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The Dollar – Best House on a Bad Block
I’m here to draw your attention to something alarming happening in currencies at the moment. Here is a picture of the US Dollar, which has lost a huge amount of value in the past year.
Now, before certain ones of you get all excited and say that this proves Trump is ruining the dollar and forcing foreigners to vamoose out of the United States, take a look at the Euro.
I’m not going to tease you too much with this. The first chart is just the dollar in terms of ounces of gold; the second is the Euro in terms of ounces of silver. Don’t worry, longtime readers: I’m not about to go all gold-bug on you. I could have done those charts with almost any currency against a wide variety of commodities: the Bloomberg Commodity Index is up 23% since mid-August, and +12% since the end of the year. So this isn’t just a precious metals story, and it isn’t just a dollar story. It’s a fiat currency vs ‘stuff’ story.
The recent breathless coverage of the melt-up in precious metals seemed to me to miss the bigger point of what it means. It’s awesome if you’re long precious metals. But the abrupt turn vertical is – or should be – alarming. But nothing looks alarming when it’s pointed higher.
Treasury Secretary Bessent, as I write this, just came out and stated that the United States has a strong dollar policy and has not intervened (at least not yet) to push the dollar lower against the yen. That’s all very nice but I don’t worry a lot about the level of the dollar against other currencies in the medium term and here’s why.
Let’s look at the monetary pipes, which to me imply an increase in the dollar and/or a sharp increase in long-term interest rates regardless of what happens to overnight policy rates. (Many people are concerned about long-term rates because of some vague sense that we are borrowing too much or because everyone is going to sell their US bonds – to buy what with the dollars they receive, no one seems to mention – but there is a mechanical/accounting relationship could cause that outcome).
To this end, the illustration below (Source: Enduring Investments[1]) is a helpful visual guide. For this analysis we are interested in the flows of the dollar system, more than its stock. And the important flows are – or have been – pretty stable. The US has for a long time run a substantial budget deficit, which means the government needs to source dollars by borrowing them. The three sources of those dollars have historically been foreign investors, the Fed, and domestic savers. Foreign investors have extra dollars because the trade deficit means that Americans send more dollars to foreign producers than foreign consumers send to US producers, and those extra dollars are invested in the US into government bonds (spigot on the lower left) or otherwise invested in markets or direct investment (spigot on the lower right). The Fed balance sheet, over the last decade or so, has often been a supplier of dollars to the system when it has been expanding more often than not. Finally, there are domestic savers who buy Treasury bonds among other things (but consider that when they’re buying US stocks, for example, the dollars are just sloshing from one domestic saver to another – that’s why there’s no flow shown for domestic savers buying US stocks). Those three ‘suppliers of dollars’ are the top hoses filling up the barrel of dollars in the illustration below.
Those flows tend to reach stasis via automatic stabilizers. For example, if the government is draining more money (with a big budget deficit) than is being supplied elsewhere, then either interest rates rise to induce domestic savers to provide more money, or the trade deficit expands. My concern is that automatic stabilizers tend to take time to stabilize, and currently there are some big changes. See the next illustration and focus on the differences compared with the prior one.
The cessation of the expansion of the Fed’s balance sheet has been happening for a while, and the balance sheet has even been shrinking a little. But the Trump Administration’s trade policies have caused two major changes: first, the trade deficit has been shrinking sharply (see charts below, source Bloomberg; the first shows the net trade balance monthly and the second shows the recent trends of declining imports and rising exports).
Some of this may be ‘payback’ for the surge in imports at the beginning of the year by importers trying to beat the imposition of tariffs, but there seems little question now that the trade deficit really is closing substantially. At the same time, foreign companies have been tripping all over each other to start making substantial investments into the US. In the second ‘barrel of money’ chart above, note the spigot at the lower right is really gushing, and two of the hoses supplying dollars have slowed to a trickle or stopped.
If that’s a fair representation, then what are the implications? If those trends persist, then the demand for dollars is going to outweigh the supply of dollars, leading to two outcomes. One of those is that in order to induce more dollars to fund the federal deficit, interest rates will have to rise. The Fed can control the policy rate, but in order to keep long-term rates down the Committee may eventually be forced to start up their hose again – intervening to buy Treasuries in the market to prevent long rates from rising, and expanding the balance sheet. The market stabilizer here would be for interest rates to rise and induce more domestic savings; if for policy reasons the Fed doesn’t want that then they’ll have to add more money themselves, with inflationary consequences. (It’s inflationary either way, but if interest rates rise it’s only indirectly inflationary in that higher interest rates also increase money velocity).
The other implication is that the dollar would strengthen on foreign exchange markets, since if foreigners are going to invest in the US in financial markets (or with direct investment, building new plants and so forth) they will need dollars to do so and the trade deficit is no longer providing a surplus of those dollars. It’s likely also that, with fewer dollars being sent abroad, domestic stock and bond markets would struggle more than they have been. A stronger dollar would be disinflationary at the margin, helping to hold down core goods prices, but this effect is fairly small…especially in the broader context I’ve mentioned, which is that all fiat currencies right now are getting smashed versus real stuff.
These are the implications of the recent large changes in financial flows. There are potential offsets available. If the trade deficit declines and the federal budget deficit declines also, it diminishes upward pressure on interest rates since domestic savers do not have to be incentivized to provide as much of the dollars in deficit. You can infer this from the barrel illustrations as well: if the federal budget moves towards balance, it lessens the net change in the system.
And there had been some positive signs on that score. The tariff revenue has been large, and some of the spending priorities of the prior Administration have been de-emphasized. These are positive developments which could lessen the pressure on the dollar and interest rates…except that the Trump Administration has been mooting the idea of ‘tariff dividend checks,’ increased defense spending, buying Greenland, and other significant spending initiatives.
It is also possible, even probable, that the Fed or Congress could change banking liquidity regulations in such a way that banks are forced to hold more Treasuries, which would add an additional hose to the top of the barrel. However, the more assets that banks are required to hold, worsening the return on assets of traditional banks, the more banking functions will start to move to non-bank entities or into crypto, increasing the money supply while decreasing the Fed’s control of it.
The upshot of all of these changes is that – based on the flows as we see them now, which could change – I believe we are going to see a significantly steeper yield curve and a significantly stronger dollar over the next few years.
