Inflation Monitoring Comments

I was asked about the commentary in a report "Inflation, Do You Feel it Yet?" by the Interprime Newsletter. I think it follows standard market research conventions, which is aimed to be fairly sensitive to changes in direction. The problem with this sensitivity is that underlying inflation in recent decades in the developed world is quite sluggish. However, as seen in the chart above, standard economic time series have been mangled by the economic disruptions associated with the pandemic.

I will let the reader go through that newsletter. The focus is mainly on various goods and commodity prices, many of which have jumped in the past couple of years.

The advantage of looking at commodity prices is that they are available in real-time (or close to real-time), and there are no statistical adjustment issues to worry about. The problem with them is that they are now highly sensitive to the global cycle, in particular China. Although we cannot ignore the global cycle, the Chinese economy has been quite perky over the past couple of decades, yet that has not spilled into core inflation in the services-dominated developed economies.

Another issue with some goods prices is that they are tied to investment activity -- in particular, lumber (North American housing) and computer chips (cryptocurrency mining). We know that animal spirits have bounced back in speculative markets -- but we have had ongoing bubbles for a long time without there being much feed through into wages.

It is clear that it is probably a mistake to keep explaining away rising prices as being due to special factors since supply chain disruptions always show up in particular areas. There is no doubt that there has been at least a one-time upward shock to a variety of prices due to various disruptions, the only question is whether price hikes can be sustained.

In order for goods prices to enter a sustainable uptrend, wages need to also rise to keep the volume of demand stable. The lack of follow-through into wages in the past decades explains why previous price jumps (such as oil price spikes) have not resulted in sustained inflation. Unfortunately, standard wage data has been disrupted by a change in mix (figure at the top of the article). Lower-wage employment was shut down more as a result of the lockdowns, and so there was a mix change that raised wages. (There are various data sources that were supposed to allow us to control for that mix change; I have not dug into them on the basis that I am not attempting to be a forecaster.) At present, there are plenty of anecdotes about labour shortages. At the same time, I dealt with economists who were pounding the table about similar anecdotes in 2010. Various programme changes as well as an unwillingness to take now-risky jobs for a low wage have tightened the labour market, but vaccinations have kicked in the United States (and with a lag, Canada), and the fiscal programmes are rolling off.

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Disclaimer: This article contains general discussions of economic and financial market trends for a general audience. These are not investment recommendations tailored to the particular needs of an ...

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