2014: The Year of Inflation’s Return?

Here’s a trend I see in research notes and in the financial blogosphere – predictions of the return of inflation in 2014.   Some of these predictions are coming from noted deflationists or disinflationists like David Rosenberg (see here).    Some of these inflation predictions are coming from financial bloggers who you wouldn’t necessarily expect to see this from (see here and here).  The Wall Street consensus economic forecast for 2014 is 2.2%, which is certainly not high, but still well above the current readings of 1.2%.  Jan Hatzius of Goldman Sachs predicts 2% inflation in 2014, while some firms predict higher levels (like UBS who is predicting 2.5% inflation).   Again, not exactly high, but certainly higher.

The rationale for this thinking tends to revolve around the following ideas:

  • Resource prices (oil prices in particular) have put unsustainable downward pressure on prices.
  • Real wages will rise as the labor class gains negotiating power in a stronger economic environment.
  • Total capacity utilization is nearing 80% which will put pressure on firms to raise wages.
  • Health care inflation will rise in 2014.
  • Owners equivalent rents are on the rise.

Before I outline my thoughts on this I’d like to open the floor up to the smart readers here.  What are your thoughts on inflation in 2014?  And please remember – hyperinflation predictions will be harshly reprimanded.  Hyperinflation predictions based on QE will put the reader at risk of eternal damnation.  And hyperinflation predictions using Zimbabwe or Weimar as a comparison will require an accompanying address so I can locate the reader and shake some sense into you.

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Cullen Roche

Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services. He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance and Understanding the Modern Monetary System.

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  • SS

    How is the consumer strong enough to generate high inflation?

  • Shawn

    I still think the current method of calculating inflation is suspect at best. Ever since they decided to readjust the calculation method that was used since inception I feel (and my real world experience of going to the grocery store every week confirms) that it feels like we are running way more ahead than the “massaged” figures reported in mainstream media.

    Tend to agree with the following:

    Around 5% if we use the 1990 method
    Around 9% if we use the original method that was employed since inception of this metric.

    Problem I have with the existing substitution-based calculation are the same as he reports in his public comment link on the above link:

    “…Indeed, with the use of a substitution-based index (the C-CPI is fully substitution based), the resulting cost of living adjustments promise only a declining standard of living. Expanding the example that former Federal Reserve Chairman Alan Greenspan often used, where, as the price of steak rose, consumers would shift to hamburger, so too with higher hamburger costs have some cash-strapped retirees actually shifted consumption to dog food.”


  • jt26

    Don’t see any significant changes:
    – inflation expectations have been well anchored for 20 years; what is showing a change?
    – commodities & gold? nope.
    – increasing union membership; decrease in right-to-work or increase in union friendly regulation? nope
    – increase monopolistic power in services? not sure.
    – although OER is a component of CPI and by definition, numerically influences CPI inflation, I have never seen real-estate prices “drive” inflation; it’s usually a symptom of something else, and I’m not sure I see that something else for the US

  • Geoff

    I think the disinflation experienced in recent years has been mainly related to the household deleveraging trend. If a new household releveraging cycle is now underway, and it appears that way, then so may be inflation.

  • Tom Brown

    Shawn, that ShadowStats guy claims this on his home page:

    “For a number of years I conducted surveys among business economists as to the quality of government statistics (the vast majority thought it was pretty bad), and my results led to front page stories in 1989 in the New York Times and Investors Daily (now Investors Business Daily), considerable coverage in the broadcast media and a joint meeting with representatives of all the government’s statistical agencies.”

    I’ve tried to find the NYT “front page stories” he wrote on this in 1988, 1989, and 1990 (just in case he was off a year), using the NYT free archive and it’s search tool. I used all permutations of his name:

    John Williams (aka Walter J. Williams)

    I came up with nothing. Why didn’t he just give us a link?

  • Mr. Market

    There’re a number of inflations & deflations and A LOT OF people have a VERY muddled understanding of what inflation & deflation precisely is.

    And Rosenberg proves in his article that he’s also can’t distinguish between the two. If Rosenberg was a student of mine then I would give hime an F. I like to read his work but when it comes to inflation & deflation then he simply misses a number of things.

