Inflation Nation?

Is inflation overseas headed our way?

That’s the question on a lot of people’s minds these days. In England, inflation is running at 4% and headed higher. In China inflation is 5%. In Brazil it’s 6%. Could their inflation come our way?

Certainly the headlines are worrisome. Commodity prices are soaring: wheat, sugar, cotton, even industrial metals like zinc and lead are soaring. Growing economies in Asia and Latin America–notably China and Brazil—are boosting global demand for raw materials. But because poorer countries spend proportionately more on food and energy than we do, those commodities play a larger role in their price indices.

But there’s another angle. Unemployment in Brazil is 5%, in China it’s 4%. The largest component of inflation is labor costs. In the US, with unemployment at 9%, it’s assumed that inflation can’t get out of control. But that was the assumption in the ‘70s, when inflation accellerated from 3% in 1972 to 10% in 1975 at the same time that unemployment rose from 5% to 9%.

The inflation we experienced then wasn’t imported. Easy money led to excess demand even as investment in new production fell. Rising prices triggered adjustments in labor contracts, which became part of a structural inflation problem. Up until now, that hasn’t been part of this cycle. But when too many dollars chase too few goods, that kind of monetary inflation takes drastic measures to tame.

Excess inflation doesn’t have to be imported. We are quite capable of growing our own.

Douglas R. Tengdin, CFA
Chief Investment Officer
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