“How many people..? How much steel…?”
Data indicative of ongoing price pressure continues to pour in. In addition to PPI beating expectations, and continuing strength in the ISM Manufacturing Prices Index (which Tim Fiore discussed in an interview with Manufacturing Talk Radio), price are catching the attention of policymakers. Chinese officials “warned about the potential rise of commodity prices and consumer inflation”, and the Fed may be thinking on similar lines. The minutes from the March FOMC meeting highlighted “the staff viewed the risks of upside inflationary pressures as having increased since the previous forecast and now saw the risks to the inflation projection as balanced”.
At the risk of receiving the kind of second opinion that Rodney Dangerfield got from his psychiatrist, it is perhaps worthwhile to take a look at the other side of the coin by considering the points being brought up by those more relaxed about the prospect of inflation.
First on the list is Claudia Sahm, the namesake of the Sahm Rule. In an opinion article for Bloomberg, Sahm writes that arguments about the economy overheating that rely on traditional ideas of “potential output” are based on faulty assumptions about the nature of output, and ignore the potential of more equitable economic outcomes.
Second, Stephanie Kelton offers some perspective on the inflationary dynamics of fiscal spending. In the context of discussing the latest infrastructure proposal from President Biden, Kelton warns that the ambitious expansion of “physical and human infrastructure” “might mean that we start to run out of available capacity as we go”. However, she gives several suggestions on how “to avoid short-run constraints like supply bottlenecks” and for “containing inflationary pressures”.
Last on the list is Lacy Hunt. Hunt, whose inflation views we highlighted in August 2020, spoke with Danielle DiMartino Booth in a Real Vision interview explaining a number of reasons why he doesn’t buy into the “inflationary psychosis that’s been gripping the financial markets”. To make his point, Hunt examines the historical phenomenon of higher indebtedness leading to “falling rates of inflation and in two cases there was such falling inflation that we actually went into deflation.” Hunt also explains that supply chain dynamics over the last year point “in the direction of lower inflation”. He argues that, with supply chain disruptions freezing low-cost producers out of the US market, “domestic producers were able to gain market share”. Once supply chains are restored, Hunt believes that there will be “a price war” as “US producers are going to try to hold” onto market share while foreign producers “try to get back to where they were”. Hunt offers additional perspective on other dynamics, such as the velocity of money, as well as caveats regarding a potential “road to hyperinflation”, and the interview is well worth watching (or reading).
