Wednesday, October 16, 2019

Inflation - Is it really worth following?


Remember when inflation used to be a critical number to track? If you now talk about following inflation to young portfolio managers, they will look at you as the old guy who raves about some by-gone era. The new monetary politics of MMT says that inflation may be something we will see in the future but don't bet on it. The same could be said about the secular stagnation crowd. Just focus on growth. Worrying about inflation is showing concern about a past problem that is irrelevant in today's environment. Inflation concerns from an 70's and early 80's experience is like the concerns of the generation scared by the Great Depression. One big past crisis clouds the economic events of today. 

It is easy to warn about the hidden dangers of inflation, yet that warning has provided to be false for a decade. Someday inflation may appear and you can say to all that you predicted it. The real issue is determining what to do if inflation stays well-behaved with core values between 1.5 and 2 and headline below 2.5 to 3 percent


It is hard to forecast higher US inflation when the rest of the world shows stable prices and there is no Phillips Curve trade-off. The reality is that local inflation is more closely linked with world price behavior and there is no inflation in either developed or emerging markets.



The number of countries with inflation above 2 percent is limited. Inflation as an emerging market problem is also limited. Now this may change given the move away from globalization and the reduced amount of slack in the economy, but recession fears and controlled inflation expectations make for an environment that is extremely inflation stable. 

The big winners over the last few years have been investors who have discounted inflation fears early. The continued winners may be those that continue to discount the threat of inflation. 

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