A Lone Wolf Cries, ‘Inflation!’

By Shobhana Chandra and Steve Matthews,

Economist David Rosenberg likes to go against the grain. So when Rosenberg, chief economist and strategist for Gluskin Sheff & Associates in Toronto and former chief economist for North America at Merrill Lynch (BAC), declares inflation is returning, peers take note. They may not follow, but they listen to a man who’s proven to be a shrewd prognosticator for the past decade. Rosenberg’s focus on inflation since last year marks a 180-degree turn for him—his earlier call on the threat of disinflation represents the view now prevalent among economists. “This deflation, disinflation, benign inflation story which seems to be everybody’s mindset is really yesterday’s story,” Rosenberg says. The Federal Reserve “is carrying out the mother of all reflationary policies. My bet is that eventually the Fed will get what it wants, and then some.”

Rosenberg says investors are being complacent, just as they were in 2003, when few economists or policymakers foresaw the inflation that prompted the Fed to begin raising rates in June 2004. “You have to expect that as the economy does better, inflationary pressures follow suit,” he says. “At some point the Fed will have to start raising rates.”

Some support for Rosenberg’s view comes from former Federal Reserve Bank of Cleveland President W. Lee Hoskins, who says Fed policymakers tend to tolerate higher inflation and act slowly to quell it.

Rosenberg addressed the possibility that the Fed won’t rush to put a lid on inflation in a Dec. 16 note, arguing that once commodity prices find a bottom and resume their upward rise, costs will increase for businesses and households. “The next decade is going to look more like the ’70s than many think,” he wrote.

More From Bloomberg Businessweek: