David Rosenberg has seen the same surging inflation data that every other economist has seen. And yes, he’s worried.
Worried that so many of his fellow experts have gotten it backward.
“When these temporary disturbances fall out of the data, people are going to be surprised at how low the readings are going to be on these official inflation statistics,” the famed Canadian economist said in an interview Friday.
“I think we’re going to go back to talking about disinflation and deflation [by] the end of the year.”
Anyone who has followed Mr. Rosenberg’s nearly 35-year career isn’t surprised that he’s dug in to an unpopular position; it’s kind of his thing. Still, it’s a defiant stand to take, warning of disinflation the day after the United States reported a year-over-year inflation rate of 5 per cent in May, the highest since 2008.
Canada’s consumer price index, or CPI, figures for May come out this Wednesday, and economists are bracing for another big number – probably not as big as the U.S. stunner, but still, a second consecutive month well north of 3 per cent. Given the surprisingly hot U.S. reading, the risk for those expectations probably tilts to the upside; it’s not inconceivable that we could see the first 4-per-cent reading in 18 years.
Economists in North America and elsewhere are looking at the swelling prices – and the surging commodity prices and serious global supply-chain bottlenecks coming out of the COVID-19 pandemic – and warning that central banks may have badly underestimated inflationary forces. U.S. economic luminaries such as Lawrence Summers and Stephen Roach have issued dire warnings that if policy-makers don’t wake up soon, they risk letting loose the worst inflation problem in decades.
“Yes, we do have inflation right now, but it can be explained,” Mr. Rosenberg countered. “The transitory nature of it can be explained.”
He believes we’re witnessing the temporary impact of the sudden reopening of economies – just as we saw short-lived disinflation last spring, when the COVID-19 pandemic hit, economies were suddenly shut down, and people were confined to their homes. The reopenings are releasing a wave of pent-up demand from a consumer segment that has been primed by government income support programs.
The supply side needs some time to respond, he said, but it will, in the second half of the year. Which is about the same time as those government stimulus measures begin to fade and the heat comes off demand.
“Postsummer, expect to see production expand, demand growth recede, and all this price inflation chatter to quiet down,” he said.
“We’re going to have a completely different inflationary backdrop on our hands.”
Much of what Mr. Rosenberg is saying echoes the U.S. Federal Reserve and the Bank of Canada, which have insisted that this surge of inflation, though admittedly bigger than they had anticipated, will not last. The central banks and Mr. Rosenberg point to the still-massive numbers of workers who remain unemployed because of the pandemic – which, while fading in many parts of the world, is still far from over – and say that all that spare labour capacity will weigh on wage costs and consumer demand as the reopening phase matures, keeping downward pressure on prices.
The central banks’ view may now be getting some support from the bond markets, which were first to sound the inflation alarm early in the year. The yield on 10-year U.S. government bonds – the global benchmark – has fallen a quarter percentage point in the past month, even as U.S. CPI numbers have shocked and inflation chatter has risen to a crescendo. Ten-year Government of Canada bond yields are down 0.2 percentage point in the same time. Ditto British gilts.
Some of that move has been attributed to a so-called short squeeze – short-sellers who had bet on rising yields being forced to abandon their positions, as the yield declines accelerate. But at the root of the move is a growing suspicion that the inflation surge may, indeed, be a tempest in a teapot.
Mr. Rosenberg said that, frankly, anyone trying to place a firm bet on the inflation numbers or any other economic data in this pandemic is playing with fire. The COVID-19 crisis has made many traditional economic indicators pretty hard to read and anticipate, much less predict.
Looking at the monthly economic data in the U.S., he said, “In the past 15 months, they are exhibiting a level of volatility that is six times greater than what would be construed as normal in the context of any recession or expansion in the past.”
“We’re in a bog of uncertainty, and intense volatility, as it pertains to all the data,” he said. “To be drawing hard-core assumptions on the future, based on what we’re seeing right now, I think is a dangerous proposition.”
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