Inflation, Inflation, Inflation...

Generali

...aka if the recovery is so strong and the Fed is raising rates, why hasn't inflation taken off?

Two reasons IMHO. Firstly the oil price. Everyone can see what's happened. It's this:



This is quite a good article on what has happened to oil prices in the US:

http://www.nytimes.com/interactive/2016/business/energy-environment/oil-prices.html?_r=0

Reason number two? The US is by far the world's biggest food producer and a massive exporter. In 2013 for example, they produced enough corn for every man, woman and child on the planet to have a kg a week! This is what has been happening to food prices:

http://climateerinvest.blogspot.in/2016/01/deflation-food-prices-fall-at-fastest.html?m=1

To paraphrase the article, in the US there have now been 26 consecutive years of near-perfect food growing conditions and food prices have fallen 17.1% in the US in 2015 alone.

It is highly unlikely IMHO that both oil and food prices will continue to fall at the current rates which means that inflation should start to trend upwards pretty soon as falling oil and food falls out of the CPI calculation.

FWIW, in the CPI transport costs are down 2% and 'food and non-alcoholic beverages' is down 3%.

chucknorris

Generali wrote: »

...aka if the recovery is so strong and the Fed is raising rates, why hasn't inflation taken off?

Two reasons IMHO. Firstly the oil price. Everyone can see what's happened. It's this:



This is quite a good article on what has happened to oil prices in the US:

http://www.nytimes.com/interactive/2016/business/energy-environment/oil-prices.html?_r=0

Thanks, a good link. I do wonder if the fall of the markets attributable to the drop in oil prices (I'm not saying oil is the only drag factor) might have been overdone a bit. Obviously it hits the oil companies hard, and they are very significant companies, but what about the other companies who are consumers and also individual households too, now having more money to spend. Has this been factored into sentiment sufficiently? Or perhaps that just takes a bit longer for the benefit to be fully realised? What do you think?

Generali

chucknorris wrote: »

Thanks, a good link. I do wonder if the fall of the markets attributable to the drop in oil prices (I'm not saying oil is the only drag factor) might have been overdone a bit. Obviously it hits the oil companies hard, and they are very significant companies, but what about the other companies who are consumers and also individual households too, now having more money to spend. Has this been factored into sentiment sufficiently? Or perhaps that just takes a bit longer for the benefit to be fully realised? What do you think?

It will take time for the oil price fall to feed through into economic activity but imagine the impact on the US economy, for example, of an extra $750/year to each and every household that was being spent on imports now being spent in bars and restaurants and shops.

The fall in share prices is driven by the Fed increasing rates I reckon. All yield assets, IMHO, have become bond-like. You can think of shares as effectively being perpetuals. As the Fed raises rates, asset values will fall vs the income they generate. Of course for a share or a house that income can be variable so it isn't a simple straight-line calculation: the economy does better so the Fed raises rates which pushes down yielding asset prices but the economy doing better also pushes up share prices as the underlying company sells more or gains higher margins.

The fall in oil prices isn't a huge minus for the economy. Obviously it's a minus if you're an oil company or a place that relies on oil for a large part of your GDP. As a secondary consideration, there will be banks that have lent too much to oil companies that will be in trouble. For most of the world the economic benefits far outweigh the negatives. The Middle East might be a bit screwed but some of those lunatics having a bit less power could well be a good thing.

chucknorris

Generali wrote: »

The fall in share prices is driven by the Fed increasing rates I reckon.

Yeah I think that is probably the most significant factor, also there are concerns over China, Greece (still lurking), Brexit etc. I also think that the impact of rising interest rises might also be over stated, but I suppose that's just what the markets tend to do, overreact then later recover. I don't think rates are going to get that high, although I am only guessing and could easily be wrong, I reckon that in a few years the new 'norm' for the base rate is going to be a bit lower than the previous 5-6% (ish) that we used to have.

