Consumer expectations for inflation have risen in June, causing some investors and policymakers to begin worrying about inflation again. Inflation expectations have risen to 3.1%, the highest level since last fall. We continue to think these inflation concerns are premature while we remain in the “Great Recession”. Most of the recent increase in prices has been due to rising gasoline and energy prices, which have risen sharply in recent months but still 50% below their price levels last year. Once more, demand for energy has fallen slightly in the U.S. and developed nations, and new energy saving technologies could continue this trend.
All the other key drivers of inflation point to limited inflation risk in the near-term. Employment is 9.4%, and still rising, meaning wage inflation pressures will remain in check for a while. The uncertain economy is causing consumers to save money, and spend less, taking the personal savings rate from zero to 5.7% over the last year. Fewer buyers mean businesses are more reluctant to raise prices, only 2% of businesses plan to, and 20% have reduced prices this past year, according to a recent National Federation of Independent Business survey. Our friends overseas are feeling the pinch too, overall import prices are down 17% from last year on imported foreign goods.
The economic theory that higher deficits and government spending leads to inflation seems reasonable, but the evidence is not there yet. Remember stocks do better during periods of low or mild inflation- so keep investing!!!