Mon, 18 Jul 2011
Oppenheimer's Alessio de Longis says commonly followed inflation statistics are not necessarily reflecting how higher import prices are pinching consumers' purchasing power.
Jason Stipp: I'm Jason Stipp for Morningstar.
We are reporting on inflation this week, and to get some viewpoints on the current inflationary environment and some ways that investors can counteract that, we are checking in today with Alessio de Longis--he is a vice president and portfolio manager at Oppenheimer and a manager on the Oppenheimer Currency Opportunities Funds--to get his take on the situation today.
Alessio, thanks for calling in.
Alessio de Longis: Thank you.
Stipp: First question for you, I wanted to get a bigger picture take on inflation. So, we've seen inflation heat up and consumers have felt inflation heat up in the first half of 2011.
Yet, when we hear from the Fed, the Fed seems to think that inflation is pretty much under control.
So, there seems to be some disconnect between what the fed is telling us and what we are feeling at the gas pump and in the grocery store. What's behind some of that disconnect?
de Longis: Absolutely Jason. There is a big disconnect between the Fed and consumers. If you think about the inflation measures that the Fed cares about, they don't necessarily matter much for consumers. Consumers care about loss of purchasing power, and that's not necessarily captured by the most commonly followed inflation statistics.
I'll give you two examples. The CPI Index, the most common inflation statistics--30% of the CPI Index is made up of rents--homeowners estimated rent. Now, I would argue with you that if you are a homeowner, and most people in the country are, rising rents, rising house prices do not represent a loss of purchasing power. Quite the opposite they represent a perception of wealth, a perception of rising wealth.
A second example, the most important inflation statistic for the Fed is wages--wage inflation. Now, despite a very high unemployment rate, obviously most people do have a job and rising wages do not represent a loss of purchasing power. Quite the opposite--they are a good thing.
Now, where are consumers feeling the pain? Where is the loss of purchasing power coming from?
Let's talk about import prices. Import price inflation has been rising at about 13.5% over the past 12 months. Compare that to wages running at only 2% over the past 12 months, or rents rising at about 1%. So, it's obvious that from that metric alone, 13% minus 2%--consumers are actually feeling a loss of purchasing power of about 11%. That's an example of where consumers are feeling the pain.
Now, import price inflation, as many people think, is not just about energy. This is an always overlooked measurable of inflation. We think it's actually rising in importance. Think about this: Back in the 1990s, about 40% of the manufactured goods we consume in this country used to be imported. Today, that same statistic is north of 60%. 60% of what we consume every day comes from abroad. So, it's clear that this will continue to be an important problem for the U.S. consumer, and U.S. investors and consumers alike need to be aware that this is a global economy, and how global economic developments affect their consumption patterns and their loss of purchasing power.
Stipp: I want to talk to you a little bit about what some of your forecasts are for inflation, because I think the import picture is an important one to consider, as you've described there, but we are also seeing some countervailing forces. We still have high unemployment here in the U.S., a lot of slack capacity, which would tend to keep a cap on rampant inflation, yet we did see, and as you've explained, consumers are experiencing some inflation.
What do you expect to see on the inflation front, and do you have a different forecast for near term versus longer term inflation?
de Longis: Absolutely. In the near term we think inflation will remain fairly low, and probably over the next year, we are going to see even lower inflation numbers, especially if we talk about domestically generated sources of inflation. As you mentioned, high unemployment rate, plenty of spare capacity, and a troubled housing market--those are the drivers of the main inflation statistics we are used to, and we don't see inflation rising.
On the other hand, as we mentioned, import price inflation maybe a different story also in the near term. We continue to see ongoing pressure on the dollar and that could be a catalyst for additional risks of rising import price inflation and volatility in import price inflation over the near term.
As per the long-term, the situation can be very different. We believe we are seeing today the end of what has been a one or two decades' disinflationary period for the U.S. economy. A lot of the disinflation that we had imported from emerging markets over the last 20 years is about to dissipate. We are likely to enter a decade where emerging markets will be providing, will be exporting to the rest of the world, more inflation rather than disinflation. We are seeing plenty of domestically generated inflationary pressures in emerging markets, particularly Asia.
Moreover, considering the current stance of monetary policy all around the world, real interest rates are extremely low, and in most cases, are actually negative in the largest economies in the world: United States, China, Europe.
So these definitely are conditions that would argue for a rising inflationary cycle over the long term. Maybe nothing concerning, but definitely higher inflation numbers that what we have gotten used to over the last 10 years.
Stay tuned: Part 2 of our interview with Alessio de Longis will be released on Thursday, July 21.