Having said all of that, let me circle back to the start of this note – while the USD is not likely to collapse against other currencies, the movement against commodities (not to mention equities) and other real assets is disturbing. The US money supply has been accelerating recently; M2 is only +4.6% in the last 12 months, but that’s near (or may even be above) the maximum rate that is sustainable without causing inflation in a country that is deglobalizing and in demographic reverse. I am not bullish on gold and silver at these levels, and am more cautious on commodities than I have been in a while. But while I am a dollar bull against other currencies, I am a bear of fiat currencies against real assets generally…and I am concerned that the recent waterfall-like behavior of fiat presages a re-acceleration of CPI-style inflation. Commodities feed broadly into prices, but so do wages and lots of other things that are measured in terms of dollars. If the problem is fiat, and not gold and silver themselves, then it’s a bullish signal for inflation.
[1] These images were generated using AI image generation tools to create an illustrative representation for explanatory purposes.
The Fault, Dear Brutus, is in R*
I want to say something briefly about the “neutral rate of interest,” which has recently become grist for financial television because of new Trump-appointed Fed Governor Stephen Miran’s speech a couple of days ago in which he opined that the neutral rate of interest is much lower than the Fed believes it is, and that therefore the Fed funds target should be more like 2%-2.25% right now instead of 4.25%.
Cue the usual media clowns screaming that this is evidence of how Trump appointees do not properly respect the academic work of their presumed betters.
If that was all this is, then I would wholeheartedly support Miran’s suggestion. Most of the academic work in monetary finance is just plain wrong, or worse it’s the wrong answer to the wrong question being asked. And that’s what we have here. Anyone who thinks that Miran is an economic-denialist should read the speech. It is mostly a well-reasoned argument about all the reasons that the neutral rate may be lower now than it has been in the past. And I applaud him when he comments “I don’t want to imply more precision than I think it possible in economics.” Indeed, if we were to be honest about the degree of precision with which we measure the economy in real time and the precision of the models (even assuming they’re parameterized properly, which is questionable), the Fed would almost never be able to decisively reject the null hypothesis that nothing important has changed and therefore no rate change is required!
I can’t say that I agree with Miran’s argument though. Not because it’s wrong, but because it’s completely irrelevant.
Sometimes I think that geeks with their models is just another form of ‘boys with their toys.’ And that is what is happening here. The “neutral rate of interest” is a concept that is cousin to NAIRU, the non-accelerating-inflation rate of unemployment. The neutral rate, often called ‘r-star’ r* (which is your clue that we’re arguing about models), is the theoretical interest rate that represents perfect balance, where the economy will neither tend to generate inflation, nor tend to generate unemployment. Like I said, it’s just like NAIRU which is a level of unemployment below which inflation accelerates. And they have something else in common: they are totally unobservable.
Now, lots of things are unobservable. For example, gravity is unobservable. Yet we have a very precise estimate of the gravitational constant[1] because we can make lots of really precise measurements and work it out. Economists would love for you to think that what they’re doing with r* is similar to calibrating our estimate of the gravitational constant. It’s not remotely similar, for (at least) two enormous reasons:
- Measuring the gravitational constant is only possible because we know (as much as anything can be known) what the formula is that we are calibrating. Fg=Gm1m2/r2. So all we have to do is measure the masses, measure the distance between the centers of gravity, and infer the force from something else.[2] Then we can back into G, the gravitational constant. Here’s the thing. The theory of how interest rates affect inflation and growth, despite being ensconced in literally-weighty economics tomes, is just a theory. Actually, several different theories. And, by the way, a theory with a terrible record of actually working. To calibrate r*, the hand-waving that is being done is ‘assume that interest rates affect the economy through a James and Bartles equilibrium…’ or something like that. It is an assumption that we shouldn’t accept. And if we don’t accept it, calibrating r* is just masturbation via mathematics.[3]
- With the gravitational constant, every subsequent measurement and experiment confirms the original measurement. Every use of the model and the constant in real life, say by sending a spacecraft slingshotting around Jupiter to visit Pluto, works with ridiculous precision. On the other hand, r* has approximately a zero percent success rate in forecasting actual outcomes with anything like useful precision, and every person who measures r* gets something totally different. And r* – if it is even a real thing, which I don’t think it is – evidently moves all the time, and no one knows how. Which is Miran’s point, but the upshot is really that monetary economists should stop pretending that they know what they’re doing.
In short, we are arguing about an unmeasurable mental construct that has no useful track record of success, and we are using that mental construct to argue about whether policy rates should be at 2% or 4%. Actually, even worse, Miran says that the market rate he looks at is the 5y, 5y forward real interest rate extracted from TIPS. The Fed has nothing to do with that rate. But if that’s what he is looking at why are we arguing about overnight rates?
I should say that if there is such a thing as a ‘neutral rate’ that neither stimulates nor dampens output and inflation, I would prefer to get there by first principles. It makes sense to me that the neutral long-term real rate should be something like the long-run real growth rate of the economy. And if that’s true, then Miran is probably at least directionally accurate because as our working population levels off and shrinks, the economy’s natural growth rate declines (unless productivity conveniently surges) since output is just the product of the number of hours worked times the output per hour. But I can’t imagine that the economy ‘cares’ (if I may anthropomorphize the economy) about a 1% change in the long-run real or nominal interest rate, at least on any time scale that a monetary policymaker can operate at.
The best answer here is that whether Miran is right or not, the Fed should just pick a level of interest rates…I’m good with 3-4% at the short end…and then change its meeting schedule to once every other year.
[1] Which may in fact not be constant, but that’s a topic for someone else’s blog.
[2] In the first experiment to measure gravity, which yours truly replicated for a science fair project in high school, Henry Cavendish in 1797 figured the force in this equation by measuring the torsion force exerted by the string from which his two-mass barbell was suspended, with one of those masses attracted to another nearby mass.
[3] Yeah, I said it.
When and How Much Tariff Effect?
As we look forward to the CPI report next week, the monthly-repeating theme is ‘when will the tariff effect show up?’ The answer, so far, is ‘not yet,’ but economists who had forecasted the end of life as we know it when the Trump tariffs went into effect have been befuddled.
I’ve already admitted in this column that I was educated in the tradition of ‘tariffs bad,’ but that over the years Trump’s insistence otherwise has made me carefully re-think of which ways tariffs are truly bad, and which ways they’re not so bad. Naturally, if tariffs were uniformly bad – which seems to be the orthodoxy – then it would be really hard to explain why almost every country levees tariffs. Maybe forty years ago we could blame the benightedness of those poor policymakers in other countries, who clearly just didn’t understand how bad tariffs are. But now? Heck, all someone in one of those countries needs to do is ask ChatGPT ‘are tariffs bad,’ and they’ll learn!
