Real story on inflation will soon be told: Arnott

Inflation appears tame on the surface, but Robert Arnott remains an inflation hawk. “The system used by the [Bureau of Labor Statistics] has understated [the Consumer Price Index] for the last 20 years,” Mr. Arnott, chairman of Research Affiliates LLC, said in an interview today. “To the person on street, [inflation is] not 2%,” given increases in the things most consumers buy, he said. Mr. Arnott's firm is a subadviser to the popular Pimco All Asset All Authority and All Asset funds, which seek consistent real returns. Indeed, the American Institute for Economic Research now publishes an “everyday price index” that measures day-to-day costs for consumers, according to a Reuters report today. Last year, the index rose about 8%, while the Consumer Price Index increased 3.1%. Mr. Arnott figures the headline CPI numbers will be moving up, possibly by this year. “Until the velocity of money accelerates, the vastly expanded money supply doesn't turn into inflation,” Mr. Arnott said. “So we've been protected by a sputtering economy. If the economy regains traction and we get slow to moderate growth, we'll see [higher] inflation sooner than we'd like, possibly later this year or into next year.” But if a new recession develops, the Federal Reserve “would react with stupendous easing, and consequently, inflation will hit us later — but it will be bigger,” he said. Last month, Mr. Arnott increased his weightings in commodity-related holdings and emerging-markets investments to protect against inflation and a weaker dollar. The BLS today said the Producer Price Index advanced 0.4% in February and 3.3% for the prior 12 months. That was the smallest year-over-year rise since August. Economists projected a 0.5% gain, according to the median estimate in a Bloomberg News survey. February CPI data are scheduled to be released tomorrow. Economists polled by Reuters expect the CPI to be up 0.4%, double the January rate, due largely to an 11% increase in the price of oil, according to the news service.