American inflation accelerates, but no warning lights - yet

Hi there,

At the Value Investor Conference in Omaha last month, we witnessed the most insightful presentation I’ve yet seen on what the end game might be for Quantitative Easing – America’s money creation experiment which saved the world’s biggest economy from implosion in the wake of the financial crisis.

Drawing on a slew of current and historic data, Century Management’s founder Arnold van den Berg concluded what happens next depends on how Fed Governor Janet Yellen plays her cards. All that freshly minted money will need to be withdrawn from the system. Pull it out too slowly and 1970s-style double digit inflation is likely. Too quickly and a repeat of the lengthy Japanese economic contraction beckons.

Van den Berg hopes Yellen avoids both these prospects by finessing the cash extraction perfectly, but reckons that for political reasons a “too slow” result is more likely. So yesterday’s latest inflation numbers for the US should give us all pause. America’s CPI rose 0.4% in May, double what economists had predicted and the most in over a year. It took the year-on-year gain to 2.1%, still benign but also heading the wrong way.

I liked the point Luke Delorme, a Research Fellow at the American Institute for Economic Research, made that the data “corroborates increased consumer borrowing in April – consumer spending, encouraged by credit growth, can create an environment where increased inflation is possible.” But he reckons there’s nothing in these numbers to alter the Fed’s current course of action. Yet.

Best,
Alec