    I think interest rates WILL rise in the new year and that’s (T-)bond/credit price DEFLATION. But Rosie (wrongfully) equates rising rates with rising inflation. Credit deflation will lead to a rising USD and falling price-inflation or price deflation. So, my personal outlook is a falling CPI/PCE and that could even turn into negative CPI & PCE.

  • Joshua

    A question/thought aside from 2014 CPI but having something to do with inflation. What are the possible 3-5 yr trajectories for industrial metals?

    The consensus from bulge bracket economics research teams seems to be that the commodity supercycle has ended. China’s infrastructure investment was a bit frothy anyway and then global demand fell of a cliff. There won’t be metropolises springing up every month in China as the country re-balances away from a pure play exports and manufacturing story. Hence it certainly wasn’t smart to own Arcelor Mittal or BHP Billton or the Australian Dollar in 2013.

    Yet as one looks at a future with revived global demand; one doesn’t see China as the epicenter of supply. The Renminbi’s appreciation from USD/RMB 8 to USD/RMB 6 ish has made Chinese manufacturing less attractive. Presumably when global demand picks up (assuming continued US growth acceleration and eventually European growth) companies will begin expanding in new manufacturing hubs. And another investment/urbanization cycle will commence. One day Bangladesh, India, Indonesia and Pakistan should be as well developed as China.

    Rather than trying to pick winners and understand the political risks and transportation logistics of various southeast Asian nations, I’d rather just question generally: What’s the time horizon for developed world demand to reach a level where companies make major infrastructure investments in under invested emerging markets?

    Moreover if it’s a fait accompli that one day cities will spring up throughout the developing markets why not be early to invest in a company like Freeport McMoran instead of missing the boat? Especially when someone smarter than most like Ray Dalio thinks equity returns will temper down to about 4% annually and FCX yields 3.5% just from the dividend.

    Thanks for all your interesting work!

  • Tom Brown

    pi – 1?

  • Joe

    Ned Davis Research cites the end of consumer deleveraging – evidenced by the recent uptick in consumer credit – as the primary reason why it believes the Fed is underestimating growth and inflation in 2014. They do not anticipate runaway inflation by any means, but in a nutshell the days of 0% Schilling/Hoisington-anticipated inflation are gone.


  • DRR

    There’s probably too much slack in the labor market to get a strong wage inflation. If the economy improves then the previous unemployed will start entering the market increasing the active labor pool. If revenues don’t pick up for corporates they only way they can sustain their recent earnings growth is by cutting cost with labor being the most expensive one.

    It seems to me that the investor class is a lot more optimistic about the economy than the labor class. No surprise there with the S&P up, etc. But there is a little bit of nervousness amongst investors wondering if the sustainability of their nominal gains are real and they are actively searching the fundamentals of the real economy to validate their windfalls.

    On a personal note, my views are pessimistic for the future. I was laid off 2 years ago at an IT firm and have not find a equivalent job to replace that income(too old)–our standard of living decrease by half. My spouse’s work hours have been cut back below 40 hrs, wage gains are below living costs, and our medical insurance premium have increase 200$ month. We are both in our late 50s and are at the end of our careers. We are already deleveraging our lifestyle to that of a frugal retiree-I buy at garage sales and very seldom eat out. We paid down our mortgage and are debt free and count pennies. We plan on taking early SS and wringing the future. We won’t be adding to the future consumption growth.

    Of course I have three millennial kids to take over the baton but they are struggling with inconsistent employment. When they find full time employment with benefits then I will be optimistic again…

  • vx1

    pretty much sums it up

  • Kristian Blom

    A few quick thoughts on inflation but first let me say that forecasting (beyond peering at the immediate horizon for any incoming bogeys) has nothing to do with investing and making money.

    would really matters for interest rates is the output gap, fed policy and the rate of economic growth. we know what fed policy is capable of; we have now seen, in real time, the very limits of monetary policy. Does anybody really think that growth is going to rise above trend line on a sustainable basis?

    Finally and most importantly; I don’t think the output gap is materially shrinking as we can see in new credit creation (TOTTL for example). The nature of the output gap has changed materially since the 1980s; supply chain efficiencies have improved. increasing demand is met with an almost instant supply ramp up. this is a structural problem not a temporary cyclical problem. but is it really a problem? I think the problem is the way people think about inflation, deflation/investing and quality of life.


