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.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.
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