… Conclusion: Tariffs can be useful tools in specific, limited circumstances — like protecting vital industries or responding to unfair trade practices. But long-term, high or broad tariffs often do more harm than good, especially in highly interconnected global economies. (ChatGPT, July 9, 2025 query ‘Are tariffs bad’)
But it seems every country has these specific limited circumstances! It’s evidently only bad when the US does tariffs. And that is what made me ask whether maybe there is some nuance. My 2019 article “Tariffs Don’t Hurt Domestic Growth” was really good, I thought.
Even as there has been some small movement in the economintelligencia, though, about whether tariffs are all bad there has been very little movement in the notion that they are clearly inflationary. No doubt, implementing a tariff will raise prices at least a little, but how much is the important question. And regardless of that answer, tariffs are a one-time adjustment to the price level even if that effect is smoothed over a period of time. (This is why it’s weird to hear Powell say that the Fed can’t ease because they’re waiting to see the effect of the tariffs on inflation. That’s economic nonsense. The Fed can’t possibly believe that keeping rates high is the proper response to a one-time shock.)
On this question, I thought I’d share something I wrote in our Quarterly Inflation Outlook from Q1 (in mid-February), in which I roughly estimated the effects of a 20% blanket tariff. I know the answer isn’t “right,” because that’s the wrong question – there isn’t a 20% blanket tariff. But I undertook the estimate to get an idea of the relative scale of effects. (I included in the piece some parts from that 2019 article mentioned above, because I’m not above stealing from myself!) I will add some concluding thoughts after this ‘reprint’ from our QIO – which, by the way, you can subscribe to here.
Tariffs as a Tool to Promote Domestic Growth and Revenue
In the President’s view, the fact that the U.S. has a very low tariff structure compared to the tariffs (and arguably VAT taxes) that other countries place on U.S. goods is prima facie evidence that the U.S. is being taken advantage of and treated unfairly on world markets. The U.S. has, for the better part of a century, been the main global champion of free trade and this tendency accelerated markedly in the early 1990s (as the familiar chart below, sourced from Deutsche Bank, illustrates well).
The effect of free trade, per Ricardo, is to enlarge the global economic pie. However, in choosing free trade to enlarge the pie, each participating country voluntarily surrenders its ability to claim a larger slice of the pie, or a slice with particular toppings (in this analogy, choosing a particular slice means selecting the particular industries that you want your country to specialize in). Clearly, this is good in the long run – the size of your slice, and what you produce, is determined by your relative advantage in producing it and so the entire system produces the maximum possible output and the system collectively is better off. To the extent that a person is a citizen of the world, rather than a citizen of a particular country – and the Ricardian assumption is that increasing the pie is the collective goal – then free trade with every country producing only what they have a comparative advantage in is the optimal solution.
However, that does not mean that this is an outcome that each participant will like. Indeed, even in the comparative free trade of the late 1990s and 2000s, companies carefully protected their champion companies and industries. Even though the U.S. went through a period of being incredibly bad at automobile manufacturing, there are still several very large U.S. automakers. On the other hand, the U.S. no longer produces any apparel to speak of. In fact, the only way that free trade works for all in a non-theoretical world is if (a) all of the participants are roughly equal in total capability, and permanently at peace so that there is no risk that war could create a shortage in a strategic resource, or (b) the dominant participant is willing to concede its dominant position in order to enrich the whole system, rather than using that dominant position to secure its preferred slices for itself and/or to establish the conditions that ensure permanent peace by being the dominant military power and enforcing peace around the world. We would argue that (b) is what happened, as the U.S. was willing to let its own manufacturing be ‘hollowed out’ in order to make the world a happier place on average.
The President (and many of those who voted for him) feel that (b) is inherently unfair, or has reached extremes that are unfair to U.S. citizens. Essentially, the President is rejecting the theoretical Ricardian optimum and pursuing instead a larger slice for his constituents. This is where reciprocal tariffs (where the U.S. matches the tariff placed on its exports by a trading partner, with a tariff placed on the imports of that product from that trading partner) or blanket tariffs (where the U.S. imposes a tariff on all imports of a product irrespective of source – e.g. aluminum – or on all imports from a given trading partner) come in.
Blanket tariffs are good for domestic growth,[1] but definitely increase prices for consumers. How good they are for growth, and how much prices rise, depends on how easily domestic un-tariffed supply can substitute for the imported supply and also on whether your country is a net importer or exporter, and how large the export-import sector is in terms of GDP. Because this is an inflation outlook, let’s make a very rough estimate of the impact on the overall domestic price level of a blanket 20% tariff (such as the one Treasury Secretary Bessent has proposed). We suppose the average elasticity of import demand in the U.S. to be 3.33[2] and the elasticity of export supply to be 1.0[3]. In that case, the incidence of a tariff falls about 23% on consumers: [1.0 / (3.33+1.0) ]. So, for a 20% tariff, prices for the imported goods would be expected to rise about 4.6% (20% tariff x 23% incidence). However, imports only account for about 15% of US GDP, which means the effect on the overall price level would be 15% x 4.6% = 0.69%.
So, for a 20% blanket tariff on imports, Americans should expect to see a one-time increase in the overall price level of something on the order of 0.7%, smeared over the period of implementation. This is not insignificant, but it is also not calamitous. It does affect our estimates for 2025 and 2026 inflation, shown in the “Forecasts” section (somewhat less than 0.7%, because we do not expect a blanket tariff but rather reciprocal and targeted tariffs). Also note that the retaliatory tariffs on US exports have no direct effect on domestic prices, so that whether or not trading partners retaliate is irrelevant to an analysis of first round effects, anyway.
Thus my wild guess back in February was that a 20% blanket tariff would result in a bit less than 0.7%, smeared out over 2025 and 2026. That doesn’t answer the ‘timing’ question, but the delays in implementation (so as to not affect Christmas 2025 prices of the GI Joe with the Kung-Fu Grip) and the importer/retailer initial reaction to try and absorb as much as possible for optics – presumably, easing price increases into the system later – mean that it shouldn’t be shocking that we haven’t seen a big effect yet. My point in the above calculation, though, is that we really shouldn’t expect to see a big effect, regardless.