  • Geoff

    That’s sort of my think as per above. Also, Cullen’s point about the labour class gaining power is a worldwide phenomenon. The era of cheap labour from places like China is over.

    On the other hand, the sentiment on bonds is very negative. The pain trade is deflation.

  • no more banksters

    December 23, 2013: banksters celebrate 100 years of absolute sovereignty!


  • Shawn

    I’m not a total conspiracy nut as some would probably claim he is, but I try to remain open to any and all theories. Many great ideas often come from the fringe. The secret is to try and remain open minded.

    I did find at least 1 NYT article citation during 1989:

    “Economists are debating whether important statistics like productivity, savings and the G.N.P. really measure what is going on in the economy. It will not be long, some say, before the Government will be trying to set economic policy with a statistical compass so inaccurate that it cannot find north. In a poll taken at a recent meeting of the National Association of Business Economists, Walter J. Williams, president of American Business Econometrics Inc., said he found that 72 percent of his colleagues were unhappy with data quality, up from 61 percent in 1988. “

  • http://howfiatdies.blogspot.com/ Vincent Cate

    Given the guidelines in the post, I am not making any predictions for Japan or the USA. :-)

  • http://orcamgroup.com Cullen Roche

    :-) Noted.

  • Tom Brown

    Ah, so he didn’t write the article. Thanks for digging that up. I guess if you read his claim carefully he doesn’t claim to have actually written the articles.

  • Suvy

    It’s gonna be debt deflation for everyone except Japan. In a world riddled with excess capacity, I’ve got difficulty seeing how we can get runaway inflation.

  • BB

    Why are rising real wages considered inflationary, and rising real profits considered good economic performance? Improvements in wage share is not always (in fact rarely) inflationary.

    In Australia real wages have increases every year for 20 years, and inflation in less than 2.5%. However, Profit share of GDP is lower compared to the USA.

  • JohnC


    I note no one is mentioning Stagflation as a possibility. Personally I think there is a strong argument to suggest the global economy is on the verge of stagflation – in South Africa wages have not kept pace with inflation (wages increasing at 6-8% p.a. whereas food / energy / cellular increases between 10-15% p.a.).

    Cullen your insights / comments would be appreciated as always.

  • Suvy

    I have a problem understanding how rising real wages are inflationary too. The US had much of the highest real wage growth in an economy with an extremely deflationary bias. I actually think deflation forces real wages much higher than inflation does.

  • Geoff

    Hey Suvy, are you married? If so, your wife may be about to become a widow. :)

  • matt

    Just one current example of higher wages resulting in inflation. One bedroom apartments that just 5 years ago rented for $400/month in North Dakota now rent for four times that amount.

    A one bedroom apartment in Williston, ND was rented for $2100/month — ouch.

  • BB

    That is cheap compared to Sydney. A 1 bedroom apartment in a good location in Sydney can be as much as $600 per week. An ok 3 bed house, $1200 per week.

    Not much inflation in Australia though.

  • Old Dog

    Let’s just get it over with:

    1600 Pennsylvania Ave.,
    Washington, DC

  • Old Dog

    Seriously though – just what is in short supply that will drive prices up?

    Certainly not labor, or commodities, or energy.

    As far as rising medical costs – we will be in a single payer system before long – not that that is a good thing.

    Rising interest rates will kill housing before it gets off its knees.

  • InTheIndustry

    My view is 2014 official CPI will be much the same as 2013. Forward guidance is the same, the market seems to be ok with tapering, and are pay rises really going to happen? I’m rubbish at predicting, but I don’t see policy changing much for 2014. Maybe this is a question for 2015. Cheers

  • Neil Kashyap

    The Apt rent inflation in Williston, ND is due to the Bakken shale exploration growth. More drilling crews landing in those coordinates with limited supply of Apts has led to increased rents.

    On inflation –

    The biggest component to inflation is inflation expectation and it is hard to see that creep up until jobs come back in a meaningful way (as some astute readers have pointed out). Inflation can come in three ways –

    1) Output Gap (when there is more demand than supply) – given low capacity utilization we can’t expect inflation here

    2) Wages – Again not happening given structural employment issues. Also in the 70’s the country had more union membership (and hence higher bargaining power), which led to higher wage inflation. Today’s labor force’s bargaining power is de minimis

    3) Monetary inflation (what people are expecting today). But until money velocity goes up you won’t see this as well. For money velocity to pick up people have to want to borrow, AND banks need to want to lend. Time will tell if this recent uptick in consumer borrowing will lead to inflation.

