, is by any reasonable estimate far below the present figure of nearly 10%.
http://www.levyforecast.com/recent-publications/docs/Widespread%20Fear%20of%20the%20Wrong%20Kind%20of%2 0Price%20Instability.pdf