Hi Maurice, and the inflation you so championed and approved of is getting underway in big way ...
Again, no URL for same reason as stated in previous post.
Prices aren't creeping up? Yeah, right...
Sharon Reier IHT
Saturday, April 13, 2002
A Swiss banking executive found this month that a room at a five-star Milan hotel cost E350. The brochure for last year, he found, quoted 450,000 lire, or about E250, for the same room.
Six months ago, the owner of a high-tech business in Connecticut found supplemental health-insurance premiums for his 200 workers had increased by 65 percent.
As a result of the transition to the euro, a service shop in the business-oriented 8th arrondissement of Paris raised prices for copies and fax use to 4 euro cents from 20 centimes - an increase of 25 percent.
In Japan this winter, as prices were spiraling downward all around, McDonald's stopped offering its special, low-low-priced lunches during weekdays.
Is there a whiff of inflation in the air? Or are these phenomena an illusion?
If you listen to the official view - as promulgated by the Federal Reserve Bank, the European Central Bank and large financial institutions like J.P. Morgan Chase Co. and Commerzbank AG - inflation is essentially dormant. The ECB, in particular, explains away the increases as "shocks"
and does not count them as inflationary unless they trigger other increases, such as higher wages.
But the anecdotal evidence is overwhelming that prices are on an upward march - borne higher by a variety of factors, from monetary policy to the changeover to the euro, and bolstered by a growing body of statistical evidence. And that has implications for investors in all asset classes.
As expressed in what economists call the headline figure, which is what most people see in the media, U.S. inflation in the 12 months through February was a moderate 2.6 percent. Add in volatile food and energy prices, which fell, and the consumer price index rose only 1.1 percent.
Inflation in the 12 countries that use the euro is also around 2.6 percent, above the ECB's 2 percent target but modest by historical standards.
But all price indexes are not created equal. Among the experts who are capable of constructing and deconstructing such things, there is considerable disagreement about how to measure prices and what prices to include.
Stephen Cecchetti, an economist at Ohio State University, and Michael Bryan, a vice president at the Federal Reserve Bank of Cleveland, have created a median consumer price index, which is published monthly by the Cleveland Fed. Cecchetti said he and Bryan created the index to find a
more logically consistent and less arbitrary measure of inflation than the one compiled by the Bureau of Labor Statistics. The median index strips out "outlyers," or items that rise or fall drastically. For instance, if tobacco prices rise dramatically for a month, or computer
prices plunge, they are stripped out.
For months, Cecchetti's median index has been rising faster than the headline figure. In February, for instance, when the headline CPI excluding food and energy was up by 3.2 percent, his median index was up 4.2 percent. For the 12 months ended February, when the official core CPI was up 2.6 percent, Cecchetti's median index was up 3.9 percent.
One reason inflation has seemed to be so low over the past few years is that globalization, with its ability to lower labor costs, has cut the cost of commodities and many manufactured goods. But Cecchetti hypothesized this year that there was a danger that the price of goods will stop falling, while service prices continue to rise at the rate
they have established. Or, as he put it, "There is only so much the price of tennis shoes can fall."
By February, Cecchetti's prediction seemed to be coming true. After falling steadily for some time, core goods prices, as measured in commodities and excluding food and energy, were flat - but core service prices rose by 5.2 percent. Housing and medical service costs, in particular, had risen - housing by 6 percent, medical services by 4.7
percent. Medical costs were up because employers are shifting more expenses to employees.
As non-energy goods make up 30 percent of the index, and services 70 percent, "simple arithmetic leads to the troubling conclusion that inflation is on its way over 3 percent," Cecchetti wrote. "To make matters worse, the possibility of a global recovery combined with a moderate dollar depreciation presents the risk that inflation could go even higher."
While economists argue about semantics, investors who follow the money rather than concepts might look for clues in other areas, such as bond prices. Because bond investors want interest payments that exceed inflation, bond prices fall and yields rise whenever markets perceive inflationary pressures.
So what explains the fact that yields on 10-year U.S. Treasury bonds have gone from 3.3 percent to 4.25 percent in the past five months?
"People who buy a bond with maturities of five years, seven years and 10 years care about the long term," said Gerard Piasko, chief investment officer at Bank Julius Baer in Zurich. The jump in the 10-year bond "cannot only be explained by better-than-expected growth. There is
something about the inflation rate going two quarters out."
The "something" could be the tremendous overhang of money created by the fact that interest rates have come down all over the world - in the United States, to 1.75 percent from 6.5 percent in the past year. Interest-rate cuts go hand in hand with increases in the money supply. And when money supply grows, prices of some assets rise.
James Grant, publisher of Grant's Interest Rate Observer, cites Bank of Japan figures showing a 33 percent rise in that country's money supply over the past 12 months. "That is the highest since the early 1970s, during the oil shock," he said. "It is an extraordinary amount of credit
creation." The Fed's interest-rate policy has grown the money supply 10 percent over the last 12 months, he said.
Of course, interest-rate cuts are intended to stimulate slumping economies. But the effect on prices is unmistakable. "When two out of three of the world's largest central banks are leaning in the direction of stimulus," Grant said, "you are a wise investor to stand up and take
note."
There are other government policies that may also be feeding inflation:
The war on terrorism, with its defense buildup. "This year we will see a 13 percent increase in nondiscretionary federal spending," said Paul Kasriel, Northern Trust Co. chief economist. "An increase in government spending can worsen the tradeoff between economic growth and inflation,
because the government doesn't use resources as effectively as the private sector."
Trade policy. The tariffs Washington recently imposed on steel and Canadian lumber are resulting in higher material prices. "That is not in itself inflationary," Kasriel said. "But a lot of companies use steel and if they can't pass along the price, they will have to lay off people
and the Fed will be under pressure to keep printing money to make sure people are employed."
Investors who believe the inflationary thesis have many ways to take advantage of - or hedge against - rising prices.
Grant suggested inflation-linked bonds, known in the United States as TIPs (for Treasury Inflation Protected bonds). Similar instruments are available in Britain, France, Canada and New Zealand. The bonds pay an inflation bonus at maturity that is linked to the CPI. TIPs are now yielding 3.22 percent, while non-indexed bonds yield 5.25 percent. The difference is the inflation expectation. According to Grant, TIPs are discounting inflation at a 2 percent rate for the next 10 to 20 years - so if inflation rises over 2 percent, you are a winner.
Andy Engel, senior analyst at the Leuthold Group in Minneapolis and compiler of its monthly Inflation Watch, last month began recommending specialty retailing stocks and restaurant stocks. "It is a play on the consumer and that spending will continue," he said. "There will be
higher prices. But the consumer will step up, and margins will improve."
Housing also continues to appear attractive. Robert Shiller, a Yale economics professor and principal at Case Shiller Weiss Inc., a real estate consulting firm, predicts that property prices will continue to go up in most places. Although a few high-tech related areas like San Francisco and San Jose, California, have seen housing prices fall,
Shiller said that people were pretty confident now about real estate.
"People seem to think that it is not worth saving any money," Shiller said - as concise a description of inflationary times as you can devise.
Copyright © 2001 The International Herald Tribune |
