A Dissenting Voice on Inflation

Can inflation make a comeback in the ‘90s? Most Wall Streeters say no. James Grant begs to differ.

Grant, who writes Grant’s Interest Rate Observer newsletter in New York, made his mark in the ‘80s by predicting the asset deflation, bank ruin and junk bond collapse that ended that decade and kicked off the sober ‘90s.

Widely appreciated on Wall Street for his wit and insight on the market’s machinations, Grant also is interesting because his views usually run counter to the crowd’s. His current big theme is that higher inflation is waiting in the wings of the global economic recovery.

So far, Grant says, nobody’s paying attention to inflation rumblings because they are mostly “hidden” in relatively obscure markets. But the potential for price shocks in a stronger economy is growing, he maintains.

“In the oil seed market (such as cottonseed, used in food products), global inventories stand at 20-year lows in relation to worldwide consumption,” Grant wrote recently. “In container board, shipments and prices are rising. And in unleaded gasoline, where prices are still falling, refining capacity is tightening.”

“The gathering strength of even a few commodity markets in the midst of a global recession is, to us, an interesting omen,” Grant warns his subscribers, who include many top money managers.

Higher commodity prices don’t necessarily have to translate into higher inflation, he admits. But because so many people doubt that prices of depressed basic materials can rise in a supposedly glutted world economy, Grant sees a strong chance that the crowd, as usual, will be wrong.

Or, as he puts it: “If, after a dozen years of falling prices, the majority of producers and consumers were not implacably bearish, and therefore figuratively out to lunch on the subject of a future bull market (in commodities), the book of human nature would have to be rewritten.”