You would think Jamie Dimon, the head of JPMorgan Chase has little to worry about today. The economy is strong, loan losses are minimal and the bank’s earnings and stock price are doing great.
But in Dimon’s annual letter to shareholders he is very worried about one thing - - a pickup in inflation. If this occurs, Dimon says, the Fed will be forced to push interest rates up more rapidly, which means instead of tapping on the brakes lightly as they are now doing, the brake pads will get a real workout and the economy might be in for a hard landing.
I am an old school kind of guy. When economic conditions get hot and unemployment gets really low (both conditions exist now) then wages increase and interest rates and inflation have to be headed higher.
When looking at the future, most people forecast based on the most recent past. Since 2009 the economy has steadily improved but interest rates and inflation have stayed comatose. This leads many to believe that even with continued economic growth, inflation and bond yields will remain subdued for years to come. This seems like whistling past the graveyard to me. Just because there have been no storms is no reason to assume that clear skies will last forever.
The chart above is my somewhat facetious, somewhat enlightening history of various prices in Burlington, Vermont since 1986. It is certainly not a scientific index like the Government’s Consumer Price Index (CPI) but it does include many of life’s essentials like, babysitting, a divorce and a funeral. It also includes stress reducers like a massage to hopefully offset the stress increasers like a parking ticket and a bounced check.
Over the past year, the twenty-three items in the Hanson Index have increased about the same amount as the increase in the CPI, 2% to 2 ½ %. But over the past 32 years, my list has caused real pain compared to Government reported numbers. Twenty-one out of the twenty-three prices have gone up more than the CPI. The message is that life is expensive, inflation is real and many prices (even if they are not included in the Government’s market basket of goods and services) can cause real pain.
The Wall Street Journal recently wrote about Elkhart, Indiana, the home of America’s recreational vehicle (RV) industry. The economy there is pistol hot with unemployment down to 2% after peaking at 20% during the depths of the Great Recession of 2007-2009. Demand for RVs is on a tear, workers are scarce and not only are manufacturers desperate for help but even places like KFC are paying sign on bonuses for minimum wage workers.
If this continues - - a solid economy and rock bottom unemployment - - it is only a matter of time, I feel, before inflation starts to really take off. This is Worry #1 for me.