Bay Street veteran David Rosenberg isn’t buying any argument the world is staring down a new long-term inflationary environment.
Rosenberg, the chief economist and strategist at Rosenberg Research, said he agreed with U.S. Federal Reserve Chairman Jerome Powell’s assessment the current uptick in inflation is transitory, and sees little evidence the decades-long trend of disinflation has been broken.
“I think it’s pretty hard to believe that it was the first global pandemic in over a century that would have caused what’s been really a four-decade secular downtrend in inflation to suddenly reverse course in dramatic fashion,” he said in an interview Tuesday.
“If you’re asking me if I’m in Jay Powell’s camp: most of his tenure I have not been in his camp, but when he says this inflation run-up is transitory, I think he’s probably right.”
Concerns about inflation potentially rearing its head have reverberated through global markets, sending yields on the benchmark U.S. 10-year treasury above 1.6 per cent and hurting high-flying tech stocks, which have benefitted from muted inflation and rock-bottom interest rates.
While inflation has been appearing in a number of goods, in particular in the commodity sector with the likes of lumber and grains hitting multi-year highs, Rosenberg said the gyrations are exaggerated due to consumer demand returning before supply chains can return to pre-pandemic capacity.
“In this reopening phase, what’s happened is – and of course with the fiscal juice that’s been supplied – is that demand is coming back much faster than supply,” he said.
“We had a temporary deflationary experience a year ago. This inflation run-up we’re seeing now might not be as temporary; but if you’re going to ask me if by the fourth quarter will we start to see the head of disinflation coming back to the fore, yes, I think it’s going to happen.”
While the headline consumer price index (CPI) south of the border surged 2.6 per cent year-over-year in March, part of that rebound was driven by so-called base effects, where the deflationary environment for goods like gasoline in the early days of the pandemic distort the year-over-year data.
Higher inflation typically leads to a rate-tightening cycle, but Powell has repeatedly stressed that the U.S. Federal Reserve will allow inflation to run somewhat hotter than the central bank’s two per cent target as the economic recovery gains traction.
Although a rate hike from the Fed isn’t expected until 2023, Rosenberg said the sheer amount of debt accumulated by governments around the world will likely keep a cap on how high rates can ultimately go, as the higher cost of debt service would strain many governments and the overall financial system.
“Interest rates can’t really rise much, because what happens is the debt-service that goes along with that ends up impairing the economy,” he said. “The only thing that’s not temporary is this gargantuan debt burden.”