Inflation Potential

US inflation has decelerated very sharply from a cyclical 2011 peak of 3.9% yr/yr down to 1.5%
recently. With a sluggish economic expansion, capacity utilization is up but one percentage
point over this interval, thereby putting very little cyclical pressure on pricing. As well,
commodity prices remain well below levels seen in 2011 despite the recent upturn. $CRB
A rise of inflation pressure can be "validated" when wages rise concommetantly, but the
US wage has remained quite subdued. Also, since businesses can try and recapture their
rising capital costs via higher pricing, little pressure has come from this area reflecting
the Fed's ZIRP on short rates and tame long term interest rates. Finally, when you consider
that significant economic slack is still extant in the Eurozone and China, businesses  are
wary of raising prices lest market share be lost.

On a global basis, new order rates have moved up moderately over the past three quarters
and my inflation pressure gauge, which gives heavy weight to both commodities prices and
operating rates, has also been rising over this period. However, the pressure gauge, which
foretells the future direction of the CPI, has only begun to exhibit the momentum and power
which normally accompanies a firming business environment. The upshot is that the CPI so
far remains well muted although some acceleration can be expected if the pressure gauge
continues to rise from here as expected.