ECRI Warns of High Inflation Nightmare From QE2

ECRI Warns The Fed's QE2 May Cause High Inflation Nightmare

The Economic Cycle Research Institute, ECRI - a New York-based independent forecasting group, says there will be no double dip recession and Fed's planned QE2, a second round of quantitative easing, could lead to unintended "worse nightmare" of high inflation. (More about ECRI)  

Earlier today, Lakshman Achuthan, ECRI's co-founder and chief operating officer. and Anirvan Banerji,ECRI's co-founder and chief research officer, wrote: 

• "The much-feared double-dip recession is not going to happen."
• "That is the message from leading business cycle indicators, which are unmistakably veering away from the recession track, following the patterns seen in post-World War II slowdowns that didn't lead to recession."
• After completing an exhaustive review of key drivers of the business cycle, ranging from credit to inventories and measures of labor market conditions, we can forecast with confidence that the economy will avoid a double dip.

But ECRI warned there is bad news for growth and jobs

• But the bad news is that a revival in economic growth is not yet in sight. 
• The slowing of economic growth that began in mid-2010 will continue through early 2011. 
• Thus, private sector job growth, which is already easing, will slow further, keeping the double-dip debate alive. 

Even worse, the Fed could be behind the curve yet again with QE2 leading to unintended inflation down the road.

• The problem with QE2. The worse news is that, even without the nightmare of a new recession, an uglier scenario may still lie ahead in the form of unintended consequences of such Fed stimulus.

ECRI warns that the Fed, using its rear-view mirror indicators, may be goosing the economy with an inflationary stimulus program when it isn't needed and worse, just before the economy could get better.

• Because monetary policy acts with "long and variable lags," the Fed should, in principle, rely on forward-looking measures to time its actions. Yet, in practice, it does pretty much the opposite, relying on backward-looking statistics like core inflation and hard-to-assess measures of the so-called output gap, including estimates of "full employment."
  
• In mid-2003, the last time "core" inflation was this low, the Fed cut rates to just 1% and kept it there for a year, contributing in no small measure to the inflation of the housing bubble that ended so disastrously.
• In fact, the Fed is about to launch QE2 because it believes inflation to be too low, which really means they are willing to go to new extremes to head off the risk of deflation.  Yet, over the last two centuries the U.S. economy has seen sustained deflation only when it has mostly been in recession -- a scenario that our analysis rules out for now.

If the Fed goes ahead with its planned QE2 program, then the question for us investors will be "where is the next bubble forming?"

• Today, the car that is the U.S. economy is crawling uphill, slowing as its engine sputters. With politicians fighting about whether to use a screwdriver or a spanner wrench to fix the motor, the Fed is convinced we'll end up using neither. Determined not to let the car start rolling back disastrously downhill, yet unaware that the road is about to level off, the Fed is strapping an untested rocket onto the car in hopes of blasting it over the top.
  
• The Fed, looking out the rear-view mirror to steer the car, won't know when we're approaching a bend in the road, though we're now high up in the mountains, with a dangerous abyss below.

If the Fed goes ahead with its planned QE2 program, then the question for us investors will likely be "where is the next bubble forming?"  The very high returns for my individual TIPS and TIPS funds (FINPX Charts and VIPSX Charts)  these past two years plus the large gains in gold (Gold Charts and Quote) and commodities, despite low CPI inflation, might be signaling what lies ahead.

ECRI Global Inflation Outlook - Higher Inflation Ahead

The Economic Cycle Research Institute, ECRI - a New York-based independent forecasting group, in a series of six press releases last night and this morining, updated their outlook for global inflation. (More about ECRI). Below is a summary of ECRI's international Future Inflation Gauges (FIG) for February 5, 2010.

