Here’s the flip side of the Sober Look article I posted earlier. Bank of America brings us 4 reasons why inflation is likely to remain low (via Calculated Risk):
Reserved money growth
Since the beginning of the economic recovery, monetarists have argued that with the Fed’s massive balance sheet strong inflation could be just around the corner. Our response has always been: reserves are not money, and unless those reserves stimulate a surge in bank lending and spending, they are not inflationary. … even with the recent pick up in business lending, overall bank lending is still growing at half the normal pace of a business expansion. …
Another key inflation concern is that special factors have temporarily held inflation in check and are now reversing. There seems to be an element of this in medical inflation. Inflation dipped last year as government payment rates were reduced and as key drugs became generic. Thus the medical PCE price index fell 0.45% in April 2013 and then rose 0.20% this April. That swing alone added more than a tenth to year-over-year core PCE inflation. However, we are reluctant to extrapolate the recent strength going forward. …
It’s a small world after all
In our view, one of the most underrated factors in recent inflation movements is the impact of global markets. … In recent months, there have been some signs of a bottoming out of consumer import prices. However, a significant acceleration seems unlikely. The conditions that created the low inflation are still in place: emerging market growth remains low, there is abundant spare capacity in the global economy, the dollar is trending higher and Europe is at risk of sliding into deflation. The main upside risk comes from commodity prices, but usually that takes some time to develop.
While there is a lot of talk about higher wage growth, there is very little evidence. …. In our view, there is still some slack in the labor market; when slack disappears, the rise in wage growth will be very slow, and as Yellen made clear at the press conference, the Fed will welcome the initial rise in wage inflation as a sign of normalization rather than inflation.
Read more at https://www.calculatedriskblog.com/2014/06/merrill-lynch-inflation-bump-up-or-bust.html#eOdVm5vqZgwX0L5M.99
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.