So will it be inflation? Or Deflation?
As the economy comes out of its funk, two opposing camps are preparing for battle. The inflation hawks point to the massive expansion of the Fed’s balance sheet and monetization of the deficit as a likely precursors to accelerating inflation. Nature abhors a vacuum, and those dollars will find a home somewhere.
The deflation bears point to the increasing “output gap” and the downward pressure on wages that 15.8% total unemployment necessitates as causing deflation, or at least lower inflation. How can such a slack labor force demand higher wages, or pay higher prices?
My answer? They’re both right. There is no question that wages are going to be stagnant for a while. Too much labor is chasing too few jobs for wages to rise significantly. But that doesn’t mean that other issues can’t push up prices. Problems with financing are boosting crop prices. And as the world economy recovers, the dollar is likely to fall. That will drive up oil prices.
So I expect stagnant wages and rising commodities. Call it the big squeeze. Ouch.
Douglas R. Tengdin, CFA
Chief Investment Officer
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