Six Reasons to Expect Inflation: 1- China is running short of cheap agricultural labor and workers are flexing their muscles, generating higher wages. 2- Big structural changes in countries like Brazil have been a boon for domestic economies. In the past, similar growth rates would have driven high inflation, but this time government prudence, more flexible labor forces, investment and the like have suppressed price pressures even as economies boomed. But the benefits of those structural changes are running out and inflation is picking up even as trend growth slows. India is the most clear example of these forces, but they are also coming to the likes of Russia and Brazil and elsewhere. 3- Germany’s reunification nearly a quarter of a century ago caused a long period of low economic growth and forced big labor force and welfare reforms. Changes allowed unemployment to fall back sharply without any wage pressures, boosting export growth and making Germany into Europe’s economic engine since the single currency was adopted. So far that hasn’t fed through into wider German inflation–though it has boosted domestic asset prices–but it almost certainly will, unless the rest of the euro zone drags Germany into slower growth. 4- Other euro-zone economies might be bottoming out this year or early next, thus reducing deflationary forces battering the continent. OK, so the evidence for this is modest and there are plenty of forecasters who’d argue the Great European Recession/Depression still has years to run, but the pace of decline must almost surely slow in countries like Greece, whose economy has already shrunk by 20% from its pre-crisis peak. 5- The U.S. economy is rebounding, employment is picking up and wage settlements are increasing. 6- Paradoxically, the U.S economy’s big headwind–government belt tightening–could prove to be inflationary. Yes, that sounds absurd, but here’s the reasoning: U.S. companies saw a huge profits boom since the downturn, thanks to the government’s unprecedented peacetime deficits. But since firms cut labor in response to the recession, that surplus accrued to companies rather than workers. Now, the fiscal cuts mean smaller government deficits and imply smaller private sector surpluses. Workers are being rehired, so the squeeze will be on corporate profits. But companies resist squeezed profits and will try to make them back somehow. And that’s likely to come through price hikes. This is one of the reasons why European economies haven’t suffered more deflation despite their long economic woes. Companies have been defending their margins.
Posted on: Tue, 23 Jul 2013 14:50:17 +0000
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