For what it’s worth, the Budget Lab at Yale estimates that currently “the 2025 tariffs to date are the equivalent of a 15.2 percentage point increase in the US average effective tariff rate,” so if we take my 0.7% guess for 20% then we would be looking closer to 0.5% in total. And in fact, lower even than that since the 15.2% average will have less impact than a 15.2% blanket tariff, assuming that the tariffs will be highest where domestic substitution is easier.[4]
Wrapping this up, let me make one final observation. Current year/year headline CPI inflation is 2.35%. The inflation swaps market, specifically the market for ‘resets’ where you can trade essentially the forward price level, currently suggests that traders expect y/y inflation to rise to 3.29% over the next six months: almost 1 full percentage point from here. But that actually flatters what the market is pricing, because the shape of the energy curves suggests that rise is being dragged about 20bps lower by the implied moderation in energy prices (give me a break, inflation traders: I’m doing this in my head).
So, the market is pricing core inflation peaking about 6 months from now, about 1.2% higher than it currently is. Not all of that is the effect of tariffs; some is due to base effects as the very low May, June, and July 2024 numbers roll off of the y/y figure. But if we get that result, you can be sure that economists will put most of the blame on Mr. Trump, while Mr. Trump will put most of the blame on Mr. Powell. Either way, I think the interest rate cuts that the President would prefer are unlikely unless growth takes a significant stumble.
[1] …but bad for global growth! There is no question that unilaterally applying tariffs to imports is bad for all suppliers/countries providing those imports. If Ricardo is right, the overall pie shrinks but the domestic slice gets larger…at least for the dominant players who already have a large slice. If everyone raises tariffs in a trade war outcome, the less-productive countries suffer the most loss of growth and the most-productive countries likely still benefit. But prices rise for all.
[2] Kee, Nicita, and Olarreaga, “Estimating Import Demand and Export Supply Elasticities”, 2004, Figure 5, available at http://repec.org/esNASM04/up.16133.1075482028.pdf Your answers may vary!
[3] Estimates are wildly all over the map, depending on the exporting country and the product. In general the smaller the country, the more price-inelastic it is. We chose unit elasticity here (a 1% increase in price cause a 1% increase in the quantity supplied) just to be able to get a rough guess.
[4] To be fair, the Budget Lab at Yale also estimates the effect on PCE inflation of a whopping 1.74%. They must be really surprised at the impact so far.
The Coming Surge in College Tuition Inflation
Today’s news is clearly about the imposition of new reciprocal tariffs on US trading partners, and the responses that those countries will have to the tariffs. In terms of the markets’ reactions, it does seem shocking to me that people were shocked and appear to have not been particularly well hedged…considering that the Administration has clearly been telegraphing this action for a long time. For what it’s worth, expect the countries with big surpluses to the US (they sell us a lot more than we sell them) to rapidly cut their trade barriers while countries that are closer to balanced in their flows to beat the drum more. But there is a ton of analysis out there about the tariffs, most of it informed by bad modeling, and I have already expressed my view that this is going to (a) have a smaller price impact in the US than most people are worried about, (b) may produce a technical recession simply because of all of the front-running imports we have seen in Q1-Q2, (c) will increase, not decrease, US employment, although it (d) may well result in longer recessions ex-US. Oh, and furthermore (d) will tend to result in lower global energy prices, which will help further with (a).
Today, though, I want to talk about another policy that is going to work the other way on inflation…but no one else I have seen has mentioned this yet. And that is how the sharp decrease in federal appropriations going to colleges and universities is going to lead to a sharp acceleration in tuition inflation going forward, especially if the stock market continues to decline.
To understand why, consider a simple but descriptive model of how college tuitions are set. Colleges have fairly simple income statements in aggregate: expenses are primarily labor, along with ancillary expenditures on physical plant and other expenses, while revenues consist of tuition, government funding (in the case of public institutions), and endowment earnings (primarily in the case of private institutions). For the purposes of illustration, I randomly pulled the annual report of Indiana University, from https://finance.iu.edu/doc/reports/fy2023.pdf. The tabular numbers are on page 23, but here they are graphically.
So, as I said, compensation expenses are 2/3 of the budget and revenues are half tuition, and another 20% federal grants and contracts (and a little bit from state and local). Some of the ‘auxiliary enterprises’ or ‘other revenues’ may be endowment returns, but those tend to dominate more at private institutions. Either way, Note that the Board of Trustees has no control over endowment returns or government appropriations, even if they have nominal control on some of the other levers. Also, the Trustees have very limited control, especially in the short-term, on compensation and benefits – it isn’t like you can fire your tenured professors and go get cheap ones. So, in practice, the university budget is balanced on the one number the Trustees really do control in the short run, and that is tuition.
So expenses are fairly inflexible and highly driven by inflation (since wages follow inflation). That means that tuitions also increase faster, obviously, when the general level of inflation is faster and vice versa. But on top of that, tuitions tend to increase more slowly when governments are pitching in more (or endowment returns are awesome), and more quickly when governments are pitching in less (or endowment returns are weak). Here is our model, set against an index of tuition from 4-year public universities (sourced from College Board: https://trends.collegeboard.org/college-pricing/figures-tables/published-prices-national , author’s calculations). The model simply uses College Board’s information on government appropriations per FTE student from the same report, along with simple equity returns, bond yields, and inflation. The little deviation at the end is interesting in itself because it happens starting at COVID, when tuitions went up less than the model would have expected. Or did they? I wrote at the time (https://inflationguy.blog/2020/09/11/summary-of-my-post-cpi-tweets-september-2020/ for example) that the BLS was assuming no quality adjustment downward despite the fact that many schools were quasi-virtual or fully virtual. That’s an issue – our model also assumes no state change in the quality of education during the COVID years – but other than that, the model worked pretty well.
The point is that a decrease in federal appropriations will result in a large increase in expected tuition inflation. The betas on our model are not helpful, because they assume a homoscedastic relationship…that is, the effect of changes in that variable (beta) does not change with the size of the change in the variable. That seems unlikely here. If federal appropriations per student drop 10%, I feel reasonably confident that we have the scale of the impact right. If they drop 50%, I suspect states will pick up some slack, tuitions will jump, schools will try to cut costs (for a change), flush more from the endowments, and take some financial lumps. But tuition would still experience a really sharp jump in that case.
For scale, consider the following table. In the aftermath of the Global Financial Crisis (when admittedly endowments were also in bad shape…it turns out to be a little hard to disentangle those two highly-correlated effects), appropriations for education declined for four years in a row (red cells). Even though inflation overall during that period declined from 5% to -1.4%, and then 1.1%, 3.6%, and 1.7%, tuition inflation actually accelerated from 6.6% to 7.25% before finally decelerating a bit. In the 2013-2014 school year, when appropriations rebounded, tuition rose only 0.6% faster than headline CPI.
