8/7/2013 7:30 PM ET|
Why prices are about to go up
After fading away 2 years ago, inflation is poised for a comeback. But so far, the market remains in denial.
Like the Terminator, inflation is poised for a comeback.
I'm talking about the silent killer of take-home pay and living standards that, after hitting a peak in 2011 on a rise in commodity prices and a whirlwind of growth created by Federal Reserve stimulus, has been moving lower ever since.
Now, as factories and service industries around the world rev up, as billions of dollars of cheap cash pour into the financial system, as officials in Beijing relax their iron grip on China's financial system and as high oil prices trickle down through the supply chain, things are about to change.
Inflation will throw a wrench into the works just as the middle-class was getting some relief.
The price lull
While job growth has been steady lately (and much stronger than mediocre gross domestic product growth in the past nine months would suggest), it has been concentrated in low-wage, no-benefit, part-time positions. The only reason this hasn't pulled down consumer confidence is that inflation has been low and falling.
Just look at the sources of the drop in inflation. Medical care is benefiting from greater price transparency and the shopping around encouraged by higher deductibles and co-pays. That has pushed the medical-care inflation rate down to levels not seen since the early 1970s, as shown in the chart below.
We've also seen inflation ease dramatically for things like apparel, financial services and automobiles. How much? In 2011, the cost of financial services was rising at a 7% annual rate. Now it's clocking in around 2.5%. Vehicle prices were rising at a 3% rate then. Now they are actually falling.
All of this has aided confidence by boosting inflation-adjusted take-home pay. Well actually, easing inflation has merely helped keep pay aloft amid all those low-paying jobs and the tax hikes we've seen this year. By offsetting those negatives, it has kept consumers humming along. If inflation were higher, real incomes would have dropped instead of just stalling, as shown in the chart below of real per-capita disposable income.
Other benefits of lower inflation include less bond market volatility (fixed-income investors had enough of a scare in the past few months as interest rates rose, thank you very much), a stronger dollar and more-potent GDP growth numbers.
But, as I said, evidence suggests that this tail wind is about to become a head wind. And with that change comes a new potential worry as we move toward the end of the year.
Hopefully, it will be a largely benign rise in prices associated with a stronger economy. After all, inflation at its core is a lagging indicator of how the economy is performing relative to its full potential. Growth running too hot? You get higher prices. Growth lagging behind? You get falling prices.
The world is turning around
The data we've received in the past week suggest that the global economy is about to heat up again. And that should start feeding inflationary pressures back into the supply chain, starting with raw-materials suppliers, then component manufacturers, assemblers, distributors and retailers before end consumers finally feel it.
In Asia, China's manufacturing sector unexpectedly returned to growth last month as the Chinese State Council announced that it wouldn't allow growth in China to slow to an unreasonable level as it works to reorient the country away from fixed-asset investment and toward domestic consumption. Japan's economy enjoyed its fifth month of manufacturing-activity expansion in July as new orders continue to grow thanks to a cheaper yen -- which is boosting export competitiveness.
But the biggest turnaround is what is happening in the eurozone: The Composite Purchasing Managers Index (which covers both manufacturing and services) increased to its best level in two years, at 50.5. This return to month-over-month growth marks the first time since January (any reading over 50 indicates growth). Europe's manufacturing sector has been contracting since late 2011, throwing countries such as Spain into recession as budget austerity and financial turmoil took their toll on the currency union. But lower government borrowing costs, stabilization in the bond market and renewed vigor have turned things around.
Even Greece, economic basket case that it is, is on the mend. The Markit Greece Manufacturing Purchasing Managers Index is rebounding, although it's still in contractionary territory. Employment and new orders are contracting at their slowest pace since January 2010.
In Great Britain, Capital Economics notes that the CIPS/Markit report on services activity shows "that momentum in the dominant part of the U.K. economy continues to build at a rapid rate." The index posted its seventh consecutive monthly rise, to 60.2, breaching the 60 level for the first time since December 2006. Pretty impressive. With the July Manufacturing PMI at a 28-month high and construction activity ramping up, the United Kingdom is looking at its best GDP growth in 14 years.
And in the United States, the ISM Non-Manufacturing Index swelled to 56.0, the best reading since February. New orders jumped seven points, to 57.7, the highest level since December.
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Two things and two things only will fix the path this country is on.
We need to be self sufficient again.
We need to cut the outsourcing and keep manufacturing jobs in this country
We need to be energy independent, plenty of our own energy sources exist
By doing those two things, simple as it seems.... everything else will fix it self.
Patriotism is a wonderful thing.... MOVE FORWARD!
Special interest kickbacks to politicians making "THEM" wealthy. As long as their world is good they could care less.
As soon as people realize the AMERICAN government is NO LONGER about the AMERICAN people things will make a lot more sense!!!
It is what it is, " NOT" what you want it to be!!
system and find cheaper insurance and THEN GAVE CONGRESS AND THEIR STAFFS A FING
WAIVER! IF IT'S SO GOOD WHY IS HE GIVING THEM A WAIVER AND WHY THE HELL DID THEY
FING FORCE THIS ON EVERY OTHER AMERICAN IF IT'S NOT GOOD ENOUGH FOR THEM???
WHERE THE F IS THAT STORY? GREAT COMMENT DAVE I WAS GONNA SAY THAT TOO!
SO NOW GOVT OWNS 80% OF MORTGAGES? HOW IS THAT A FREE MARKET? EVEN YOU
BRAINWASHED DEMOCRATS SHOULD BE OUTRAGED BY OBAMA'S LIES AND CORRUPTION!
Now commodities usually do well as inflation rises as people see precious metals as a hedge against said inflation.
I have to echo other people posting about your attitude which seems to reverse itself almost daily at times. You advised that the market was going higher and higher just a week ago so hold or buy which would have cost people. Now today you say sell sell sell which will again cost people! The only people making money off your advice are the brokers who surely see you as a great asset.
Your continual see-sawing is typical of today's investment advice which just 3 or 4 years ago would have been classified as a "Day Trader" mentality certain to hurt of ruin people without a liberal dose of good luck.
At the end of the Day, prices will go up because Big Banks never paid the huge Bill that was due, and apparently they never will. However everyone else will pay a Big Price.
Do you remember when Nixon appeared on Laugh In and said "Sock it to me?"
Mr Mirhaydari in his articles is like the groundhog we will now have 6 months of deflation.
I learned more in economics 101, and the '87 crash, and the post-Johnson inflation, than you will ever know.
Your are the Geraldo Rivera of this website.
God, I hope they don't pay you much for this drivel.
Scary part is some may believe you.
Here’s the weird thing about markets. If people could predict them by some recognized and widely accepted method, then the markets couldn’t even exist. Everyone would try to do the same thing at the same time and there would be no counterparties to take the other side of any trades. Logically, markets can only exist if they are unpredictable. But, that doesn’t stop guys like Anthony from trying to predict them, or trying to convince you he can.
Or perhaps inflation in some sectors and deflation in others? A tale of two intertwined economies within one nation.
Nonetheless, you are confusing me with your flip flopping on the state of the economy and outlook. Perhaps you should read Robert J. Gordon's paper again.
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