Friday, 24 February 2012
Paul Mortimer –Lee Inflation will go up, more than the FED wants
Paul Mortimer- Lee (BNP Paribas) was in a more optimistic mood than in the previous occasions I saw him, but he remained more negative on the growth in Europe and especially on inflation.
Why is the core inflation rising while the output gap is so high. Inflation is supposed to go through the floor in that situation?
PML thinks the central banks see inflation too much as a real phenomenon, caused by the real economy and too little as a monetary phenomenon. Since Greenspan and Bernanke agreed that there is no more good relation between money growth and inflation they watch only the real economy for inflation dangers (I also cannot find good relations between Money growth and inflation, even not after some data mining). They have forgotten about Friedman (inflation is always and everywhere a monetary phenomenon). It is very difficult to show in a chart the relation between money growth and inflation.
Paul Mortimer- Lee invented the chart above and surprise, surprise there seems to be a relation between liquidity and inflation. That would be very bad news for inflation. Inflation will go up because the liquidity in the OECD will rise further as even a child can see.
Not only liquidity but also higher commodity prices will cause higher inflation. The year on year influences are now maximally favourable and from April-May it will go in the other direction: higher commodity prices will push inflation (CPI) up again, especially when things in Iran get out of hand. Also food inflation is dangerous (but that doesn’t seem to be a big problem in 2012).
So the coming years inflation will disappoint because of the seas of liquidity that have inundated the markets already and because of higher commodity prices thanks to high growth in China, India, the US etc. Moreover inflation can rise when the English disease of continuing hikes of the VAT spreads over the world to get more fiscal prudence . For the time being inflation will not be high, but when the FED continues to print more and more money as they promise almost every day inflation will pass the pain threshold levels before the end of 2014 and then it will rain FED hikes (but this year they will defend 0% like lions) .