Now take those -4% appropriations changes and turn them to -30%. The model says that should give us something like 15% tuition inflation year/year. That seems unlikely to me, and even more unlikely the larger those appropriation declines are. Because colleges will adapt, or close. In the medium-term, the result will be higher tuitions, lower college services (what? No NIL money for the football team? No all-you-can-eat sushi?), tighter operating budgets and fewer ancillary staff. And lots of people will discover they are ancillary staff. In the short-term, it is hard to judge the scale (partly because we really don’t know how much federal aid will decrease). I am comfortable, however, with the direction. College tuition inflation is about to accelerate, and probably a lot.
Growth. Does. Not. Cause. Inflation.
I am constantly amazed at certain articles of faith among the economics community. In my line of expertise, one of the most amazing to me is the absolute conviction with which the economics community believes that if the economy grows too fast, inflation will result and if it grows too slowly, disinflation or deflation will result. That this conviction is so strongly held is especially incredible, since there is essentially no evidence for that belief.
Theory says it is so. Growing too fast puts too much pressure on land, labor, and capital, which causes their prices to rise and therefore the price of the output. I mean, obviously.
Except that it doesn’t seem to have ever happened that way, at least for a long, long time.
Heck, let’s just take recent experience. In the last twenty years, we have had two global economic crises. The upheaval in 2008 was the largest since at least the Great Depression. The economic contraction in 2020 made the Global Financial Crisis look like a piker. So obviously, if we look at inflation it must have massively slowed down in those events, right?
Hmmm. Now, I’ve showed the Core CPI price level against GDP. If you squint, you can see a small deceleration in core CPI in 2010: it actually reached only +0.6% y/y at one point. We never even reached deflation, despite the fact that the GFC was triggered by housing and housing is by far the largest component of CPI. I don’t need to say anything about the COVID period because it is so recent. Core inflation vaulted higher, and continued to do so long after economic output had been fully restored to its prior level.
The other wonderful counterexample I like to show is the 1970s.
Notice there are several flat points here, where GDP was steady-to-lower and the price level kept on truckin’ (that’s a 1970s reference, kids). Notice that since I’m using core CPI, you can’t even say ‘well, the OPEC embargo caused energy prices to spike and that also slowed the economy.’ Yes, it did, but shouldn’t that slowing of the economy have taken pressure off of other non-energy prices? Well, it didn’t. Inflation was robust during the 1970s, despite growth that lurched forward and back in fits and starts.
Those are fun, visual aids but sometimes our eyes can deceive us and hide or exaggerate a relationship that is statistically present (or not). So here I did the economist thing and ran scatterplots at different lags. Each of these shows the y/y change in GDP on the x-axis (quarterly observations, since 1960 until 2024), and y/y changes in Core CPI on the y-axis. Chart A shows the y/y changes contemporaneously (1965Q1 vs 1965Q1, e.g.). Chart B lags the inflation one quarter, so we see if this year’s growth affected this year’s inflation but lagged a little bit. Chart C lags the inflation one year, so we see if this year’s growth affects the coming year’s inflation. And Chart D lags the inflation two years, so we see if this past year’s growth affects next year’s inflation.
The correlation coefficients, for your reference: -0.18, -0.13, 0.03, 0.14. That’s thin gruel on which to make a strong argument about growth causing inflation, in my mind.
Now, I’ve run these regressions since 1960 since the core CPI index only goes back to 1957. The same regressions with headline inflation show coefficients of -0.11, -0.05, 0.10, and 0.11. I’m actually surprised they’re not any better, because energy prices should be correlated with growth and flatter the relationship. The OPEC embargo does hurt that relationship, but even if we just run these regressions since 1980 the correlations between growth and headline inflation are just 0.13, 0.19, 0.16, and -0.09.
So where do we get the idea that growth causes inflation?
Well, if I look at GDP growth versus headline inflation, from 1929 until 1960, and I exclude 1946 when industry relaxed from its war footing and war-time price controls were removed, then I can coax a really nice correlation of 0.73.
Indeed, if you look at the correlation between 1929 and 1945, it becomes a whopping 0.88. That’s science, baby – fitting the data to the story! But now I think we get to the heart of the matter because something else momentous happened in 1948 and that was the publication of the first edition of the most-used textbook in history: Paul Samuelson’s Economics. It is no surprise, perhaps, that generations of economists learned this ‘fact’ based on a correlation of 0.88…that has been falling ever since.
Since that time, the correlation between core inflation and growth has been low, and sometimes even negative, over very long periods. If there is any causal relationship, it is completely swamped in exceptions. Decades-long exceptions. It is time to give up this idea. One unfortunate consequence of that is that the way the Federal Reserve operates is as if there is one dial it can turn and that is ‘the dial that increases growth until inflation gets hot, then decreases growth.’ The problem is that isn’t one dial, it’s two. In general, I think the Fed should keep its hands off the growth dial, but if it wanted to meddle on rare occasions it would do so by manipulating medium-term interest rates. To control inflation, it needs to moderate the growth of the money supply. Frankly, in my opinion the FOMC should simply focus on the latter mission and let growth, and markets, take care of themselves. They’re not good at any of these missions anyway.
Trump Tactical Targeted Tariffs: A Reminder of the Impact of Tariffs
Representative Alexandria Ocasio-Cortez, aka AOC, recently railed against the President when he threatened Colombia with tariffs if they should refuse to accept their citizens being deported back to them. In her typical hyperventilated fashion, she implored us to “remember” that “WE pay the tariffs, not Colombia.”
For a change, AOC is not entirely wrong but merely mostly wrong. She seems to remember at least one important thing from Econ 101 and that is that businesses don’t pay anything to anyone, since a business is just a legal structure. Shareholders, other stakeholders, consumers, or suppliers pay and/or receive the cost of goods sold, taxes, wages, and so on. Unfortunately, I don’t think that was her point and she missed the important bit which is that ‘who pays the tariff’ depends almost entirely on the elasticity of demand for the product. Here are two charts. In each case, the tariff shifts the supply curve leftward/upward by the amount of the tariff, the same amount in both pictures. In each picture, the quantity consumed of the good being tariffed goes from c to d and the price goes from a to b as the market moves from one equilibrium to the other.
The first chart shows an inelastic demand curve, which is characterized by the fact that large changes in price do not change the quantity demanded very much. In this case, the main effect is that consumers buy almost as much of the good, but the price moves almost the full amount of the tariff. Consumers end up paying most of the tariff.
