There was general agreement that both inflation and productivity were understated. Housing is a big part of the inflation calculation and, for most of the country, housing costs have been rising modestly. The prices of services like healthcare and lifestyle-supporting needs used by everyone, such as haircare and cleaning services, have risen sharply but don’t show up in the numbers. As for productivity, the measurement techniques were developed in the 1950s when the U.S. was more of a manufacturing economy. Now with services and knowledge-based industries so important, the historical measurement approaches, which underestimate the impact of computer software developments, understate productivity improvements. Time spent posting and reading posts on Facebook during working hours, however, detracts from productivity. One technology person pointed out, though, that the video games of today are intensely interactive and represent a learning experience for the kids playing them. This is in sharp contrast to the passive watching of television by previous generations.

We talked a bit about inequality and agreed the problem was likely to become worse because of globalization and technology. One investor was optimistic, however, because of the positive impact machine learning was making in improving the outlook of disadvantaged Americans and educational opportunities in the emerging markets. Another pointed out that 60% of the jobs held in 1980 don’t exist today and still unemployment is down to 4.3%. On-demand services, such as Uber, are creating jobs, but technology displacing workers is a problem throughout the world.

Even though there was an apprehensive mood at the lunches few were buying gold as a safeguard. In spite of the strong performance of the Japanese economy this year and the rise in its stock market, the group remained wary of Japan. There was no clear consensus on why the dollar was weak, but a lack of confidence in the new administration in Washington was clearly a factor in spite of strong U.S. growth and a rising stock market. One of the lunches was decidedly bearish. Overall, a vote on market performance between now and year-end showed that 60% believed it would be higher in spite of the caution expressed in the discussion.

Eoin Treacy's view

Here is a link to the full report.

What I spend money on every month is going up in price yet official inflation measures tell me there is little inflation. I took a look at my family’s expenditures on a year over year basis at the weekend. My health insurance went up 30% last year, my children’s tuition increased 10%, my car insurance went up 8%, food was relatively unchanged and gasoline was volatile. Meanwhile my mobile phone service got cheaper.

It’s hard to get an accurate measure of restaurant prices because we do not frequent the same ones on a regular basis but prices have gone up and I notice that the “suggested tips” printed on the bottom of receipts now range from 18% to 25% whereas a couple of years ago they ranged from 15% to 22%. Whatever about the basket of goods and services the government uses, I can definitely attest to the fact that inflation is alive and well in the real world and I am far from unique in that regard.

If my personal experience is the real world then we have to ask why isn’t the bond market reflecting that perspective? The answer of course lies in quantitative easing and the distorting effect it has had on the pricing model. If the government prints and purchases hundreds of billions of bonds it can’t but have an effect on prices.

Th 10-year Treasury yield bounced from the region of the June lows on Friday and was steady today. The slow pace of Fed rate hikes coupled with discussion about how to begin to reduce the size of the balance sheet are helping to put a floor under yields. However, many investors have been conditioned to be sceptical of Fed pronouncements so they will need evidence of action to lend credence to the view that yields are soon going to trend higher.