CIBC's Rubin Sees U.S. Inflation Hitting 6%
Headline inflation in the United States could be headed as high as 6% before the end of the year, CIBC chief economist Jeff Rubin warns in a forecast published Wednesday.
"We haven't seen a 6% CPI inflation rate posted in the U.S. since 1990 and even then only briefly for four months," wrote Rubin. "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. Yet within the next six months, there is every reason to believe that headline CPI inflation will once again reach that speed."
Rapidly rising energy costs are likely to have American workers seeking cost of living protection in their wage contract negotiations, says Rubin.
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."
That will put more upward pressure on inflation, and force the U.S. Federal Reserve to start rapidly raising interest rates, he says.
"If labor markets start changing, how high will interest rates have to rise? The last time we saw 6% inflation in 1990, the federal funds rate was running at around 7'%- over three times today's setting. And a 10-year Treasury bond was yielding 8'%-over double what it yields today."
"We expect that the Federal Reserve Board will raise interest rates no less than 200 basis points by the end of next year. History says we will be very lucky if they don't have to do more," Rubin continued.
By Geoff Matthews and edited by Cristina Markham