The second chart shows an elastic demand curve, in which even small changes in price induce large changes in the quantity demanded. In this case, the main effect is that consumers buy much less of the more-expensive good, and the price goes up only a little so that the seller bears most of the cost of the tariff.
Thus a blanket statement that “we pay the tariffs” is wrong. It is sensitive to the characteristics of the product market. One needs to be very careful about how we define the product market because it matters. I would argue that the elasticity of the demand for coffee is quite low, which is why Starbucks even exists. If the demand for coffee was very elastic, charging $5 a cup for bad coffee would not produce a line around the block at rush hour. But that is not what we are talking about here. The question here is, what is the demand elasticity for Colombian coffee? The answer to that question is very different. Coffee as a way to wake up in the morning has few close substitutes. But Colombian coffee has many, very very very close substitutes. My favorite right now is Ethiopian Yirgacheffe coffee. I also like a good Panama Boquete. Add 20% to the cost of the Boquete, and I think I’ll mostly drink the Yirgacheffe. Add 20% to both of them, and I’ll go to Brazilian Santos, or Colombian, or Kona.
I think the reaction of the Colombian President tells you everything you need to know about what he perceives about the demand for Colombian coffee and therefore the impact a tariff would have on exports of Colombian coffee to the United States. Trump very quickly got what he wanted with his Trump Tactical Targeted Tariffs (TTTT™). So to review: +1 for TTTT, -1 for AOC.
A couple of other points about tariffs and tariff strategy.
First, this episode illustrates a very important distinction to be made between the use of targeted tariffs and the use of blanket tariffs. Blanket tariffs, for example on everything we import from a major trading partner or on every trading partner, definitely increase prices for consumers. How much, and which prices, depends on how easily domestic untariffed supply can substitute for the imported supply. But the answer is certainly that prices go up. But let me point you to two articles I’ve written previously about this:
Tariffs Don’t Hurt Domestic Growth (https://inflationguy.blog/2019/08/28/tariffs-dont-hurt-domestic-growth/), August 28, 2019. This is a really good piece. In summary, tariffs are bad for global growth but they are not the unalloyed negative you learned about in school. How good/bad they are for growth depends on whether you are a net importer or a net exporter, and how large the Ex-Im sector is in your country. Truly free trade works in a non-theoretical world only if “(a) all of the participants are roughly equal in total capability or (b) the dominant participant is willing to concede its dominant position in order to enrich the whole system, rather than using that dominant position to secure its preferred slices for itself.” Really, you should read this.
The Re-Onshoring Trend and the Long-Term Impact on Core Goods (https://inflationguy.blog/2022/02/22/the-re-onshoring-trend-and-the-long-term-impact-on-core-goods/) February 22, 2022. This is not directly about tariffs, but the broad imposition of tariffs (if they happen) should be thought of as reinforcing this prior trend. The prior trend, of re-onshoring production to the US, has been under way for several years – the way that COVID exposed long supply lines certainly helped the trend but the long-term globalization trend was already reversing and in this article I argue that this means core goods inflation going forward is likely to be small positive, rather than persistently in deflation. In the context of the current discussion, President Trump has certainly made re-onshoring of production a major goal of his Administration. So whether it happens because of TTTT, or because of blanket tariffs, or because of tax breaks given for domestic production, the direction of the inflation arrow is clear.
I’m not worried about hyperinflation from tariffs and I think that if you’re the biggest and the strongest economic actor they’re probably more good than bad for domestic economic outcomes.
Reality is more nuanced than we learned in school. Not everything that expands the economy is good, and not everything that is good expands the economy. Not everything that is bad causes inflation to go up, and not everything that causes inflation to go up is bad.
The Residual Effect on Rent Inflation of the Eviction Moratorium
Today’s column will be a brief one, because it’s summertime and the people on the beach generally don’t read my column. I saw a headline today for an article on Realtor.com. “June 2024 Rental Report: Median Asking Rents Continue to Fall.” Here is the first chart, under the title ‘Rents Decline Again,’ which unironically shows asking rents are rising (but, on a y/y basis, still a tiny bit lower than a year ago.
My article though is not meant to beat up on the journalistic merits of this article. No, I want to run back a chart I showed a couple of years ago which was interesting at the time and – what surprised me when I updated it yesterday – is actually still interesting now.
The chart shows asking rents (Source: US Census), effective rents (Source: REIS), and the CPI for Rent of Primary Residence (Source: BLS). When I first ran this chart, the point was that the eviction moratorium instituted by the Biden Administration had held down realized rents, but opened up a large gap between actual rents and asking rents, which meant that there would eventually be a large catch-up. Prior to the eviction moratorium, these three measures paralleled quite well – as one would expect them to. But the point of divergence is obvious, as was its implications (and I noted them for example back in March 2021. You’re not wasting your time here, people).
Sure enough, rent inflation accelerated sharply when the moratorium ended.[1] Look at how the red line moved smartly up towards the blue line starting in the summer of 2021. The BLS measure, with a lag, also accelerated, and now has just about caught up to the Effective Rents measure. The animated discussions you hear today about how rents are still rising in the CPI even though effective rents and rents for new apartments are in some cases declining is mostly an argument about lags. The BLS series understated rent inflation for a while, and has been gradually catching up. It’s almost there.
But the interesting part to me is the blue line, especially in the context of an article about how “Asking Rents Continue to Fall.” I would absolutely expect asking rents to be falling, since they are up about 41% since the divergence began while effective rents are up only 18% or so. The curious part is the question about why this divergence has recently re-accelerated, and the secondary question about whether asking rents lead effective rents as they did during the eviction moratorium. That, though, was an unusual event and otherwise there doesn’t appear to be a lead relationship there.
There also, though, hasn’t previously been such a divergence. I wonder if the elevated asking rents measure is due to shortages of rental properties in areas of the country where the population growth (of both legal and illegal migrants) is hot. I don’t know. What does seem to be clear here is that the eviction moratorium caused massive turmoil in the rental market, and that volatility is continuing even today.
All the more reason to hate the idea of price controls on rents! Stop poking the hornets’ nest and let the market settle down.
[1] The Congressional eviction moratorium enacted as part of the CARES Act ended on July 25, 2020. The CDC unilaterally ordered the ban extended and imposed criminal penalties on violators. Congress extended the moratorium for one month, and the CDC again declared it to be continuing. A series of court decisions in July 2021 made clear that the CDC’s action was unauthorized by Congress and therefore unconstitutional. On August 3, 2021, the CDC extended the moratorium anyway but landlords felt more comfortable ignoring it. Various states extended the moratorium for a while within their states, but the nationwide moratorium effectively ended in July 2021. Wow, this footnote was longer than I thought my whole article would be.
