Inflation concerns are real: economist

Assurances by policy makers that the recent surge in headline inflation—spurred on by soaring commodity prices—is transitory may be off the mark, one economist said in a research note on Thursday.

Douglas Porter, an economist at BMO Capital markets, said markets are already beginning to price in the risk of growing inflation—with soaring gold prices the most obvious example.

But policy makers and other dovish commentators continually point to low core inflation figures, a major output gap and slow wage growth as reasons for why inflation will remain contained, he said.

Porter responds to these claims and concludes: “Despite the soothing words from central banks on this point, there is little doubt which way inflation risks are now tilting.”

His five arguments for growing inflation are:

• Over the past decade there has been a major divergence between core and headline inflation; this reduces the usefulness of CPI as a gauge of underlying inflation.
• The spare industrial capacity of the U.S. economy is obsolete and the growing ranks of the jobless will take years to retrain and move to other sectors of the workforce. In Canada the output gap is shrinking and the jobless rate is already well below its long-run average.
• Governments will act as a restraint on economic growth. And in doing so, they could enforce higher user fees and sales taxes, as well as regulated price increases, which would contribute to inflation. 
• Wage growth may not be as stagnant as policymakers claim. Already, there are reports that skilled professions in the U.S. are facing labour shortages. 
• Inflation in emerging economies will eventually be passed on to consumers in the developed world.