Inflation remains close to historic lows, not just in the
United States but also in other large developed markets.
Last week, we got more evidence of this with news that
U.S. import prices fell 0.7% in October
and are now down 2% from a year earlier. And on Wednesday,
the Bureau of Labor Statistics
will report October's consumer price inflation, which is expected
to fall to around 1%, a low reading even by the diminished
standards of the past four years. Similarly, outside of volatile
food prices, inflation in other large, developed countries is
running around 1.5%, with inflation in both Europe and Japan even
As I write in
my new weekly commentary
, there are three big reasons for the lack of developed world
Low wage growth.
Last week, the Bureau of Labor Statistics announced that
unit labor costs in the United States actually
at a 0.6% annualized pace in the third quarter. As long as
there's considerable slack in
the labor market
, wage costs will remain contained.
There is a fair amount of slack capacity in U.S. factories and
- how much of our factories, utilities and other capital stock is
being used - remains depressed. Practically this means few
factory bottlenecks and little upward pressure on prices.
Slow credit growth.
While the Fed has expanded its balance sheet, banks have not been
lending aggressively. With credit growth slow, growth in the
money supply is also muted.
Assuming this is the environment we're in for 2014, there are
two investment implications:
will support stocks
While the Fed is likely to start to taper at some point in the
next several months, short-term interest rates should remain
anchored at zero throughout 2014, and potentially much longer.
Low short-term rates will continue to support stocks by keeping
margins and valuations higher than they would otherwise be.
Treasury-Inflation Protected Securities (
I still don't advocate increasing exposure to
particularly if those hedges are expensive
. The lack of inflation is one reason that TIPS have
underperformed so dramatically year-to-date. And despite the
losses, this asset class, particularly long-dated TIPS,
still not cheap
. Finally, while TIPS hedge against inflation,
they're vulnerable to rising real rates
To be sure, none of this suggests that inflation won't
eventually pick up. But for now, to the extent we remain in a
world characterized by slow wage growth, excess capacity, and
modest credit creation inflation is likely to remain low, at
least for the next year or so.
Russ Koesterich, CFA,
is the Chief Investment Strategist for BlackRock and
iShares Chief Global Investment Strategist. He is
a regular contributor to
and you can find more of his posts
Sources: BlackRock Weekly Commentary, Bloomberg