Like Asia, European equities have gotten a lot cheaper compared to historical averages. Another simi...
Our Fears May Be Inflated
04/15/2011 4:22 pm EST
Despite data that points to very low core inflation in the US, market bears are stressing over data in the US and abroad that may lead to more worrisome numbers down the road.
People who know how many calories they’ve had for breakfast, and those who pay close attention to safety briefings before takeoffs, may find Friday’s inflation numbers troubling.
- Prices in China accelerated last month to a 5.4% annual rate—the highest in more than two years, and two ticks hotter than the consensus forecast.
- India’s inflation rate perked up to nearly 9%, raising expectations for additional rate hikes, as in China.
- Even in the debt-ridden Eurozone, the consumer price index was up 2.7% year-over-year, a shade hotter than the prior month’s reading and forecast. There, too, benchmark rates are on the rise, notwithstanding the rising likelihood of economic collapse in Greece, Ireland and other guinea pigs experimenting with German prescriptions for austerity uber alles.
About the only place inflation didn’t run hotter than expected last month was here in the US, where the consumer price index rose 0.5% in March, and was up 2.7% on the year. Excluding food and energy yielded a tame 0.1% uptick for the month and a modest 1.2% increase in a year.
Though it’s become fashionable to ridicule this “core” number as heedless of reality, it has traditionally been a more useful predictor of future inflation than data that includes the prices of groceries and gas.
But even the US data is highly unlikely to reassure worrywarts that pricing pressures are contained.
Start with the fact that, over the last three months, consumer prices have risen at a 6.1% annual rate. Throw out the inflation-dampening effects of housing, and the number for the last three months, annualized, jumps to 8.5%. Housing’s not exactly a leading indicator either.
Meanwhile, groceries—most people’s primary point of reference with regard to price trends—have appreciated this year at an 11.2% annual rate.
Inflation hawks who question whether government statistics fully reflect reality also have plenty of other evidence at hand. Gold (GLD) charged to a new record today, while silver’s (SLV) white-hot rally—which would be hard to justify based on industrial demand or the supply outlook for the metal—tacked on another 2%.
And then there was Google (GOOG), its shares slammed after earnings fell short of expectations. They did so because, while revenue jumped a healthy 29%, operating expenses soared 54%, driven primarily by hiring, pay raises, and advertising and marketing expenses.
Google recently handed out a 10% across-the-board pay hike to all non-executive staff, so while public employees everywhere are getting squeezed, Silicon Valley technorati will have no trouble at all with the rising price of lattes.
NEXT: So Things Are Terrible, Right?|pagebreak|
So Things Are Terrible, Right?
Taken out of context, the headlines paint inflation as a clear and present danger, raising the odds that the inevitable monetary tightening needed to fight it will ultimately throttle the recovery.
Now for some context: Traders of stocks and commodities issued a giant yawn in response to the data. They looked at China’s 5.4% inflation in the context of an economy growing almost 10% a year, and decided that Beijing would do nothing to upset the apple cart.
Oh, sure, the Chinese government is ordering up some price controls. It might also hike rates again and increase the reserve requirements for banks. These are the sort of policies that get cited whenever the global risk trade takes a break.
But the reality is that—for all the rate increases, reserve requirement hikes, and other posturing—the people calling the shots in Beijing remain steadfastly pro-growth and pro-exports.
This is why China’s foreign-exchange reserves have soared to a record $3 trillion, why its money supply is up more than 16% year-over-year and why bank lending keeps growing over and above the officially mandated flood of easy credit unleashed in 2009 and 2010.
Meanwhile, in the US, 3% growth and inflation in the same ballpark isn’t going to spark a hawkish revolt at the Federal Reserve. There hasn’t been so much as a squawk of protest or a symbolic dissent so far this year, and one of the ostensible hard-liners, Philadelphia Fed President Charles Plosser, has just opined that the Fed is not behind the curve on inflation.
Meanwhile, the doves, led by Fed Chairman Ben Bernanke, plan to complete the latest bond-purchasing program in June—and then sit on those purchases for a good long while, keeping interest rates low. As one of them whispered into the ear of CNBC’s Steve Liesman this week, you don’t drive all the way out to California only to turn around and come right back.
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What Can We Do?
The Fed is going to take its sweet time. The dollar will keep going down until such time as it’s cheap enough for the US economy to draw its fair share of corporate investment.
There’s no shame in that. The 17% of the labor force that’s unemployed or underemployed would also like to earn enough to have a latte, now and then.
Much has been made of the benefits the US derives from the dollar’s role as the world’s reserve currency. And it’s true that the dollar’s global status has permitted consumption way beyond our means without the restraint of higher interest rates.
But there have been costs as well, in particular chronic underinvestment because the dollar has remained much more expensive than warranted by economic fundamentals, and the resulting hollowing out of the workforce. The US economy functions best when 20% of the population is not scrounging and another 30% is not worried about having to do so in the near future.
Consumers may complain about high food and gas prices, but they spend based on employment prospects. And there’s nothing natural about a 9% unemployment rate—it’s more an artifact of currency controls abroad.
It’s not as if those spooked by inflation alarms have no options beyond demanding that the Fed steer the economy back into a recession. They could go out and buy the iShares MSCI Singapore ETF (EWS), which is up 15% in a year’s time, and could get another boost now that Singapore has said it will permit faster currency appreciation.
The unemployed have no comparable means to offset a too-strong dollar that has deprived them of a paycheck, self-esteem and career prospects. The Fed has a legal mandate to help them, even if its policies ding the net worth of investors who aren’t properly hedged.
(No positions for securities mentioned in this column. I do have stakes in a grains proxy (JJG), as well as Chinese chip maker Spreadtrum (SPRD).)
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