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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, July 17, 2013

Inflation Potential -- Cyclical

The inflation rate experienced a more or less normal cyclical acceleration coming out of
the Great Recession in 2009. The 12 month CPI swung from a mildly deflationary reading
on up to a cyclical peak of 3.9% for Sep. 2011. Then things changed both in the US and
globally. Output growth lost substantial momentum over 2011 - early 2013 and US
and global operating rates declined mildly. The starch went right out of inflation, with the
US 12 month CPI declining to an extraordinary 1.1% by Apr. this year.

The yr/yr CPI has accelerated since then and is at a point where there could be a positive
reversal to the trend. Capacity utilization has ticked up slightly and commodities and fuel
prices have starting moving up. $CRB Composite & Wholesale Gasoline Price Chart
Fuels pricing, including long quiescent natural gas billings, have been the main culprits.

My inflation pressure gauge made a yr/yr % change bottom in mid - 2012, and the index
from which I derive it has put in a recent double bottom. The US, at least, is at a cyclical
inflection point, but it is too early to say the index itself has reversed. I do use a couple of
other economic measures that are considerably less attuned to the commodities markets.
Here the suggestion is that inflation should begin to accelerate on a cyclical basis starting
in the second half of this year and run higher through 2014 (These measures are based off
leading economic indicator trends and are not that sensitive to short term developments).

Since my work is more indicator driven than reliant on forecasts, I am posting this warning
on inflation even though I do not yet have evidence the economy is about to break positive
from the dreary, low growth mode it has been in.

There is a way to look at long term inflation potential based particularly on monetary and
productivity trends. Sometime over the next week or so I will post on this view. For now,
suffice it to say that longer term inflation potential is mild and that a period of deflation
cannot be ruled out.

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