However, the deflation predictions may be a little extreme as signs of inflation are creeping back.
Gluskin Sheff’s David Rosenberg wrote about it last week in his Breakfast With Dave note.
He began with an illustration about psychology. (emphasis added)
THE DEFLATION HOAX
I spent the 19080s and 1990s on trading floors with old veterans from the late 1960s and 1970s who had only seen rising inflation and higher bond yields. They knew from nothing else and so it was very tough for them to buy into the disinflation theme and declining interest rates. In the periodic spasms to the upside they would say “Rosie, ya see, inflation is back”. You see, they couldn’t differentiate between what was cyclical and what was secular. And then I noticed in the 1990s and this past decade-plus, that we have an entirely new crew of bond traders on the desks, the sons, daughters, nephews and nieces of the old guard, who have only known disinflation, deflation, lower (minuscule) bond yields and radical Fed easing cycles. That is all they have known for their entire professional lives. Their elders didn’t see the great deflation coming, and the offspring don’t see the remote prospect of a moderately higher inflation environment coming at any time on the forecasting horizon. They have become entrenched in the consensus view of demographic strains, excess capacity and demand deficiency (I was there once, but knew when to make the turn).
That’s how generational turnover can mess with forecasts.
And that brings us to today.
So here we have the CPI flat in November on the back of 1% gas-induced slide in energy prices. The core inflation measure rose an above-expected 0.2%, the most since July, and the deceleration in the YoY trend has in fact bottomed out now at +1.7% for three months running. While there has been mild deflation in the commodity space — the core goods CPI has dipped 0.1% for three months running and now is at -0.2% YoY, but this cannot be expected to last indefinitely. At some point, resource prices will find a floor — unless, of course, China slips into a downturn.
After all, the industry capacity utilization rate is inching closer to 80% and on track to soon match the cycle highs of six years ago. But the hurdle for the deflation theme is what is happening with core services which actually jumped 0.3% in November, the fastest increase since January, and the YoY trend definitely carves out a bottom and has actually hooked up a tad to +2.4% on a YoY basis. What exactly is deflationary about that? Movie ticket prices up 1.2%. Vet services up 0.6%. Restaurants up 0.3%. Air fares up 2.6% on top of a 3.6% surge in October, the biggest back-to-back gains in over five years. Delivery services up 1% and rising now for four straight months and up at a 5% annual rate over the time. Hotel rates also soared 3.6% in the sharpest increase since October 2005! Oh, but there’s no inflation. I forgot.
Tight capacity utilization is being cited widely as a reason why wages are soon to increase.
Among other things, slow medical cost inflation has been holding back prices. But this isn’t expected to last.
Inflation will certainly be something worth keeping an eye on.
Later this morning, we’ll get that November reading of core PCE, the Federal Reserve’s favourite measure of inflation.