The Inflation Story - What is the evidence?
Print This Story
October 15th, 2009 by Prieur du Plessis, Investment Postcards from Cape Town
Twitter It! | Email This Article
This post is a guest contribution by Paul Kasriel* of The Northern Trust Company.
There is a growing concern about an inflationary threat in the U.S. economy given the enormous monetary accommodation the Fed has put in place. As expected, there are differing opinions about this issue. First, the unemployment rate in September was reported as 9.8%; the all inclusive unemployment rate is 17% (see chart 1).
Wages are unlikely to be the cause for a large increase in inflation in the near term because widely used measures of wages pressures are trending down (see chart 2), given the lack of demand in the labor market. By the way, the Federal Reserve tracks these variables to form its assessment of inflation.
Second, the operating rate of the nation’s factory sector was 66.6% in August, close to the record low mark of 65.1% registered in June 2009.
Third, financial institutions are not lending (see chart 4) implying that a stalled credit machine supports expectations of a non-inflationary environment in the near term.
What is the indication from the market based measure of inflation expectations? Inflation expectations as measured by the difference between the yield on Treasury securities and TIPS are below the pre-crisis levels (see chart 5).
In sum, the overwhelming evidence presented here points to a Fed worrying about inflation in the early part of the next decade. It is important to note that concern about inflation is the long term story. Paul Kasriel has published a detailed analysis of the long-term outlook for inflation (Greater Risk over the Next Five Years - Inflation or Deflation?)
Source: Northern Trust - Daily Global Commentary, October 8, 2009.
* Asha Bangalore is vice president and economist at The Northern Trust Company, Chicago. Prior to joining the bank in 1994, she was consultant to savings and loan institutions and commercial banks at Financial & Economic Strategies Corporation, Chicago.
Dr. Prieur du Plessis is an investment professional with 26 years' experience in investment research and portfolio management. More than 1,200 of his articles on investment-related topics have been published in various regular newspaper, journal and Internet columns, including his blog, Investment Postcards from Cape Town. He has also published a book, Financial Basics: Investment. Prieur is Chairman and principal shareholder of South African-based Plexus Asset Management, which he founded in 1995. The group conducts investment management, investment consulting, private equity and real estate activities in South Africa and a number of foreign countries. He also serves as Honorary Consul of Slovenia for South Africa, actively developing economic, cultural and scientific relations between Slovenia and South Africa. Prieur is 54 years old and live with his wife, television producer and presenter Isabel Verwey, and two children in Cape Town, South Africa. His leisure activities include long-distance running, traveling, reading, motor-cycling and scripophily. Read more from the author/contributor here.
Related Posts
Paul Volcker On How to Fix the Financial System
Credit Crisis Watch: Thawing – noteworthy progress
Roubini Global Economics: Banks in the spotlight
Credit Market Conditions - An Update
Tags: Asset Backed Securities, Auto Loans, Balance Sheets, Commercial Banks, Credit Availability, Disbursement, Economic Activity, Economic Strategies, Global Commentary, High Risk, Loan Facility, Loan Institutions, Northern Trust Company, Risk Premiums, Savings And Loan, Securities Credit, Securities Loan, Small Business Administration, Small Business Loans, Strategies CorporationPosted in Credit Markets, Markets |
