Although he looks to be a stereotypical absent-minded professor, Dr. Jeremy Siegel of Wharton remains my favorite absent-minded-looking-but-nonetheless-brilliant professor.
His latest commentary raises an eyebrow about the return of inflation. The Producer Price Index for March was greater than expected. Gas prices have risen to almost a 12-month high. Factory usage as measured by the capacity utilization index has risen to 79.2% -- 80% is traditionally the minimum level for inflation to occur.
While inflation watch is a 24/7 job, I have not lost much sleep about this yet. Until the velocity of money or the number of times a dollar is spent each year rises, I don't foresee inflation of the demand-pull variety.
You'll recall inflation may be demand-pull whereby the demand for a good or service is so strong that the seller can raise the prices. Or, it can be cost-push inflation, which can occur when there are bottlenecks or supply shortages in manufacturing or delivery costs. Dr. Siegel suggests that we watch cost-push inflation more closely.
Supporting this view, in a conference call yesterday with the National Association of Business Economics, I learned that 31% of businesses reported higher material costs, compared to only 15% a year ago. Also, 35% reported higher wage costs, compared to only 23% a year ago. Yet, the number that reported increasing their prices remained constant at 20%, which means profits are getting compressed. That cannot last very long and could create a sudden outbreak in cost-push inflation.
Janet Yellen and the Fed are more worried about deflation right now, but my old professor should not be ignored.
His latest commentary raises an eyebrow about the return of inflation. The Producer Price Index for March was greater than expected. Gas prices have risen to almost a 12-month high. Factory usage as measured by the capacity utilization index has risen to 79.2% -- 80% is traditionally the minimum level for inflation to occur.
While inflation watch is a 24/7 job, I have not lost much sleep about this yet. Until the velocity of money or the number of times a dollar is spent each year rises, I don't foresee inflation of the demand-pull variety.
You'll recall inflation may be demand-pull whereby the demand for a good or service is so strong that the seller can raise the prices. Or, it can be cost-push inflation, which can occur when there are bottlenecks or supply shortages in manufacturing or delivery costs. Dr. Siegel suggests that we watch cost-push inflation more closely.
Supporting this view, in a conference call yesterday with the National Association of Business Economics, I learned that 31% of businesses reported higher material costs, compared to only 15% a year ago. Also, 35% reported higher wage costs, compared to only 23% a year ago. Yet, the number that reported increasing their prices remained constant at 20%, which means profits are getting compressed. That cannot last very long and could create a sudden outbreak in cost-push inflation.
Janet Yellen and the Fed are more worried about deflation right now, but my old professor should not be ignored.