    My bet has been on deflation over the last few yrs and given inflation has stayed somewhat tame it seems like the right call but as pointed out earlier we all see inflation in our daily consumption so one wonders if it is creeping up on us slowly. That said, a shock to consumer confidence (maybe through another equity mkt correction or some other event) will take out any inflation that has crept in.

    This is one topic where I find smart investors are on both sides of the camp and I think it comes down to one’s time horizon. 2014 I am still in the deflation camp. Time will tell.

  • Mike

    Aging population, increasing number of retirees, increasing health care and college expenses, inability of consumers to use home as ATM this time around, auto refresh cycle, falling median incomes, increasing political pressure on deficit spending, massive drop in home ownership, hedge funds renting homes to masses, drought of capital spending, cash, cash, cash just sitting, millennial work ethic issues, continued cultural pressure on wealth creation, de-emphasis on the importance of education, continued emergence of the entitlement mentality……

    The list could continue for much longer. All of these point to a secular deflationary trend. The fed is losing its ability to fight deflation, and it is coming.

  • casanova

    Inflation in 2014 will happen because Cullen is not expecting it.

  • Greg

    You mean new revised predictions? You already predicted hyperinflation in Japan by early 2014. Times running out.

  • Suvy

    Why? For predicting deflation? Japan has put up with deflation for almost 25 years and now they’ve decided to export the only thing they’ve had that the rest of the world doesn’t want: their deflation. It’s debt deflation everywhere except Japan, where they’ll print until they won’t have any more deflation.

  • Barak

    I think the Goldilocks possibility for the US is that the end of the deleveraging cycle will bring higher growth, while the end of the commodity boom that was mainly led by the BRICS, and specifically China, will limit inflation and help the fed keep his extra low interest rates (not that i think it’s wise). In this case inflation might be under the fed’s target in the next year as well.

  • Stephen

    Generally with that view. Throw in disinflationary effects of upsurge in US energy production on top.

  • Digitking

    I think we might start to see more inflation because China (and to a lesser extent India) will cease exporting deflaton via job outsourcing that has been so prevalent for the last couple of decades. Every plant/job that is brought back to North America will cause upward pressure on wages and lessen senior managers negotiating power (because they can’t credibly use the threat plant closures/outsourcing in negotiations). Moving production from Northern states to Sourthern right to work states will offset some of this but from what I’m hearing just it’s not working out that well because the big plants that need a lot of skilled works can’t find these workers at the wages they wantto pay (similar to what is now occuring in China).

    Just my 2 cents.

  • MG McCune

    Deflation in the discretionary private sector, taxflation in the mandatory public sector.

  • Geoff

    Haha, Suvy, I’m just joshing you about the Widowmaker trade (i.e. predicting inflation in Japan, or shorting JGBs). Who knows, you may be right this time.

  • Andrew P

    I don’t think 2014 will be much different from this year, except perhaps in higher interest rates, and higher energy and healthcare prices. 2015 is a different animal altogether. If the House becomes Democratic, we will see massive wage inflation from a doubled minimum wage. Remember, historically the minimum wage sets a base that inflates all wage scales. If the House remains Republican, and especially if the Senate becomes Republican as well, there won’t be much wage inflation. This is one of the few areas of macroeconomics where it really does matter which Party is in control. Wage inflation is driven by political pressures, not market pressures. (Or for an alternate narrative you could say that market pressures on wages are expressed through the political system.)

  • Andrew P

    The excess capacity has to be destroyed first. Historically, there is one main mechanism for this – war – although sometimes governments destroy excess capacity simply to support price levels as they did in the 1930s. I’ve seen predictions that the 3 main War Cycles will peak in the 2020s. If so we may have high inflation by the 2030s.

    But our political masters are not going to be willing to wait that long for inflation. They need inflation, and need it bad. They are going to try to jumpstart the process by doubling the minimum wage once the Democratic Party gets full government control once again.

  • Andrew P

    Inflation makes nominal wages go up. Deflation makes real wages go down because it produces unemployment which increases the competition for jobs. The only thing that can increase real wages over the longer term is real growth.

