Building Inflation Pressures?

Where’s the inflation? Oil prices have risen by about 50% this year, while the dollar has weakened by about 10% (on a trade-weighted basis), which raises import prices. We would typically expect both of these effects to generate inflation. Yet most measures of inflation still show it at historically very low levels.

However, this story, which is primarily about the prospects for further weakening of the dollar, provides some interesting tidbits about the possibility that inflation pressures may be building:

Bridgewater Associates’ Daily Observations observed yesterday: “The striking theme coming out of third quarter earnings reports has been the pressure of corporations to raise prices on the heels of rapid increases in materials costs. All in all, the picture bubbling up from corporate America makes it appear that inflationary pressures that have already hit the early stages of production are likely to flow through to overall gauges of inflation.”

I actually think a bit of inflation would be good for the economy (though not nearly as good as it would be for Japan’s economy…), but I’m sceptical about whether firms are facing enough demand to be able to pass on price increases. Next week we’ll get the October inflation data from the BLS. The results will be interesting.