David Rosenberg: Some effects of the pandemic may linger, but inflation isn’t one of them
The prevailing narrative surrounding inflation, particularly within financial circles, often centers on a temporary surge driven by supply chain disruptions and robust consumer demand. However, the renowned market strategist, David Rosenberg, offers a notably contrarian perspective, arguing that this inflationary pressure is, fundamentally, transient. He contends the current economic conditions, especially when viewed through the lens of historical precedent, dispel the notion of sustained, widespread inflation. Rosenberg’s analysis focuses on the distinct characteristics of the post-pandemic economy, highlighting the significant policy stimulus and resultant shifts in consumer behavior as key drivers of this temporary inflationary environment.
The central argument of Rosenberg’s assessment revolves around the acknowledgement that the initial shock of the pandemic—characterized by a massive contraction in demand alongside restricted supply—created a temporary deflationary condition. This was exacerbated by significant fiscal stimulus measures and a period of ‘reopenings’ which unleashed a surge in demand. However, Rosenberg emphasizes that this scenario is fundamentally different from previous inflationary periods, notably the 1970s, and shouldn’t be compared directly. He posits that the economy lacked the underlying structural conditions—such as rampant productivity growth—that fueled the inflationary pressures of that era. This crucial distinction is underscored by his reference to the initial deflationary pressure observed in front-month WTI contracts, alongside sustained negative readings on the Consumer Price Index (CPI).
A cornerstone of Rosenberg’s viewpoint is the understanding that much of the perceived inflation is rooted in transitory factors: supply chain bottlenecks, and the large cumulative amount of government stimulus flowing directly into consumer savings. He rejects the extrapolation of current inflationary trends, asserting that the worst aspect of past inflationary shocks—rapid and sustained price increases—is unlikely to recur. His analysis stresses the importance of considering the scale of policy intervention—a 148% increase in government transfers in the past year—as a significant driver of consumer spending behavior and, consequently, inflationary forces.
Furthermore, Rosenberg highlights the distinct nature of the recovery. Unlike previous recoveries, which often involved an immediate surge in industrial production, this recovery is characterized by a sustained, albeit elevated, level of consumer spending, driven by abundant savings. He notes this shift in consumer behavior—reflected in the 70% recovery of consumer cyclical expenditures—while not inherently damaging, contributes to the perception of inflation. However, he believes this will eventually recede as pent-up demand dissipates, and the economy returns to a more normalized trajectory. His projections for a waning of savings rates and a decline in consumer spending are crucial to his central argument.
The market is shaped by multiple factors, but Rosenberg’s observations on productivity are particularly insightful. While acknowledging the remarkable rebound in output—particularly in durable goods—he emphasizes that underlying productivity growth remains subdued. This is especially evident when compared to historical trends. He notes increasing automation, which boosted productivity during the 2020 downturn, adding a 2.5% increase, and that this is a crucial distinction. The rise in productivity, inversely correlated with inflation, means that the ‘mother’s milk’ for inflation—a lack of productivity growth coupled with a proliferation of cost-of-living-adjustment (COLA) clauses—does not exist in the current landscape.
Finally, Rosenberg underscores the influence of the substantial fiscal stimulus measures—including infrastructure proposals—in shaping the future trajectory of the market, citing the opposition within Congress and potential resistance from the Biden administration. While acknowledging the global pandemic has driven substantial disruptions, the market is ultimately influenced by the expectations of both investors and policymakers, and the potential for a decline in savings rates and a shift back towards a more conventional monetary policy. In essence, Rosenberg’s analysis provides a sober assessment of a temporarily inflationary environment which is expected to resolve itself as underlying structural weaknesses emerge alongside a waning of government stimulus.