  • Andrew P

    The real question is whether the government can engineer an inflationary shock to the system by doubling the minimum wage, and whether this could be self-sustaining. Would this start the wage-price spiral that is intended, or just increase unemployment and automation?

  • Mr. Market


  • MacroTrad3r

    Inflation likely in 1-2% range with risks to downside (although I suspect would need recession to see outright deflation in the US). Asian exporters have been cutting prices to compete with Japan and this deflation will be exported to the Eurozone which is still facing constrained private credit. Better US growth will cushion the blow but Fed not hiking rates any time soon with world still facing largely deflationary forces.

  • AK

    A corporation has only 2 cash expenses — wages + employer’s health care and energy.

    If either of these go up — inflation will go up.

    I agree with some of the comments that labor’s negotiation power is in decline due to less unionization and more globalization. We need to add automation and robotics as another factor acting against the labor.

    The only thing that is working for labor is the increase in natural gas production in the U.S. because it is forcing corporations to bring production back to the U.S. More local production will lead to higher utilization resulting in higher wage demand.

    Labor has a new adversary robotics! The question is whether robotics can replace labor in the U.S. If the answer is yes then inflation may take longer than usual to take hold.

  • BAlex

    It looks to me like there a quite a few commodities trying to put bottoms in on the charts. Combine this with everybody hating commodities and I think the surprise of 2014 could be a pretty nice rebound across a wide section of the commodity complex. Who knows how much of this will translate into reported inflation, but many commodity related stocks are starting to move to the upside. Something is afoot, but I have no idea where it will play out.

  • http://highgreely.com John Daschbach

    Robotics have been a large factor in manufacturing and other industries for decades. It’s nothing new.

  • http://highgreely.com John Daschbach

    I think the focus on YoY inflation is misleading. Better to look at it with and exponentially weighted exponential fit (because it’s naturally a compound function). Looking at the 30+ year trend of this it looks like we will settle long term in the 1.8% range +- 0.3%.

    Looking at the FFR, inflation, and unemployment, it certainly appears that the Fed responds late to inflation with dramatic jumps in the FFR. Eventually this almost always crashes the economy, unemployment spikes up, inflation falls, the Fed responds with a large drop in the FFR, unemployment comes down slowly, and the cycle repeats.

    To the degree the FFR impacts the economy (and the data is pretty solid that it does) the Fed is terrible at controlling it. Any engineer or scientist would apply a PID algorithm to the FFR, which in fact is roughly something Milton Friedman proposed.

    Given where we are on the unemployment curve (we have recovered less than half the damage of the recent recession, and we are still well above the unemployment peak of the previous recession) I don’t see the Fed tightening the FFR significantly until 2015, probably after inflation pushes up closer to 3%.

    I don’t see inflation reaching that level (on the weighted fit, not the silly YoY number) until unemployment is under 5.5%.


  • Warren Gibson

    The monetary base has been inflated at a furious pace. Why has there been little corresponding price inflation? In part because banks have stuffed so much of the new money into excess reserves at the Fed. They can draw that out any time they see good loan opportunities and thereby fuel price inflation. Given the multiplier associated with fractional reserve banking, that $2 trillion could conceivably turn into $10 trillion or more, which would ignite big time price inflation. The Fed knows that, and they are prepared to hold back that flood by hiking the interest they pay on excess reserves. But that would drag other interest rates up with it, putting a lid on the economic expansion and raising the Treasury’s borrowing costs.

    Will that dam burst in 2014? Nobody knows.

  • Shizzmoney

    “Real wages will rise as the labor class gains negotiating power in a stronger economic environment.”

    And I want a blowjob from Christy Turlington.

    You can’t have inflation without rising wages. And without the ability to unionize without repercussion, or the fact that the drop in labor participation rates has outpaced the drop in the unemployment “rate”, as well as both Democrat and Republican opposition to raising the minimum wage in Congress (and it wouldn’t even match the existing depressed inflation levels!)…….”real wages” will not rise.

    But costs of rent, health care, and food will. But the folks who read and write these blogs can afford the food on the table for the holiday. No so much the unemployed (but as one who has been unemployed, I will say it is probably the best diet out there).

    But hey, the stock market and S&P will go up in 2014. What great inflation we will have!

