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24/7 Inflation Watch

04/22/2014

Although he looks to be a stereotypical absent-minded professor, Dr. Jeremy Siegel of Wharton remains my favorite absent-minded-looking-but-nonetheless-brilliant professor.

His latest commentary raises an eyebrow about the return of inflation.  The Producer Price Index for March was greater than expected.  Gas prices have risen to almost a 12-month high.  Factory usage as measured by the capacity utilization index has risen to 79.2% — 80% is traditionally the minimum level for inflation to occur.

While inflation watch is a 24/7 job, I have not lost much sleep about this yet.  Until the velocity of money or the number of times a dollar is spent each year rises, I don’t foresee inflation of the demand-pull variety.

You’ll recall inflation may be demand-pull whereby the demand for a good or service is so strong that the seller can raise the prices.  Or, it can be cost-push inflation, which can occur when there are bottlenecks or supply shortages in manufacturing or delivery costs.  Dr. Siegel suggests that we watch cost-push inflation more closely.

Supporting this view, in a conference call yesterday with the National Association of Business Economics, I learned that 31% of businesses reported higher material costs, compared to only 15% a year ago.  Also, 35% reported higher wage costs, compared to only 23% a year ago.  Yet, the number that reported increasing their prices remained constant at 20%, which means profits are getting compressed.  That cannot last very long and could create a sudden outbreak in cost-push inflation.

Janet Yellen and the Fed are more worried about deflation right now, but my old professor should not be ignored.  

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