By Michael Brush, MarketWatch
Fed Chairwoman Janet Yellen last week claimed the Fed doesn’t really understand why inflation remains so low.
Astute Fed watchers have been observing this for a while. “They seem to be clueless about the forces keeping a lid on inflation,” economist Ed Yardeni, of Yardeni Research, wrote in a recent note.
But I think she’s clueless like a fox, so to speak. I believe Yellen is fibbing, for two reasons.
Sure, it’s tough to really know what’s going on in the economy because it’s complicated. But the Fed employs some of the brightest economists on the planet. If anyone can figure out why inflation is gone, they can.
So I’m pretty sure they have figured it out. I think Yellen and the rest of the Fed understand inflation will be dormant for a long time because of half a dozen big-picture trends, outlined below. However, acknowledging this would be like admitting inflation is outside the Fed’s control. Since managing prices is one of the two main jobs of the Fed, that could really shake up investors. Better for Yellen to just go with the narrative that it’s unclear why inflation is stuck in neutral.
Fortunately for investors, the Fed hasn’t hired all of the best thinkers on the economy. For years I’ve followed the economists and strategists at T. Rowe Price, a shop that’s big enough to invest in its own macroeconomic think tank. They’re good.
Laurence Taylor, the firm’s global equity portfolio specialist, thinks inflation is going to be “lower for longer.” If he’s right, this has big implications for where to invest your money.
A lot of investors are positioning for an increase in inflation because this economic cycle is getting up there in years and the job market is tight. But Taylor thinks these six inflation slayers aren’t going away soon. So unlike the latter innings of prior economic cycles, this one won’t see runaway inflation.
Here are the six slayers, followed by how you should invest now if you agree that inflation will be lower for longer.
This is the big one. And it’s pervasive. We all know technology has made a lot of things cheaper and easier, but it’s still worth pointing out a few remarkable examples. Back in the 1980s, we paid $15 for 10 songs on a CD. Today, for $10 a month, we get access to 20 million songs on Spotify. A few decades ago we shopped at malls, which typically had around 80 stores. Now we shop on Amazon.com, which offers more than 250 million products. Having so much stuff in one place lets us compare prices, which puts downward pressure on prices.
In a recent Marriott /zigman2/quotes/200170042/composite MAR -3.16% earnings call, CEO Arne Sorenson said his company is having a tough time raising room rates. No doubt this is because websites give travelers easy price comparisons, and travelers have a ready alternative with Airbnb. Uber is probably putting pressure on car prices since the service means fewer people want or need cars. The list goes on and on. I am sure you have your favorites.
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Thanks to internet connectivity, it all happens very fast. It took 38 years for radio to reach 500 million users, points out Taylor. Today, services like Facebook and Twitter /zigman2/quotes/203180645/composite TWTR +0.65% cover that milestone in a year or less.