  • Cheeto Dust

    Private households have been de-leveraging. The problem is and always has been too much public debt. There are three ways to deal with this issue – reduce government spending, try to inflate it away, or wealth confiscation. The bill comes due eventually (hello, Detroit!). The bank bail-in in Cyprus was a trial balloon for developed countries everywhere – heed at your own risk.

    Straight from the IMF’s Fiscal Monitor Report from October:

    “The sharp deterioration of the public finances in many countries has revived interest in a “capital levy”— a one-off tax on private wealth—as an exceptional measure to restore debt sustainability. The appeal is that such a tax, if it is implemented before avoidance is possible and there is a belief that it will never be repeated, does not distort behavior (and may be seen by some as fair). … The conditions for success are strong, but also need to be weighed against the risks of the alternatives, which include repudiating public debt or inflating it away. … The tax rates needed to bring down public debt to precrisis levels, moreover, are sizable: reducing debt ratios to end-2007 levels would require (for a sample of 15 euro area countries) a tax rate of about 10 percent on households with positive net wealth. (page 49)”

    The quote above includes an open admission of inflating debt away. That’s the supposed “painless” way of dealing with the problem until it (inflation) becomes the problem. We’ve seen it before and it is happening now with negative real interest rates. Noticeable for its absence from the IMF report is any discussion of reducing public spending as if this is not even an option.

    Frankly, I find the statement – “….and there is a belief that it will never be repeated” laughable. It is the classic child-cookie jar problem. Once the child has grabbbed a cookie out of the jar, he will go back again and again until you put a stop to it. And so it is with heavily indebted governments and weak kneed politicians – they will continue to go back to the “cookie jar” until it is exhausted or the people finally say “enough!”.

    The national debt is around $17 trillion, but the present value of future liabilities (including all the big entitlement spending) is closer to $150 – $200 trillion depending on whose estimate you believe. No telling what Obamacare will add to the above.

    How are we going to pay it? That is the question of our time, and I suspect the answer is not going to be pretty.

  • Geoff

    Warren, your view of the monetary system and banking is somewhat outdated. See this paper:


  • http://highgreely.com John Daschbach

    This is just the incorrect Right wing view of economics. There is no present value of future liabilities in macro economics. It’s almost impossible to save current productivity, except intellectual productivity. The provably wrong concept of present value of future liabilities at the macro level is used by the right wing as a way of repressing people by exploiting a lack of economic intelligence.

    Obamacare will evolve, but it is a great step forward in moving the US towards a morally acceptable health care system that all other developed countries have. To argue against Obamacare is only possible for people who believe that indiscriminately hurting other humans is acceptable.

    Economically Obamacare is a good thing compared to the current system, especially for states that expanded Medicaid. Since the inflation in preventive care is low compared to extreme care, overall health care inflation will be lower with broader coverage.

    Ultimately, there is the fact that the US spends $780/month per person (from birth to death) on health care (about 65% of median family income for a family of 4). Friends and colleagues from other countries are aghast that Americans can have such an inhumane and inefficient health care system.

    We use health care spending as a way to provide employment. Macro economically this is a problem in comparison to other countries and in the unethical distribution of health care services. But because of our aversion to government involvement in the economy it somewhat works for the US.

  • AK

    Automation and Robotics has been around for decades in automotive industry but not in other industries. Now, corporation are looking into implementing robotics wherever possible.

  • Greg

    Using health care to provide employment doesn’t seem like a bad thing to me. We just need to direct it at more prevention and health improvement modalities. Nothing wrong with having a society where a lot of people are taking care of each others health needs. Better than training them to fly bombers and jets in my view.

    I agree that we have an unethical distribution of services

  • Mark Caplan

    Inflation compounded at a 7% annual rate from 1941 to 1948 and again from 1968 to 1982. The worst single calendar year in the earlier period saw 14.4% inflation. The worst calendar year in the later period saw 13.5% inflation. I don’t know that economists have adequately accounted for either bout of high inflation, not even in hindsight. This is worth remembering when one reads inflation forecasts by academic economists and Wall Street pundits.

