Why Aren’t We More Worried About Inflation?

Our stated view for some time has been that deflation, not inflation, is the bigger structural risk for the global economy. But, we can also find plenty of reasons that argue against getting too complacent about the benign state of inflation we currently enjoy. For example, the monetary base has exploded, the amount of borrowings by the government seems destined to crowd out the private sector, and the fiscal situation in the U.S. leaves the dollar vulnerable to future weakness.

However, a number of cyclical indicators we are watching would argue against getting too worried about inflation at this time. Capacity utilization rates are still extremely low, wages are declining and argue against the possibility of a wage-price spiral any time soon, the velocity of money is still decelerating, and the dollar has firmed on the back of weaker European growth rates and insolvency fears coming out of the Euro-zone. We are not complacent about inflation, and it may be that the current cycle will sow the seeds for a future inflation problem down the road. But as we look at the fundamental drivers of inflation, we think there are plenty of good reasons not to get too worried about it at this time.