By Richard Bernstein
US investors are increasingly fearful of inflation. Every cycle has some growth in headline inflation, but there is a big difference between such normal, cyclical pricing pressure and the rising fear that the
Ironically, emerging market central banks’ recent monetary tightening is likely to prevent
“Printing money” is today’s derogatory description of what was once simply called “monetary stimulus”. Some observers, distorting basic monetary theory, argue that monetary stimulus itself causes inflation. In fact, it is only the combustible combination of printing money and creating credit that stokes inflationary fires. With credit growth in the
Monetary theory states that an economy cannot sustain an abnormally high inflation rate without abnormally high credit growth that stimulates abnormal demand. Consider the recent housing bubble.
Abnormal growth in housing-related credit caused abnormal demand for housing, which in turn caused abnormal inflation in home prices. The
It is easy to blame the Federal Reserve for the recent increase in
Abnormal credit and money-supply growth in the major emerging markets have been spurring abnormal inflation exactly as monetary theory would suggest. Monetary growth during the past 12 months in
Emerging market central banks have been tightening monetary policy to curtail credit growth and slow aggregate demand. If they are successful, the recent uptrend in commodity prices might end. It has been widely accepted that the incremental demand for commodities during the past decade has come from the emerging markets. That incremental demand has been fuelled in part by the easy money and credit conditions noted. However, it might be a mistake to extrapolate from past demand trends, especially in light of emerging market central banks’ increasingly tight policies.
Yield curves are very good forecasters of future economic and profits growth. Whereas the US yield curve remains very steep (with higher interest rates over longer maturities), suggesting robust growth, yield curves in many parts of the world are demonstrably flattening as their central banks’ tightening policies take hold.
The emerging markets are increasingly showing characteristics of late cycle economies: inflation ramping up, monetary tightening, yield curves flattening and overly optimistic earnings forecasts (with 45 per cent of emerging market companies reporting negative earnings surprises during the last reporting period).
It appears that the
If emerging market central banks ultimately succeed in curbing local credit growth and cooling their economies, then the commodity inflation in the