Inflation Worries
Disinflation - a moderating of the rate of increase in prices has characterized the U.S. for much of the last two decades and contributed to attractive stock and bond market returns. Lately, investors have worried about a return of inflation with the Consumer Price Index and the core Personal Consumption Expenditure deflator rising at levels above what Bernanke has stated to be price stability.
According to Van Hoisington and Dr. Lacy Hunt of Hoisington Investment Management Company, "a further pass-through of energy costs is likely to push the year over year rise upward over the next several months, such a development should not be taken as a sign that inflation is moving higher. Multi-year inflations take the character of what may be termed a money/price/wage spiral."
"To have a money/price/wage spiral develop and become entrenched in the economy, money growth must accelerate, be sustained, and lead to a speed-up of price increases across the board. Then the widespread rise in inflation must lead to faster wage increases that are validated by a further acceleration in money growth and inflation. This happened in the 1960s and 1970s when M2 growth was the highest for any two consecutive decades. M2 growth averaged 7% in the 1960s, and then accelerated to almost 10% in the 1970s. This was the fastest acceleration for any decade other than those containing World Wars I and II. In the 1970s the core PCE deflator increased by as much as 8% per annum, more than triple the average 135 year inflation rate. Wage costs accelerated steadily in those years. The Employment Cost Index registered its all time high of nearly 11% in 1980."
"The current situation is extremely different. In the past two years, M2 growth has averaged just 4.2% per annum, a far cry from the pattern in the 1960s and 1970s, and well below the 6.6% average increase in M2 since 1900. The Employment Cost Index was up just 2.6% in the latest four quarters, a record low increase. Hence, money growth is decelerating and so are wage costs. This is more likely to lead eventually to a downward money/price/wage spiral rather than to an upward one. "
This is further evidence of our belief that interest rates will decline in the second have of 2006.
According to Van Hoisington and Dr. Lacy Hunt of Hoisington Investment Management Company, "a further pass-through of energy costs is likely to push the year over year rise upward over the next several months, such a development should not be taken as a sign that inflation is moving higher. Multi-year inflations take the character of what may be termed a money/price/wage spiral."
"To have a money/price/wage spiral develop and become entrenched in the economy, money growth must accelerate, be sustained, and lead to a speed-up of price increases across the board. Then the widespread rise in inflation must lead to faster wage increases that are validated by a further acceleration in money growth and inflation. This happened in the 1960s and 1970s when M2 growth was the highest for any two consecutive decades. M2 growth averaged 7% in the 1960s, and then accelerated to almost 10% in the 1970s. This was the fastest acceleration for any decade other than those containing World Wars I and II. In the 1970s the core PCE deflator increased by as much as 8% per annum, more than triple the average 135 year inflation rate. Wage costs accelerated steadily in those years. The Employment Cost Index registered its all time high of nearly 11% in 1980."
"The current situation is extremely different. In the past two years, M2 growth has averaged just 4.2% per annum, a far cry from the pattern in the 1960s and 1970s, and well below the 6.6% average increase in M2 since 1900. The Employment Cost Index was up just 2.6% in the latest four quarters, a record low increase. Hence, money growth is decelerating and so are wage costs. This is more likely to lead eventually to a downward money/price/wage spiral rather than to an upward one. "
This is further evidence of our belief that interest rates will decline in the second have of 2006.
posted by WRA Strategy Group at 8:12 AM
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