Tags: James Paulsen | inflation | money | velocity

Wells Capital's James Paulsen: Inflation Will Rise Amid Gains in Money Velocity

By    |   Sunday, 02 March 2014 12:46 PM

Inflation is set to move higher as money velocity accelerates, says James Paulsen, chief investment strategist at Wells Capital Management.

Consumer prices rose 1.6 percent in the 12 months through January.

"Currently, many are focused on the Federal Reserve," Paulsen writes in a commentary obtained by Fortune.

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"However, the most important monetary event during the rest of this recovery may not even involve the Fed. In our view, monetary policy will be primarily defined from here by if, when, and how fast money supply velocity rises."

Four factors should push velocity higher, Paulsen says.
  • Bank lending and consumer borrowing are increasing. Consumer debt advanced by $241 billion in the fourth quarter, the biggest quarterly gain in six years.
  • Commodity prices are rising. The Dow Jones-UBS Commodity Index has gained 6.5 percent so far this year.
  • Private sector GDP growth has appreciated. The "best signal suggesting improved money velocity is accelerating economic activity," Paulsen writes. "In the last two quarters, nominal private GDP [growth] has increased from about 4 percent a year ago to about 7 percent."
  • Private-sector money velocity already is on the upswing, rising in tandem with private-sector GDP growth, Paulsen says.
Not everyone shares Paulsen's concern about inflation. "There is very little pricing power for businesses," Julia Coronado, chief economist for North America at BNP Paribas, told Bloomberg.

As a result, "there doesn’t seem to be any need [for the Fed] to tighten policy any time soon," she said.

For now, though, the financial community's emphasis is on the lack of inflation. "The price data continue to deliver the same message: no signs of inflation pressures in the U.S. economy,” Laura Rosner, an economist at BNP Paribas, tells The Associated Press.

Guy Berger, an economist at RBS Securities, tells Bloomberg, "Core inflation [which excludes food and energy] is going to gradually, gradually converge to the 2 percent target that the Fed has."

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Inflation is set to move higher as money velocity accelerates, says James Paulsen, chief investment strategist at Wells Capital Management.
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2014-46-02
Sunday, 02 March 2014 12:46 PM
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