U.S. inflation set to soar, Rubin says

Thursday, July 31st, 2008


CIBC’s Jeff Rubin believes soaring oil prices will drive up U.S. inflation to six per cent. CNS file photo

TORONTO — Jeff Rubin, chief economist at CIBC World Markets, pushed his bullish oil call one step further yesterday, forecasting in a report that soaring oil prices will drive the annual U.S. inflation rate to six per cent in the next six months.

He said the U.S. Federal Reserve will have to raise interest rates 200 basis points by the end of 2009 as a result.

The report says the U.S. economy has not seen an inflation rate this high since 1990 — and that only lasted four months.

“You’ve got to go back to 1982, in the midst of the stagflation that followed the second OPEC oil shock, to see the last time American inflation was clocked at that kind of pace for any sustained period,” Rubin said in the report.

Rubin forecast in April that oil would hit $150 US by 2010 — which looked possible only a few weeks ago when oil crested at $145 US, but less so now with oil at $121 US — and $200 US by 2012 on a wave of emerging market demand and a shrinking supply of politically stable sources.

And he said the last bastion against oil seeping into broader price pressures — wages — is set to fall. High energy prices give American manufacturing workers bargaining power that they have lacked for over a decade, while at the same time encouraging them to ask for larger pay raises to keep pace with the soaring price of gasoline, he argues.

Rubin expects to see a return to cost-of-living allowances (COLA) in North American wage negotiations, particularly in highly organized industries like steel.

“Back in the 1980s, most collective bargaining agreements of the day had cost-of-living allowances built into the wage scale,” Rubin said. “Those COLA clauses largely became self-fulfilling prophesies by ensuring that largely oil-price driven inflation would become self-sustaining through a wage-price spiral.”

To fight off the deepening inflation threat, the U.S. Fed will have to raise rates 200 basis points by the end of 2009, Rubin said. He notes that in 1990 the federal-funds rate — the U.S. central bank’s lever for adjusting overnight loans between commercial banks — was at around 7.5 per cent, a far cry from the current two-per-cent rate.

In contrast to the CIBC World Markets view, many economists believe the current U.S. inflation problem will be fleeting, as the massive housing crunch and economic slowdown suck oxygen from any inflationary embers and stop aggressive wage demands in their tracks.

© The Vancouver Province 2008


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