Causes of Inflation | E-piphany

Summary of My Post-CPI Tweets (April 2022)

May 11, 2022 Michael Ashton Leave a comment

Below is a summary of my post-CPI tweets. You can (and should!) follow me @inflation_guy. Or, sign up for email updates to my occasional articles here. Investors, issuers and risk managers with interests in this area be sure to stop by Enduring Investments! Get the Inflation Guy app in your app store! Check out the Inflation Guy podcast!

It’s #CPI day and #inflation has peaked! Yay!
Well, in a few minutes it will be official: peak CPI has passed. Of course, that’s entirely a mechanical fact due to the fact that core CPI in April, May, and June last year was +0.85%, +0.75%, and +0.80%, and it (probably) won’t be that high this year.
It certainly doesn’t mean inflation pressures themselves have peaked. In fact Median CPI, which is a better measure of the central tendency of inflation pressures, is almost certain to rise to new y/y highs today. But don’t let the facts get in the way of a party.

The bigger issue I think is that people confuse peak INFLATION, which is a rate of change, with peak PRICES. Prices aren’t going to fall, even if the inflation rate falls. (Some prices will fall, of course, but not generally). Price level is here to stay.
Before I go on: after my comments on the number, I will post a summary at https://mikeashton.wordpress.com and later it will be podcasted at http://inflationguy.podbean.com . And all of that also will be linked on the Inflation Guy mobile app. AND….
What is more, at 1:00ET I will be live with @JackFarley96 on @Blockworks_ to talk (for a long time) about inflation. It’s on YouTube and free, so tune in! https://youtube.com/watch?v=mrG8IHXzlQU And he had a nice placard made up.

Back to the report walk-up. The consensus for CPI is +0.2% m/m, dropping y/y to 8.1%. Gasoline should actually be a small drag this month, but contribute again next month. Consensus for core is +0.4%/6.0% after 6.5% y/y as of last month.
The interbank market isn’t so sanguine; it has been trading today’s headline print at a level suggesting 0.3%/8.2% for the headline number, so a snick higher than economists’ estimates.
That’s my feeling too. There’s more risk to the upside than the downside in this number today, I think.
The good news is that truckload rates are coming down, and this tends to precede ebbing in core. Not sure that effect is being felt yet; the typical lead is pretty long and manufacturers I speak to are still assuming high shipping in their pricing.

And the strong dollar will bring down core goods eventually too (it should decline today but is still double-digits). That is also a long lead. Used cars should drag slightly today. They were -3.8% m/m last month and private surveys have them a smidge lower this month.
But again, the rate of increase in used car prices is declining mostly because of base effects, not because prices themselves are going back to the old levels. And they won’t. We have 40% more money than we had 2y ago; that’s not consistent with prices where they were 2y ago.
On the other side of the coin, primary rents surprised on the low side last month. I expect a bit of a retracement higher this month, and I’m still not sure we’ve seen the peak m/m OER rate. Those are the 500-lb gorillas and until they ebb we won’t get 2% CPI.
As longtime followers know, I’ve also been watching Medical Care for a while. This month I actually saw stories about nurses’ salaries starting to pressure hospital prices higher. So still attentive to that. It’s one of the only sectors that hasn’t really participated.
We are also eventually going to get a bump higher in college tuition CPI – saw a story y’day about BU raising tuition ~5% (I put the story on the Inflation guy app). But the NSA series mostly puts those adjustments in the summer so we shouldn’t see an inflection yet.
In the markets, the past month has seen a massive shift in interest rates higher, and breakeven inflation rates lower (the breakeven reversal coming mostly over the last few days). 1y inflation swaps are -58bps on the month. Only some of that is carry.

Stocks have obviously been under pressure from rising inflation and real rates. Over the last couple of days, the stock market debacle has caused some unwinding of the rate selloff but breakevens are still on the back foot.
Stocks today seem chipper, but most of that is coming from signs of lower COVID transmission in Shanghai and a sense that lockdowns there may end soon. We will see if they’re still chipper after CPI.
I still don’t see the Fed as hawkish as what is priced in, mainly because I think they’ll lose their nerve as asset prices fall. I don’t really care about them changing the price of money. I’m watching for a change in quantity of money. So far, not impressed.
Just 4 minutes to the figure. Good luck!

