KeyBank economic expert warns about inflation factorWritten by Duane Ramsey | | email@example.com
Bruce McCain, chief investment strategist at Key Private Bank, warns that inflation was overlooked as a key economic factor by the Feds and other economists.
McCain agreed that sluggish domestic growth and potential problems in export markets were enough to keep economic growth the priority of the Federal Reserve after the first quarter meeting of its Federal Open Market Committee (FOMC) on March 16.
The Federal Reserve did not express any plans to raise interest rates in the near future, justified by the widely shared belief among economists that inflation will be contained for the remainder of this year and next, McCain said.
There is a strong consensus by the Fed and economists that inflation will hover around 2 percent. McCain said he sees evidence in the Consumer Price Index (CPI) and Producer Price Index (PPI) data that suggests they may not realize the effect high unemployment and low capacity utilization will have on inflation.
McCain called inflation the “forgotten stepchild” citing factors that point to more market volatility and less significant appreciation this year resulting in the added risk of inflation.
“Inflation may flare up more quickly and viciously than many economists anticipate,” said McCain. “Individuals and businesses have a much bigger fear of inflation with falling home prices holding down the Consumer Index.”
Gasoline prices are already averaging $2.89 per gallon and McCain said he would not be surprised to see further increases with current lower inventories of crude oil and gasoline.
The PPI for crude goods has increased 25 percent causing strong escalation of commodity and energy costs, cited McCain.
Consumer spending has helped drive the Gross Domestic Product (GDP) while some businesses have seen improved sales and profits. McCain thinks that business picked up due to stimulus spending versus true sustainable sales increases.
“Businesses are caught in the vortex of a highly competitive market where it has been difficult to pass along price increases despite experiencing rising costs, especially for energy, raw materials and other basic costs of operations. Businesses remain overly cautious due to these conditions,” McCain said.
If the inflation rate rises as McCain expects, businesses could be forced to push price increases while consumers will struggle to resist those increases.
Exports have been a bright spot for the U.S. economy by adding 2.3 percent to 5.9 percent estimated GDP growth. McCain believes exports may help compensate for the loss of consumer spending growth, but he sees “dark clouds forming on the overseas horizon.”
“We’re starting to see weakness in several major European economies that are facing the same situation as the U.S., competing globally with emerging markets. We’re starting to see more exports into emerging markets like China, India, Singapore and Latin America,” McCain said.
The economies of the emerging world also show signs of rising inflation. Some experts suggest wage inflation in several developing countries may rise from four to seven percent this year, according to McCain. If inflation in the emerging markets does escalate, they could begin exporting some of that pressure, he said.
McCain suggests that business could be a little more aggressive to be prepared for the demand when it eventually picks up.
“Businesses need to lower costs and increase productivity to reach the break-even point at lower sales. They will become more profitable when sales increase,” McCain said.
“We see more businesses that have restructured to survive today’s environment and thrive in the future,” said James Hoffman, district president for KeyBank in Northwest Ohio and Southeast Michigan.
Small to mid-size businesses, which are the core of the Toledo and Northwest Ohio region, are most likely to provide any jobs growth in the future, according to Hoffman.
Most job creation or business growth in this region is based on technology, taking great ideas from research at universities, commercializing them and bringing products to market, said Hoffman.
“We’ve come a long way to providing support for those tech businesses in this region,” he said.
Hoffman serves as vice chairman of the Regional Growth Partnership which held its annual meeting March 22. He chaired the LEAD campaign which raised funds to establish RGP as a private economic development organization in 2005.
RGP collaborated with its private partners to create 7,000 new direct jobs and 17,000 new total jobs in this region in five years, according to its 2009 annual report. Its Launch program and Rocket Ventures helped to commercialize 63 start-up firms last year.
“This market environment is not one that longer-term investors can trade easily. Many of last year’s best purchases do not qualify as long-term capital gains,” McCain said in a report he produces for the bank’s internal staff and shares with the media.
McCain is senior vice president and chief investment strategist for Key Private Bank, a division of KeyCorp based in Cleveland. The private bank provides investment management, estate and trust planning, customized credit and banking solutions for individuals with higher net worth. McCain has appeared on Bloomberg TV and CNBC.