About Me

Retired chief investment officer and former NYSE firm partner with 50 plus years experience in field as analyst / economist, portfolio manager / trader, and CIO who has superb track record with multi $billion equities and fixed income portfolios. Advanced degrees, CFA. Having done much professional writing as a young guy, I now have a cryptic style. 40 years down on and around The Street confirms: CAVEAT EMPTOR IN SPADES !!!

Wednesday, February 01, 2012

Inflation Potential

Inflation Pressure Gauges
By Sep. 2011, inflation had accelerated to 3.9% yr/yr. As expected, it has moderated, and the CPI
registered 3.0% yr/yr through 12/11. My narrow inflation pressure gauge, which is heavily weighted
to commodities and capacity utilization %, is signaling further moderation so that the CPI could fall
to 2.0 - 2.5% in several months' time. The easing of pressure primarily reflects the decline of
commodities prices underway since May, 2011. $CRB Commodities Comp. The chart shows the
CRB is down 8.1% yr/yr, and it would need to reverse and rise above +10% yr/yr to trigger off
a substantial re-acceleration of the CPI.

My broader gauge, which includes a wide array of economic data is consistent with a yr/yr CPI
of roughly 2.5% at present. Both gauges did tick up slightly near year's end 2011.

The Real Wage
Commodities driven inflation, particularly for petroleum products, turned the real wage negative
in early 2011. Incremental FICA tax relief eased the pain, but no further increments are expected
now. Thus, unless there is an upward adjustment to wages soon, the economic recovery will remain
at risk. The wider measure of real disposable income has also been negative. Real DPI

Companies may not realize it, but since real wages which are too low can easily jeopardize
economic expansion, investors react by reducing the stock market's p/e ratio. Thus it is
that shareholders as well as labor are now being screwed by CEO focus on short term earnings
and exec bonuses and an evident lack of foresight.

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