Inflation in the Coming Years?

 Almost every time you get a big round of QE and/or fiscal stimulus, the inflation bugs come out and talk about how inflation is just around the corner.  You saw that from 2009 to 2011, and again in 2018.  

The problem with saying whether there is inflation or not is because of how poorly its measured by the government.  The government distorts prices and uses every methodology in the book to make inflation numbers smaller in the CPI.  Hedonic pricing, substitution, etc.  If you are going to measure inflation based on how the government does it, then its going to take a huge inflationary wave to come up in the numbers.  

I see two main forces for inflation in the coming years: 1. Dollar weakness. 2. Low wage growth.  

 I expect the dollar to be weaker vs other currencies as well as vs gold/commodities.  This will result in cost-push inflation.  A commodity bull market is inevitable when you see how little oil producers have invested in future production, and the huge increase in the money supply this year and probably continuing to a lesser degree with bigger budget deficits financed by QE means more money chasing the same amount of commodities, which will make prices go higher.  

The countervailing force is low wage growth.  If the masses don't have a lot of money to spend, then consumption will be subdued unless you have something like universal basic income.  And as much as modern day Democrats like to spend money, I don't see enough support for universal basic income just yet.  There will have to be prolonged economic weakness that lasts years before you see that happen.  

The last time you saw high inflation (as measured by the CPI) was from the late 1960s to the mid 1980s.  That also happened to be a period when wage growth was over 10% during economic expansions.  Since then, it has gone from 10% to around 5%.  

Unlike a lot of macro "experts", I don't believe that US exports will go down much or that manufacturing will be making a comeback in the US.  The wage gap is just too great between the US and emerging market countries and companies will always use low cost labor whenever possible.   I don't expect big changes in US trade policy with either Democrats or Republicans.  The political powers main focus is the S&P 500, not being tough on China.  And no, Trump is not tough on China.  He raised tariffs a small amount and then stopped.  Its all talk, little action.  And Biden is basically bought and paid for by China so no changes will happen either under him.  

And if not China, companies will just manufacture in Vietnam, India, Mexico, or some other low wage country.  

Also, with so many mergers and acquisitions that happened over the past 40 years, competition has been drastically reduced, which gives companies a lot more bargaining power with workers.  When there are only 2 or 3 companies in a certain field, that means workers have limited choices for work, which means they can't request higher wages because there aren't many companies bidding for their services.  

So where does all that extra money supply end up?  In the financial markets.  The cream rises to the top.  In a crony capitalist society with too big to fail backstops, the big get bigger, and the small stay small, or go bankrupt.  The US business world has basically become a group of oligopolies and quasi monopolies that use their political power to keep competitors from catching up or even coming into existence.  Pricing power comes from having few to no competitors.  And profits come from pricing power.  Those profits are coming from both their workers and their customers.  

I don't expect any anti-trust legislation from Biden.  He will probably do what Obama did which was basically nothing but more regulation which helps big corporations keep competitors away. 

In the markets, inflation only matters in how the Fed reacts to it.  If they act and pretend like inflation is low and under control when it is high, then bond yields will stay low because the Fed will keep buying bonds.  And it seems like Powell at least will not raise rates or quit QE unless you see runaway inflation, which isn't likely under the current US economic system that favors capital over labor.  

So we could have inflation, skyrocketing commodity prices and still have low bond yields.  The US dollar will be taking the heat from the big budget deficits monetized by the Fed.  The Fed has no intention of letting rates rise much, because as soon as they do, the super leveraged financial markets will have a tantrum and then the Fed will be back to either do more QE or even start buying stocks in order to placate the markets like they always do. 

The grind higher continues, at this point its just wait, hold the shorts, and hang on for the ride.