Oh, snap.
Headline CPI fell to 8.3% y/y, not as far as expectations. Bigger deal is that core CPI was several ticks higher than expected. 0.57% m/m
I am scrunching up my eyes but I can’t see a decline in inflation pressures here.

Well, let’s see. Used Cars -0.38% m/m, small drag. New cars +1.14%, though. The spread Used:New needs to close but most of that spread probably will be new car prices coming up. After all, new price level as I said.
Owners’ Equivalent Rent 0.46% to 4.78% y/y from 4.54%. That’s in line with where it has been. But Primary Rents jumped back up after the surprise last month: 0.56% m/m to 4.82% y/y from 4.45% y/y.
COVID recovery continues: Lodging Away from Home +1.7% m/m; airfares +18.6%!
Now, I have been seeing a lot of stories about this one. It’s only 0.04% of the consumption basket but it really hits viscerally. Baby Food, +3.05% m/m, +12,9% y/y.
Food and Beverages as a whole, +0.84% m/m, +9.00% y/y. Ow!

Now, I don’t know if this is good news or not but core inflation EX HOUSING declined to 6.8% y/y from 7.5%. Good news is that means some of the outliers are coming back. Bad news is that means the big slow categories are carrying most of the upward momentum.
I guess looking at the chart, I probably shouldn’t get very excited about that last point.

Of note is that Apparel was -0.75% m/m. Apparel is only 2.5% of the basket these days (yet still a major subgroup), but it is Core Goods and one of the categories that you’d expect to see a dollar effect in. Core goods y/y dropped under 10%. But still a long ways to go.

…in that chart you can also see core services up to 4.9% y/y, which is the highest since 1991. So there’s part of the economy that’s not inflating at 40-year highs. And it’s not a small part of the economy. But, 5% isn’t exactly great news.
Turning to Medical Care – it was +0.44% m/m, up to 3.23% y/y. Led by Hospital Services, +0.48% m/m. Still not alarming and below the price pressures we’re seeing everywhere else. Weird.

Within food, here are some of the m/m NSA changes that people are seeing. This is why they’re yelling, Joe. Putin’s arm is long: Dairy +2.4% m/m. Meats poultry fish and eggs +1.7%. Cereals/bakery products +1%. Nonalcoholic beverages +1.4%.
Biggest losers in core (annualized monthly rate): Jewelry/Watches -19%, Footwear -15%, Women’s/Girls’ Apparel -10%.
Biggest winners in core (annualized monthly rate): Lodging away from home +23%, Motor Vehicle Parts and Equipment +15%, New Vehicles +15%, Car/Truck Rental +10%. Shorter list than we’ve seen in a while, anyway.
My guess at Median CPI is not good news: 0.53% m/m is my estimate, 5.23% y/y. That’s a better sense of where the inflation pressures are. We’ll revert to something like 4.5%-5% just on y/y effects, but until the monthly Median CPI is not hitting 0.5%, we’re not out of the woods.
There’s also this. I’d want to see core below median as a sign inflationary pressures are ebbing. In disinflationary environments tails are to the low side (so avg<median). In inflationary environment, tails to the upside (median<avg). We are still in inflationary world.

Quick check of them there markets…whoops, it appears equity investors don’t like this number.
By the way, for everyone thinking that rents have to stop going up because people can’t afford these levels. Again, the price level has changed. And wages are keeping up with rent increases, on average. There is no obvious sign to me that rents are overextended at all.

Here are the four-pieces charts, and I think we’re going to see the same story in the diffusion calculations. The stickier stuff is coming along for the ride. Here is piece 1, food and energy. No surprise here. And gasoline will be back as an addition next month.

Core goods. This is where the dollar effect, and the decline in the cost of shipping, will eventually be felt. And at some level actually is (see Apparel).

But now we get to core services less rent of shelter. This has been inert for years until just recently. This is the second-stickiest of the four pieces.

