More Stagflation Talk

stagflationHappy Friday Masters, Stagflation is in the news again today, check out this article and while you're at it, see the Masters Inflation/Stagflation Stock Picks

Don't believe the overly bullish global growth estimates. There's plenty of evidence that growth will slow and inflation will continue to accelerate, even if commodities back off their highs.

One question we've been wrestling with lately is: "Where do we go from here?" – particularly as it relates to the commodity inflation you've been reading about for the last few months.

There's a compelling case that the boat has left the dock with regards to global inflation trends. As we've seen with accelerating "Core" CPI readings, particularly in Asian economies like China, Indonesia, and Thailand, companies globally are taking advantage of recent robust global growth trends and bullish growth forecasts to pass price increases through to consumers.

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The US, China, Japan, India, Brazil are just a few major economies where consensus growth forecasts for 2011 are much, much too high relative to our models and the current global macro backdrop of accelerating inflation and higher interest rates.

Irrespective of the tired argument between the importance of "Core" vs. "Headline" CPI, the key takeaway here is that even if commodities start to back off their current highs (i.e. if MENA conflict stopped today and crude oil went back down to the $80-$85 range), there is a very high and underappreciated possibility that global inflation readings will continue to accelerate for two main reasons:

Corporations will look to overly bullish global growth estimates as justification to pass the last two quarters of price inflation through to end-consumers in an attempt to protect both margins and earnings.

The recent global trend of public officials caving in to populist pressure to increase subsidies, transfer payments, and wages will continue to add to the demand-side inflationary pressure and exacerbate the current supply/demand imbalances of many commodities in the near term. Longer term, this artificial support of consumer demand is likely to result in additional price pass-through to end-consumers, which is likely to stymie consumption growth over the intermediate term.

Since we all know where consensus is regarding the current lofty global growth assumptions, we'll just skip right to addressing point #2. A few specific examples of the recent global trend of increasing subsidies, transfer payments, and wages include:

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