3 Factors That Will Affect Inflation

We expect upward pressure on prices in the near to intermediate term due to the following factors:

1. Wage Pressures: The unemployment rate is currently 4.1% which is significantly below the long-term average of 5.8%. This has led to shortages of workers in some industries such as construction. Employers are also passing out $1,000 bonus payments to their workers because of the tax cuts, and the minimum wage rate is rising in several parts of the U.S.

2. Housing Prices: The housing glut caused by the financial crisis is over. The number of available homes for sale is at a multi-year low. This will put upward pressure on housing prices.

3. Commodity Prices: The U.S. economic recovery has turned into a global recovery. The glut in the supply of oil has been reduced dramatically and prices have been rising. Oil has risen from as low as $27 a barrel to a recent high of over $64 a barrel for West Texas Intermediate (WTI) crude oil. We expect commodity prices to rise due to the global recovery, and higher wealth levels caused by the dramatic rise in equity markets worldwide.

Our research shows inflation tends to be a late-cycle phenomenon. Since the fiscal stimulus is coming more than 8 years after the beginning of this economic recovery with the above-mentioned conditions we should see some upward pressure on prices this year. There are, however, factors which may lead to disappointing economic growth in the years ahead.