  • tsicby

    Obamacare is going to wipe out discretionary spending going into 2015 due to the much higher premiums and deductibles associated with ACA compliant insurance policies. This will all but wipe out consumer confidence and demand. So no, inflation will not be an issue in the foreseeable future. I might add, what is so ethical about making a family pay $12,000 in medical expenses and thousands more per year in premiums before ever receiving a dime in benefits. This is a massive transfer of wealth from producers to dependents and it’s not going to end well for the economy.

  • http://howfiatdies.blogspot.com/ Vincent Cate

    As interest rates go down the velocity of money goes down. So if as you are increasing the money supply you also force interest rates down, then you can increase the money supply without causing inflation, for awhile. The equation of exchange explains price/gnp/velocity/money-supply relationship. Hussman showed that lower interest rates make for lower velocity of money (all else being equal).

    The problem comes when interest rates start going up. This causes the velocity of money to go up, which is inflationary. Also, inflation causes the velocity of money to go up, which is inflationary. The “genie out of the bottle problem”. Now the central bank either has to fight harder to hold down interest rates in the hope of lowering velocity, or raise interest rates in the hope of controlling the money supply. Neither of these is fun.

    Anyway, initially QE type acts by central banks seem ok, but in the long run things go bad. I think 2014 is getting to the “long run” for the current central bank actions.

  • Suvy

    The exit from QE should be relatively easy. The only problem is that the exit from QE will cause short term interest rates to spike, which will put a lot of pressure on governments to be able to fund their deficits. The real problem are the massive deficits while we’re at the ZLB.

  • http://howfiatdies.blogspot.com/ Vincent Cate

    I agree, if not for the massive debt and deficit, things would be easy. But aside from that Mrs. Lincoln, how did you like the play? :-)

  • Suvy

    The historical precedent is the exact opposite; the US had the highest real wage increases under an economy with a highly deflationary bias. There are two types of deflation. There is deflation from increased productivity and deflation from the liquidation of debts. The former kind pushes up real wages and employment. The latter pushes down both.

  • Greg

    Agree tsicby, but the problem is the private insurance companies and the stockholders they have to please. Private insurance cos have ZERO incentive to lower premiums. If this thing could have been solved BY the private insurers, why didn’t they already do it? The ACA is giving the insurers what they want by putting everyone in the market but it is asking that they actually provide insurance in return instead of collecting premiums and denying payments.

  • Mr. Market


    Reversing QE will push long term rates higher !!!!! QE allowed e.g. China to sell its 30 year bonds and replace it with shorter term t-bonds.

  • Cheeto Dust

    I don’t really give a flip for macro-economics. This is a public financing issue. Any bond investor – be it municipal, corporate, or treasury – must value the borrower’s future cash flows against their liabilities as well as their ability to repay the loan + interest.

    Of course, when you have one sugar daddy customer buying 75% of your bonds who doesn’t care much about the size or quality of its balance sheet, it may not matter.

    Until it inevitably does.

  • http://macronomy.blogspot.com/ Martin T

    I agree with your prognosis. I share the same view.

  • Cheeto Dust

    Tsicby is right. Obamacare is killing middle class families with huge increases in deductibles and premiums. Household discretionary spending will go down, which by itself will act to restrain inflation.

    The incentive for private insurers to lower premiums is COMPETITION. Allowing insurers to sell across state lines would have greatly increased competition. McCain actuallly proposed this in 2008.

    The unfortunate people who have had their current plans canceled because of Obamacare are finding fewer plans and fewer providers (doctors) at higher costs (premiums and deductibles) thru the government exchange. This issue will compound itself exponentially next year when the employer mandate kicks in.

    This is precisely what we should expect when you limit compeition in favor of a quasi-monopoly, which is where we are headed with a single payer system.

    If you want your healthcare dispensed wth the efficiency of the post office, the compassion of the IRS, at Pentagon prices – Obamacare is for you (paraprhasing Phil Gramm from the 90s).

  • Boston Larry

    I concur with the Jan Hatzius/Goldman view of about 2.0% inflation in 2014. That is consistent with the spread between TIPs and comparable T-notes. And consistent with the results from MIT’s Billion Prices Project, see here: http://www.pricestats.com/ and also here: http://bpp.mit.edu/usa/

    I do not agree with those folks who try to argue that US inflation is two or three times as great as the official US statistics say in the CPI. Their arguments lack sufficient data to back them up.

  • Geoff