I am investing for retirement dividend income, rather than capital gain. So as silly as it sounds, even though I have a reasonable amount in shares, I don't want their price to recover too quickly. Certainly not before I can max out my SIPP and ISA's for at least the next tax year. As it happens I might not be continuing with my pension contributions in 2017, that depends on whether the chancellor takes away the 40% pension tax relief.

anchovypizza

chucknorris wrote: »

Thanks, a good link. I do wonder if the fall of the markets attributable to the drop in oil prices (I'm not saying oil is the only drag factor) might have been overdone a bit. Obviously it hits the oil companies hard, and they are very significant companies, but what about the other companies who are consumers and also individual households too, now having more money to spend. Has this been factored into sentiment sufficiently? Or perhaps that just takes a bit longer for the benefit to be fully realised? What do you think?

what an incredible analysis

LOL LOL LOL

Do you work in the city as well as everything else.

Strewth!

It was like a kid wrote it

Mistermeaner

My hope would be that as low oil filters into the economy (can be years as contracts for derivatives and manufacture of stuff are renewed and adjusted) that stuff becomes even cheaper and consumption increases - inflation can flatline/increase minimally but churn increase as essentially disposable income to spend on sh ite increases.

Lots of jobs and cheap staples = good life and healthy s+s

I think?

Generali

Mistermeaner wrote: »

My hope would be that as low oil filters into the economy (can be years as contracts for derivatives and manufacture of stuff are renewed and adjusted) that stuff becomes even cheaper and consumption increases - inflation can flatline/increase minimally but churn increase as essentially disposable income to spend on !!!!! increases.

Lots of jobs and cheap staples = good life and healthy s+s

I think?

Most of the benefits should filter though over the course of 12-18 months.

chucknorris

Generali wrote: »

You could try not being a pr1ck.

I have him on ignore, so I can't see what he posts, although I could in this instance because it was quoted in your reply. I don't need to (or pretend to) analyse the markets, I invest passively for dividend income in index trackers. I do however like to take a mild interest in what is going on, but it isn't really going to impact on my investment strategy, which is simply to remain a passive investor. I might not make as much as I could, but that isn't my objective, protection is, I want to hang onto what i already have, so I'm not looking to take on (that much) risk.

Also I wouldn't trust my judgement anyway.

mwpt

anchovypizza wrote: »

what an incredible analysis

LOL LOL LOL

Do you work in the city as well as everything else.

Strewth!

It was like a kid wrote it

I think everyone knows by now that you were faking with your first few posts here and you actually came here with an agenda. So basically, I'm afraid all your arguments, for me at least, are going to be read with that in mind and not taken seriously. You're not exactly acting the age you claimed to be. My conclusion: Probably a fraud.

chucknorris

mwpt wrote: »

I think everyone knows by now that you were faking with your first few posts here and you actually came here with an agenda. So basically, I'm afraid all your arguments, for me at least, are going to be read with that in mind and not taken seriously. You're not exactly acting the age you claimed to be. My conclusion: Probably a fraud.

it was a good suggestion of yours to put him on ignore, thanks for that, I'm glad that I followed your advice, and have stopped wasting my time on him.

michaels

Generali wrote: »

...aka if the recovery is so strong and the Fed is raising rates, why hasn't inflation taken off?

Two reasons IMHO. Firstly the oil price. Everyone can see what's happened. It's this:



This is quite a good article on what has happened to oil prices in the US:

http://www.nytimes.com/interactive/2016/business/energy-environment/oil-prices.html?_r=0

Reason number two? The US is by far the world's biggest food producer and a massive exporter. In 2013 for example, they produced enough corn for every man, woman and child on the planet to have a kg a week! This is what has been happening to food prices:

http://climateerinvest.blogspot.in/2016/01/deflation-food-prices-fall-at-fastest.html?m=1

To paraphrase the article, in the US there have now been 26 consecutive years of near-perfect food growing conditions and food prices have fallen 17.1% in the US in 2015 alone.

It is highly unlikely IMHO that both oil and food prices will continue to fall at the current rates which means that inflation should start to trend upwards pretty soon as falling oil and food falls out of the CPI calculation.

FWIW, in the CPI transport costs are down 2% and 'food and non-alcoholic beverages' is down 3%.

As already mentioned there is the question of the potential secondary effects of oil, commodity and food price falls.

Then I think there remains the real wages / hollowing out of the middle classes / globalisation issue. Until wages start to increase (latest data shows this slowing in the UK, not sure the situation in the US) then I can't see general inflation and therefore big increases in interest rates.

Best argument I can see for higher rates is to give scope for monetary loosening when the next cyclical downturn arrives