Breaking News
0
Ad-Free Version. Upgrade your Investing.com experience. Save up to 40% More details

Expect Inflation To Accelerate? Here's 8 Reasons To Expect Decelerating Inflation

By Mike (Mish) ShedlockMarket OverviewApr 11, 2021 01:54AM ET
www.investing.com/analysis/expect-inflation-to-accelerate-heres-8-reasons-to-expect-decelerating-inflation-200572348
Expect Inflation To Accelerate? Here's 8 Reasons To Expect Decelerating Inflation
By Mike (Mish) Shedlock   |  Apr 11, 2021 01:54AM ET
Saved. See Saved Items.
This article has already been saved in your Saved Items
 

US Per Capita Real GDP 1871-2021
US Per Capita Real GDP 1871-2021

Lacy Hunt at Hoisington Management has some interesting thoughts regarding the inflation debate.

Case For Decelerating Inflation

In its Quarterly Review and Outlook for the First Quarter of 2021, Lacy Hunt makes a case for decelerating inflation.

"Contrary to the conventional wisdom, disinflation is more likely than accelerating inflation. Since prices deflated in the second quarter of 2020, the annual inflation rate will move transitorily higher. Once these base effects are exhausted, cyclical, structural, and monetary considerations suggest that the inflation rate will moderate lower by year end and will undershoot the Fed Reserve’s target of 2%. The inflationary psychosis that has gripped the bond market will fade away in the face of such persistent disinflation.

"After declining 5.2% in 2020, or the most since World War II, world-wide real per capita GDP is estimated to rise 4.7% in 2021. The United States will perform even better, rising 6.2%, after a contraction of 4.9% in 2020. The U.S. growth rate this year could be the fastest since 1984 and possibly even since 1950 (Chart 1).

"Five considerations suggest that such growth is not likely to lead to sustaining inflation."

Lacy said 5. I added a 6th bullet point from his discussion, then added 2 more points of my own.

Six Reasons To Expect Disinflation

1. Inflation Is A lagging Indicator

As classified by the National Bureau of Economic Research. The low in inflation occurred after all of the past four recessions, with an average lag of almost 15 quarters from the end of the recessions. (Table 1 Inflation Troughs Below)

2. Productivity Rebounds In Recoveries And Vigorously So In The Aftermath Of Deep Recessions

This pattern in productivity is quite apparent after the deep recessions ending in 1949, 1958 and 1982 (Table 2 Below). Productivity rebounded by an average of 4.8% in the year immediately after the end of these three recessions and unit labor costs were unchanged. The rise in productivity held down unit labor costs.

3. Restoration Of Supply Chains Will Be Disinflationary

Supply chains were badly disrupted by the pandemic. Low-cost producers in Asia and elsewhere were unable to deliver as much product into the United States and other relatively higher cost countries.

This allowed U.S. producers to gain market share. As immunizations increase, supply chains will be gradually restored. Thus, the pandemic cost the low-cost producers market share which was shifted to domestic producers.

4. Accelerated Technological Advancement Will Lower Costs

Another restraint on inflation is that the pandemic greatly accelerated the implementation of inventions that were in the pipeline. Necessity is the mother of invention, as has been demonstrated in earlier crisis situations like wars.

Thus, the technology du jour is not the same as the technology of a year ago. This will also serve to act as a restraint on inflation. Much of the technology substitutes machines for people, communication without travel, and work without offices.

5. Eye Popping Economic Growth Numbers, Based On GDP In Present Circumstances, Greatly Overstate The Presumed Significance Of Their Result

This is where the fallacy of the broken glass comes into play. Many businesses failed in the recession of 2020, much more so than normal. As survivors and new firms take over their markets, this will be reflected in GDP, but the costs of the failures will not be deducted.

6. The two main structural impediments to traditional U.S. and global economic growth are massive debt overhang and deteriorating demographics

Both having worsened as a consequence of 2020.

Inflation Troughs

Inflation Troughs After Recessions
Inflation Troughs After Recessions

Sharp Economic Rebounds

Sharp Economic Rebounds
Sharp Economic Rebounds

Mish Comments

Lacy is talking about "inflation" as measured by the BLS. I am in 100% agreement with every point. Thus, I expect bond yields to soon peak if they have not done so already.

Year-Over-Year Inflation Spike Coming

The above viewpoint is not incompatible with my March 12 post Inflation is Poised to Soar, 3% by June is "Almost Certain"

Year-over-year comparisons produce very large numbers, up and down, heading in and out of recessions.

I commented:

"It's not that inflation will be rampant. Rather, it's the impact of year-over-year comparisons, goosed by a huge Covid-related dip in energy prices in April and May of 2020."

I also commented A Producer Price Index Inflation Spike Is On The Way Too

The rationale is the same.

Hello Fed, Inflation Is Rampant And Obvious, Why Can't You See It?

Q: Has my view change?
A: No.

Q: Is it inconsistent?
A: No.

Q: Why?
A: Lacy is talking about "inflation" as measured by the BLS. I addressed home prices in detail substituting home prices in the CPI for Owners' Equivalent Rent (OER) in the CPI.

I stand by that measure of inflation and it's out of control.

The Fed blew another set of bubbles and did so on purpose.

Two Bonus Reasons to Expect Lower Inflation

  1. Bubbles Pop
  2. Higher Taxes

Lacy came up with six excellent reasons to expect lower inflation. To those we can easily add two more.

1. Bubbles Pop

The expansion of bubbles is highly inflationary and popping is the reverse. Please note the Largest Increase in Margin Debt Since 2007 Fuels Stock Market

What happened in 2000 and 2007? I think you know the answer to that question. Bubbles inevitably pop and the result, by definition, is not inflationary.

2. Higher Taxes

Tax hikes are hugely disinflationary. Look at where we are headed.

Not all of those tax hikes will pass but some of them will. Biden wants to increase the corporate tax rate to 28% from 21%. Look for a compromise at 25% or so. Progressives want huge tax hikes, via reconciliation, some of them will get through.

These tax hikes are very recessionary and disinflationary.

Recovery in Low Paying Jobs

That's not a big inducement to higher inflation either.

Add Things Up

Add it all up and you have 8 reasons to expect inflation will soon peak.

Original Post

Expect Inflation To Accelerate? Here's 8 Reasons To Expect Decelerating Inflation
 

Related Articles

Expect Inflation To Accelerate? Here's 8 Reasons To Expect Decelerating Inflation

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind: 

  • Enrich the conversation
  • Stay focused and on track. Only post material that’s relevant to the topic being discussed.
  • Be respectful. Even negative opinions can be framed positively and diplomatically.
  •  Use standard writing style. Include punctuation and upper and lower cases.
  • NOTE: Spam and/or promotional messages and links within a comment will be removed
  • Avoid profanity, slander or personal attacks directed at an author or another user.
  • Don’t Monopolize the Conversation. We appreciate passion and conviction, but we also believe strongly in giving everyone a chance to air their thoughts. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at Investing.com’s discretion.

Write your thoughts here
 
Are you sure you want to delete this chart?
 
Post
Post also to:
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
 
Are you sure you want to delete this chart?
 
Post
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's Investing.com's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.
Continue with Google
or
Sign up with Email