Inflation Guy’s CPI Summary (June 2024)
Let’s set the stage. Last month (May’s data), core CPI printed at +0.16% and +0.25% on Median. But a lot of that, most of it, was core goods and the question was whether that month was a one-off due to be reversed at some point, or if shelter and other slower-moving things would come along. Coming into this month, the economists’ consensus was for +0.21% on core; the inflation swap market trades headline inflation but actually implied something a tiny bit softer than the economists were expecting. We knew Used Cars was going to be weak again, but it seemed like people were all-in on the idea that the worm has turned and now inflation is going to head sharply lower.
Whether this turns out to be true or not, it’s important to realize that the reason economists think that is because unemployment is rising, indicating that we are either in or very near a recession, and economists think (against logic and data) that wages lead prices so this should herald a disinflationary pulse. Now, I also think inflation is headed lower, but it’s because shelter is coming off the boil and not because the Fed successfully cracked the backs of labor.
So what happened this month?
We saw a very weak headline number of -0.06%, which was mainly the fault of a very weak core inflation number of +0.06%. That’s the second quite weak core figure in a row, and when median CPI comes out later today it should be even weaker than last month, at +0.195% or so. If we could repeat that median every month, it would be tantamount to inflation being at the Fed’s target because median normally tracks a little higher than core except when we are in an inflationary upswing.
But whereas last month’s inflation figure was all about core goods, this month we finally saw a bit of a deceleration in shelter. Okay, yes – core goods slipped further into deflation, because that category exists mainly to make me look stupid by going lower and lower when I keep thinking the disinflation must be nearly wrung out. Core Services dropped to 5.1% y/y from 5.3% y/y.
We had known Used Cars would be weak, and it was at -1.5% m/m. New cars also dragged. But I will say it again because I want to have the chance to appear stupid again next month: goods deflation is running its course. Global shipping costs are rising again, the dollar will be vulnerable if the Fed begins to ease, and while used cars should continue to show large y/y declines for the next few months that’s mostly base effects. On an index level, the used cars price index is almost all the way back to the overall price level. Since COVID, the general price level – what has happened to the average price of goods and services – is up 22.3%. Used Car prices are now only up 27.7%. Not all goods and services will move up exactly 22.3%; the point is that the dislocation in used cars is pretty much over and therefore we should expect at some point that used car inflation will start to look more like overall inflation.
But again, goods aren’t the story we really care about. The question is, what about services? The news here is all non-bad. (Some of it is good, some is just not bad.) This month, the story is that rents abruptly weakened on a m/m basis. Primary Rents were +0.26% m/m (was +0.39% last month), and Owners’ Equivalent Rent was +0.28% (was +0.43% last month). This dropped the y/y rates to 5.07% and 5.45%, respectively.
That’s good news, but it is not unexpected news. The conundrum over the last 3-6 months has been why this wasn’t already happening. On a m/m basis, the rent numbers probably won’t get a lot better, but if they print around this level consistently then the y/y rent numbers will decelerate gradually. Unfortunately, there is no sign of deflation in rents and they are likely to begin to reaccelerate later this year, or early next year. That is an out-of-consensus view, though, and you should keep in mind that the Fed believes we have imminent deflation in rents.
In addition to the softer rents numbers, Lodging Away from Home showed -2% m/m. However, like airfares (-5% m/m), LAFH is not something that is going to be a persistent large drag. It’s volatile. On airfares, this decline in prices matches nicely with the energy figures we saw yesterday that showed a surprising fall in jet fuel inventories. Prices dropped and people flew!
Moving on to “Supercore.” People made a lot last month of the m/m decline in core services ex-shelter, and they’ll make a lot of the fact that it declined m/m again this month. But that looks like a seasonal issue: last year the two softest months were also May and June. On a y/y basis, supercore showed another slight decline. Medical Care Services is 3.3% y/y, with Physicians’ and Hospital Services both holding pretty steady at a high level. I don’t see any major improvement in supercore yet.
Overall, there’s no doubting that this number is soothing for the Fed. It’s soothing for me too. Inflation is decelerating, and as I said last month I think the Fed will almost certainly deliver a token ease in the next couple of months.
The potential issue is that inflation isn’t slowing for the reason the Fed thinks it is. The economy is slowing, and unemployment is rising. I don’t know when Sahm first said it, but for decades I’ve been noting that when the Unemployment Rate rises at least 0.5% from its low, it always rises at least 1% more (here’s a time when I said it in 2011: https://inflationguy.blog/2011/07/10/no-mister-bond-i-expect-you-to-die/ ). Not that I’m bitter that it’s called the “Sahm Rule” now.
So yes, the economy is weakening and the labor market is softening. And that presages a deceleration in wage growth – or, really, a continuation in that deceleration. But the connection between wages and prices is loose at best, and that’s not why inflation will stay low, if it does. In fact, I continue to believe that median inflation will end up settling in the high 3s, low 4s. There has always been an ‘unless’ clause to that belief, but it isn’t ‘unless we enter recession.’ We will enter into one, and probably already are, but recessions and decelerations in core inflation are also only a loose relationship at best. It isn’t the recession which is causing disinflation (after all, the disinflation started long before now). What may is the slow growth in the money supply, combined with the rebound in velocity eventually running its course. We are closer to the end of the velocity rebound than to the beginning, and while M2 is accelerating it isn’t problematic yet. Those are the nascent trends to watch closely.
In the meantime – the Fed has what it wants for now. Soft employment and softening inflation. An ease will follow shortly. Whether that is followed by further eases remains to be seen, but…for now…the trends are favorable for the central bank.
Bounce in Money Growth is Good News and Bad News
The monthly money supply numbers are out. I have bad news and good news.
The bad news is that the contraction in the money supply appears to be over. That’s not bad news per se (see below), but it’s bad in that the anti-inflationary work that was happening is coming to an end before it’s quite finished. Although I would be reluctant to annualize any one month’s change in M2, the $92bln increase in M2 in March was the largest increase since 2021. It only annualizes to 5.5%, so it isn’t exactly running away from us – but it’s positive. The 3-month and 6-month changes are also positive, and the highest since early 2022 in each case. Again, we’re only 0.72% above the ding-dong lows of last October, but the sign is now positive.
