Bill, RE: If one examines the various statistics that CNBC and others fret about, the root "inflationary pressures" are twofold: Oil and Tobacco.
I guess I'd have to disagree with your premise that a lot of the 'inflation' that is out there is illusory. I guess I am in the complete opposite camp.
There has been a huge shift in the investment patterns of most companies and venture capitalists over the past 2 or 3 years, resulting in an overweight in companies with little infrastructure requirements (e.g. the dot.com world) and underweight in commodity based industries. Critical industries are now capacity constrained that will cause core inflation to continue above most people's expectations over the next couple of years.
First, look at crude oil: The OPEC discipline would mean nothing if the domestic exploration and production industry hadn't cut way back on its own capacity over the past two years. Thus, when OPEC cut back, there was nobody to make up the slack as has been the case over the 90's. This imbalance still exists and thus, no matter what OPEC decides in March, my guess is that crude prices (and, derivatively, natural gas prices) will average much higher than expected prices this year.
Next, prices of many other important industrial commodities have increased sharply over the past year, and this will soon be reflected in the CPI. The price of aluminum has doubled. The price of nickel has doubled. The prices of various paper commodities is increasing sharply. In fact, this past year, for the first time in recorded history, the capacity of the paper industry declined. Planned capacity increases in the paper industry will barely budge over the next 3 years. There is just no one investing money in this capacity. And when somebody buys a computer, it's got to be in a box, remember.
And, unlike others contentions that this capacity isn't needed, I would point to the prices of these various commodities that are increasing. If this capacity truly wasn't needed, the prices would either be unchanged or be moving down. |
