We have written on numerous occasions about our real fear of deflation, and the fact that we see no impending signs of inflation to come in the near future.
The following are some excerpts from a piece by Dr. Ed Yardeni this morning that enforces our thoughts:
“The CPI inflation rate for this group of 34 advanced economies was just 1.6% y/y in January. It’s been hovering in a 1.0%-2.0% range since the start of 2010. The Eurozone’s CPI inflation rate is especially low at 0.7% during February….
In the US, the CPI inflation rate was just 1.1% last month…..
I’ve argued that there may simply be too much competition in global markets. That implies that there may be too much supply as producers have had ample availability of cheap credit to expand capacity and to use new technologies to increase productivity. While most macroeconomists believe that easy money is always inflationary, it hasn’t proven to be so in recent years. Hence, my contrarian view that easy money can be deflationary by enabling the expansion of supply…..
In a competitive labor market, wages would fall and eliminate the excess supply. However, governments tend to intervene by raising minimum wages and by providing welfare benefits to the unemployed. So people drop out of the labor force. Wages don’t rise much because productivity is always increasing as technological innovations allow more to be produced with fewer workers.”
We do not have the “crystal ball”, but how this unfolds as the Fed continues to Taper is the $1MM question for 2014. Expect the markets this year to be much more volatile.