With the money supply figures now in, and with the advance Q1 GDP report due this week, we can revisit our chart of “how much more inflation ‘potential energy’ remains.” (see “Where Inflation Stands in the Cycle,” November 2023). As that article (and this chart) illustrates, if M2 doesn’t go down then this gets more difficult. M2 in Q1 rose at a 1.24% annualized rate over Q4. GDP is expected to rise 2.5% annualized. So M/Q…barely moves, as the chart shows.
We will eventually get back to the line, unless velocity is permanently impaired. Despite all of the crazy people who told you it was, there’s no evidence of that. M2 velocity will rise about 1% (not annualized), if the GDP forecasts are on point. That will be the smallest q/q change in several years, and velocity will be getting very close to the 2020Q1 dropping-off point. But there frankly is no reason for velocity to stop there; higher interest rates imply higher money velocity. However, we are getting close.
(Incidentally, if you’re curious how we can be almost back to the dropping-off point of velocity and yet still be 5% below the line in the first chart above, it’s because I’m using core inflation. With food and energy, we’re a little closer to the line and have used up more of the ‘potential energy.’ But food and energy are of course volatile and so while a good spike in energy prices would look like we’ve used up all of the potential energy, that could just be a one-off effect.)
Either way, we aren’t too far away from getting back to home base and that’s good news. Yes, prices by the time we are done will have risen 25% since the end of 2019, and that can’t really be characterized as a ‘win.’ Let’s go Brandon. But we are getting closer.
The good news about the new rise in M2 is that it’s timely. Markets and the economy were starting to show signs of money getting a little tight; losing a little lubrication in the machinery. An economy does need money to run, and while the only way we can get back to the old price level is to have money supply continue to decrease, that’s also a painful process. In the long run, we would have price stability if the change in M was approximately equal to the change in GDP. If we want 2% inflation, then we need M to grow about 2% faster than GDP. Vacillating velocity means that it isn’t purely mechanical like that – the steady decline in velocity since 1997 is the only reason that inflation stayed tame despite too-fast money growth over that period – but the long downtrend in velocity is likely finished since the long decline in rates is finished. Thus, if we get money supply growth back to the neighborhood of 4%, we can get our 2-2.5% growth with restrained inflation over time.
I am not super optimistic that all of that will work out so nice and cleanly like we draw it up on the chalkboard, but I am more optimistic about it than I was two years ago. We still have some sticky inflation ahead of us, but if the Fed keeps reducing its balance sheet then eventually we will get inflation below the sticky zone and back towards ‘target’ (even though there isn’t a target per se any more).
Beware the Hook
The bungee jumper doesn’t just bounce once.
Stated in a more high-falutin’ way, perturbed systems normally don’t converge straight back to equilibrium.
Obviously, the 2020-2021 COVID-triggered episode took the form of a severe shock to the system. The initial shock (to relitigate the familiar story for the thousandth time) was the panicky global shutdown initiated due to a fear of the unknown parameters of the virus. The counter-shock was the massive fiscal and monetary response to that shutdown. Almost all of the inflation-related problems we have had since then can be traced back to the fact that the initial shock lasted 6-9 months while the counter-shock lasted multiple years. “Can you give me a little push, Daddy?” says the child on the swing. “Sure,” says Dad, who then launches Junior screaming into orbit with a mighty shove.
It doesn’t matter if Daddy stops pushing; it’ll take a while for Junior’s oscillations to get back to zero. (The therapy sessions will last for years.) And so it is with the economy.[1] Positive momentum succumbs to gravity, which induces negative momentum, which succumbs to gravity again on the other side of the zero mark.
The Fed’s massive push shows up in the following chart (source: Bloomberg); highlighted in blue (left scale) is the sharp rise in M2 from 2020-2022. This surge – which indirectly financed the direct Federal stimulus payments – was meant to offset the various contractionary forces caused by forced idleness among the ‘non-essential’ workforce, such as the 140bln contraction in revolving consumer credit (in black, right scale).
So far, so good, although you can see that the M2 explosion lasted far longer than the damage to consumer credit and most other growth and liquidity metrics. The Fed adroitly (if belatedly) began to shrink its balance sheet slowly, leaning against the continued recovery in private markets. Inflation began to subside, and although it has happened more slowly than everyone would like it is going to continue a while further as rents gradually recede to a 3-4% rate of increase.
That does not, though, get the inflation rate to smoothly converge on the target even though that seems to be the forecast of a great majority of the economists out there who are employed in fancy glass and steel buildings by fancy institutions. Indeed, we are starting to see signs of a ‘hook’ higher in certain metrics that could presage a second wave of upside surprises in inflation. The system overcorrects: the latest news from Black Friday and Cyber Monday that sales were stronger than expected driven partly by increased popularity of ‘buy now pay later’ plans[2] is something that we perhaps should have expected. And so the combination of slow-but-constant balance-sheet shrinkage at the Fed and faster credit growth is helping to produce a gentle hook higher in money growth.
To be clear, I do not expect this ‘hook’ to produce a new high in the inflation rate, and any increase is probably not even to be enough to trigger further Fed tightening from here. But it should keep the Fed sternly standing off to the side, hands on hips, with a gaze which says plainly “stop playing on that swing. You have chores.”
The point is…and I guess this goes back to some extent to my observation back in July that the volatility of inflation is a tell that the oscillations still have a ways to go before dampening back to equilibrium…that this hook is evident in lots of measures. Recently, it has been pointed out that the year-ahead inflation expectations measure in the University of Michigan consumer sentiment survey has leapt higher despite declining gasoline prices (see chart), as consumers react negatively to the disconnect between politicians saying that prices are declining and their perceptions that prices are still increasing (even if inflation is declining).
And, since the Case-Shiller numbers were out today, I’d be remiss if I didn’t point out that y/y home prices are rising again in sharp contrast to where public forecasts of rents, home prices, and housing futures have been mooted.
The reason this matters is that it seems like the investing universe is all-in on the idea that not only has inflation crested, but it is heading right back down placidly to target. The bungee-jumper’s bounce is distinctly out-of-consensus, and it could scare some people if it is perceived as a new wave, rather than as a bounce. The housing market re-acceleration, in particular, could start to get some attention and some observers might think that means the Fed needs to hike interest rates further. The reality here isn’t as important as the inflection in the narrative. Beware the hook.
[1] Fortunately, I am an inflation therapist with a very reasonable hourly rate although I do not accept most insurance.
[2] AKA “I’ll gladly pay you Tuesday for a hamburger today.”