United States: FUTURE INFLATION GAUGE KEEPS CLIMBING

• ECRI’s U.S. Future Inflation Gauge (USFIG) continued to increase in January. The value of the USFIG lies in its ability to measure underlying inflationary pressures and thereby predict turning points in the U.S. inflation cycle.
• The USFIG rose to 102.0 (1992=100) in January from 99.0 in December, as did its smoothed annualized growth rate to 37.6% from 33.8%. The gauge was pushed up in January by inflationary moves in most of its components.
• With the USFIG now advancing for ten straight months, underlying inflation pressures are
  in a sustained cyclical upswing, promising higher inflation in the coming months.
  

Eurozone (Germany, France, Italy & Spain)
EUROZONE FUTURE INFLATION GAUGE SLIPS

• Inflation in the Eurozone has begun to perk up, as anticipated by the upturn in the EZFIG. Clearly, with the EZFIG remaining close to November’s 11-month high, underlying inflationary pressures in the Eurozone have begun to resurface.
  

Germany: GERMAN FUTURE INFLATION GAUGE EDGES DOWN

• German inflationary pressures dipped in December.
• German inflation remains in a cyclical upswing and well above its cycle low, in line with the upturn in the GFIG. With the GFIG staying near November’s nine-month high, German inflationary pressures are still in a cyclical uptrend.
  

France: FRENCH INFLATION PRESSURES MOUNT

• French inflation pressures rose in December.
• The FFIG has risen from the all-time low seen in June 2009 to its highest reading in over a year. Thus, French inflation is likely to rise further in the coming months.
  

Italy: ITALIAN INFLATION PRESSURES DIP

• Italian inflation pressures eased in December.
• Italian inflation rose further from its mid-2009 low, as anticipated by the upturn in the IFIG. Meanwhile, despite its latest down tick, the IFIG remains near earlier highs. Thus, Italian inflation is likely to remain in an uptrend.
  

Spain: SPANISH INFLATIONARY PRESSURES INCREASE A BIT

• Spanish inflationary pressures edged up in December.
• Despite its recent dip, the ESFIG remains in a cyclical upturn and well above its cycle low. Thus, Spanish inflation is likely to increase in the months ahead.
  

Japan: JAPANESE FUTURE INFLATION GAUGE RISES AGAIN

• ECRI’s Japanese Future Inflation Gauge (JFIG) advanced further in December.
• Japanese consumer prices have begun to stabilize following their deflationary decline.
  
• This was anticipated by the earlier upturn in the JFIG, which has now risen for five consecutive months to a 13-month high. Thus, the threat of persistent Japanese deflation continues to recede.
  

Korea: SLIGHT RISE IN KOREAN INFLATIONARY PRESSURES

• Korean inflationary pressures increased marginally in December.
• With the KFIG rising to a 14-month high in its latest reading, Korean inflation will increase in the months ahead.

Canada: DOWNTICK IN CANADIAN INFLATION PRESSURES

• ECRI’s Canadian Future Inflation Gauge (CFIG) edged down in December.
• Despite its latest dip, the CFIG remains well above March’s 26-year low, and close to October’s 15-month high. Thus, Canadian inflation pressures remain in a cyclical uptrend.

United Kingdom: U.K. FUTURE INFLATION GAUGE UNCHANGED

• U.K. inflation pressures were unchanged in December, according to ECRI’s United Kingdom Future Inflation Gauge (UKFIG).
• Despite its recent downtick, the UKFIG remains well above June’s all-time low and close to October’s one-year high. Thus, U.K. inflation pressures continue to be in a mild uptrend.

Disclosure: I own TIPS, TIPS mutual funds and Series I-Bonds. I also own and cover them in my newsletters.

More information:

• I Bond Rates
  
  
• US Treasury: Rate Quotes
  
• Expected Inflation - TIPS Spread
  
  
• Kirk's Two Investment Letters

• More about ECRI
  
  
• July 31, 2009: ECRI Predicts End of Home Price Downturn
  
  
• July 21, 2009: ECRI Predicts The End of the Recession is Imminent
  
  
• April 3, 2009: Upturn in ECRI's WLI Growth Rate Says US Business Cycle Recovery Ahead
  
  
• How to become an "ECRI Pro" Client

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