Guild Basic Needs IndexTM
November 7, 2013
Global Inflation: A Mixed Picture
Many investors and global macro economists have been on
vigil for a ramp up in global inflation spurred by immense central bank QE and
other forms monetary stimulus. All of the money printing from around the
globe has helped keep the financial system functioning, and it continues to
help weak developed economies get back on firmer growth footing. However,
it has not translated to rapidly rising prices for goods and services that many
expected. Yes, there have been pockets of high inflation, especially in
developing markets (often related to food and energy items), but when you have
had these price spikes, they haven’t lasted. In fact, many commodities have
been trading near the lows of the past three years.
Macro Forces At Work Keeping Inflation
Under Wraps — For Now
At some point, we expect
global prices of goods and services to accelerate, but as long as there are
powerful forces working against the monetary debasement, inflation has been
delayed. Some of the forces holding prices down include a de-leveraging
banking systems following the financial crisis, labor slack in the developed
world, relatively good crops, rapidly increasing energy production in North
America, and a slowing rate of growth in China. This has led to the mixed
bag of inflation numbers.
Speaking of the U.S, A Dovish Central Bank
Seems Committed To Higher Inflation
Federal Reserve policy makers
meet this week and one of the things they will discuss is that inflation is not
rising fast enough. Some economists within the Fed are convinced that
more inflation will go a long way towards helping the economy escape from a
half-decade of sluggish growth, low wages, and high unemployment.
Inflation bottomed in 2009 at about 0 percent, but is now mired in the low to
mid 1’s according the Consumer Price Index (CPI), well below the central bank’s
target of +2 percent.
Janet Yellen, President
Obama’s nominee to lead the Fed starting next year, is among the Fed economists
to argue that a little more inflation is particularly valuable when the economy
is weak, as it can help improve wages, help borrowers repay debts, and give
companies some pricing power. Inflation has also typically encouraged
people and businesses borrow and spend, which is needed to spur the moribund
It’s not just the Fed that
believes in a prescription of higher prices. Other influential economists
are calling for more inflation-inducing action. Harvard economist Kenneth
S. Rogoff, wrote recently that “Weighed against the political, social and
economic risks of continued slow growth after a once-in-a-century financial
crisis, a sustained burst of moderate inflation is not something to worry about
— it should be embraced.” Professor Rogoff even suggested that the Fed is
not being aggressive enough. He says that inflation should be pushed as
high as 6 percent a year for a few years.
To the monetary hawks, this
sounds blasphemous. They warn that the Fed could lose control of prices
as the economy recovers. As inflation accelerates, the benefits can quickly be
overcome by consequences of people hoarding and rushing to spend money. High
inflation is particularly tough on the poor and on retirees living on fixed
incomes; not to mention the fact that it can lead to more speculation and less
lending and long-term investing. The hawks argue that inflation is
already a problem, and they cite that over the past 10 years gasoline prices
are up over 121 percent. Healthcare is up 81 percent; college costs are
up 61 percent, and milk is up 29 percent.
Nonetheless, CPI remains
tame, and the hawks seem to be outnumbered by the doves.
Watch the Guild Basic Needs Index™ For
Signs That Inflation Is Back
As our regular readers know,
in 2012, we started the Guild Basic Needs IndexTM. Our index tracks the
prices of four categories of primary and essential living needs: Food,
Clothing, Shelter, and Energy (that is needed for basic heating, electricity,
cooking, and transportation). We suspect that inflation will show up in
these items before it shows up in the CPI data. This can give investors
an early look into what is percolating below the surface. Since the start
of 2000, our GBNI index of basic, essential needs has risen over 85 percent
while the CPI is up less than 40 percent.
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