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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  1. “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!

  2. 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.

    • 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.

      • 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

      • 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.

  3. 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.

  4. 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.

    • 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.

    • 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).

  5. 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.

    • 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.

      • 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? :-)

      • Nope.

        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.

  6. 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.