Thursday, January 06, 2011

Inflation Scare And Lack Of Private Income Growth

Some forward looking thoughts by Chris Wood today:
Still GREED & fear will admit that there is a real risk of more of an inflation scare from a tactical standpoint. Such an inflation scare in Asia is likely to be manifested, as was also the case in 2008, in a focus on inflation driven by rising food prices and a price spike in other commodities. But the other important point to remember is that the more commodity prices rise in a correlated fashion, a process driven in the current environment of QE2 to a significant degree by financial speculation, the more the spike creates the seeds of its own destruction given the resulting demand destruction. This is because the higher commodity prices, be it petrol prices or food prices, are deflationary in terms of their impact in the West given the lack of income growth. Thus, average hourly earnings growth of all US private employees fell to 1.6% YoY in November, down from 3.6% YoY in February 2009 (see Figure 1). This is why the oil price does not have to rise very far from here to start hitting current growing optimism on the US recovery.
Click on charts to enlarge, courtesy of CLSA Asia-Pacific Markets.

Seeds of its own destruction? And then also to realize gains from asset appreciation one should be selling?

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