Economy Growing, But Inflation Looms: Rosenberg

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Gluskin Sheff Chief Economist David Rosenberg, who is known on Wall Street for his bearish perspective over the last few years, says he believes the economy has turned a corner and continued growth is on the horizon. Rosenberg explains his point of view in an interview in the March 7 edition of the investment newsletter Welling on Wall Street, and also makes the case for the return of inflation.

Economic growth to continue

Rosenberg argues that the economy seems to finally be getting back on track, and he wouldn’t be surprised to see 3% economic growth in the U.S. this year. “I’m probably a little more optimistic than the consensus for this coming year, which is around 2 to 2.5 percent growth. I’d be closer to 3 percent, maybe even a bit better than that, by the time we finish off the year. It hasn’t just been the winter weather holding us back so far, but a lot of the fiscal drag, which is easing and I think we’re going to see accelerating wage trends.”

Inflation as a double-edged sword

From the perspective of the consumer, inflation is generally considered a bad thing, but inflation is also a natural part of the economic growth cycle, and in that sense is actually welcomed by economists. Most economists have written off the possibility of inflation right now because of the slow growth mode the economy has been stuck in, but Rosenberg says the increased growth he expects to see over the next few quarters is likely to be accompanied by a pickup in inflation.

“For example, if you look at the combination of rents, health care services, energy and food, I could point to over 60 percent of the CPI that’s probably going to be showing some surprisingly hefty inflationary numbers ahead.”

In terms of specific inflationary factors, Rosenberg mentions that landlords are starting to increase rents significantly in many major markets across the U.S. as vacancy rates decline, and that droughts in Brazil and the Southwest U.S. are likely to lead to increased food prices. He also points to higher oil and natural gas prices over the last few months, and argues that Obamacare will almost inevitably lead to higher prices for health care. He also highlights the fact that wage pressures are ratcheting up both in the U.S. and globally, especially in China.

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