And rent of shelter. The stickiest. Rising, and not yet showing signs of slowing (although I think 5-6% is where it flattens out for a while). There’s just not a lot of great news here.

Tying up one loose end here – used cars was a small drag. But look at how the y/y plunged. Again, this is because even with little change in the PRICE LEVEL of used cars the rate of change will decline.

Couple of quick diffusion charts and then I’ll wrap up. Here is the proportion of the consumption basket that is inflating faster than 4%. It’s at 76% and actually just reached a new high. No sign of peak inflation here.

And finally, the Enduring Investments Inflation Diffusion Index…actually declined slightly. Last few months it has rocked back and forth a little bit at a very high level. No real sign of peak inflation here either.

Summing up. The peak y/y CPI print is now behind us, at least for now. Expect a victory lap from policymakers talking about how their policies are winning. But there’s no sign of peak inflation pressure yet.
The core and headline numbers actually fell less than expected. And let’s face it, this month’s Core CPI figure annualizes to almost 7%.
In fact, 6 of the last 7 core CPI numbers have been between 0.5% and 0.6%, which would annualize of course to 6%-7.2%. If that’s what we’re celebrating with “peak CPI” behind us, I guess I’ll bring the whiskey but I’m not sure I’m celebrating.
And FWIW, the “peak” is because we dropped off 0.86% (core m/m) from April 2021. We have 0.75% to drop next month, then 0.80%. But then we see 0.31%, 0.18%, and 0.25%. In other words, apres le deluge, more deluge.
Core CPI is likely to still be 5%-6% at year-end! The sticky categories are still accelerating, and there will be other long tails to the upside. That’s just what an inflationary environment looks like. Watch Median CPI, which will be lower but no less concerning.
Will the Fed keep hiking raising the price of money? Probably, although I think the swagger might leave them when stocks are another 20% lower.
Will the Fed actually decrease the QUANTITY of money, which is what matters? They can’t, because banks are not reserve-constrained any more. So it’s up to loan demand and supply, and recently loan demand has been increasing, not decreasing. Chart is source Fed, h/t DailyShot

Bottom line, folks, is that this might be a clearing in the woods but there’s a lot of woods ahead. Eventually inflation will ebb to 4%ish, but it will take time. I don’t see 2% for quite a long time, and not until interest rates are quite a bit higher.
Thanks for tuning in. Don’t forget to check the summary later on the blog https://mikeashton.wordpress.com , and http://inflationguy.podbean.com where I’ll have a podcast on this later. AND tune in at 1:00ET for Inflation Guy live with@JackFarley96 on @Blockworks_

The theme of the day is that “peak inflation” means different things to different people. To economists, and policymakers, and Wall Street brokers trying to get you back into the meme stocks, “peak inflation” means “the year/year rate of inflation will decline from here.” We already knew that was happening, before this number ever showed up on screen. Yes, the drop was less than expected, but the peak is still there in March 2022!

“Peak inflation” means something different to the average consumer, who isn’t a trained economist. Consumers tend to conflate “inflation” with “high prices”, rather than rising prices. That is, they tend to confuse the level of prices with the rate of change. So the consumer hears “peak inflation is here!” and expects that prices themselves should go back to the old levels. To some extent, this version is reinforced by the price they see most often: gasoline, which goes up and down. But most prices do not go up and down. They go up more quickly, and they go up more slowly, and sometimes they stay the same. Most prices don’t go down. The average consumer, thinking he has just been promised that used car prices, meat prices, gasoline prices, and rents are going to go back down is going to be even more upset when that doesn’t happen. (This is why politicians ought to be very careful about talking about “peak inflation” as a good thing. To the average consumer, prices that go up more slowly is just less-bad than prices that go up quickly…and they think you’ve promised them something good.)

And the inflation specialist doesn’t mean either of these things when he/she says “peak inflation.” The inflation specialist is looking at pressures, and whether those pressures are increasing, abating, or staying the same. For now, those pressures are staying about the same, with m/m core and median CPI in basically the same range they have been in for 6 months. There is not yet any sign that those pressures are ebbing. Yes, they are ebbing in some items, such as in Used Cars, and in some goods where supply chains are clearing (at higher prices). In general, we would expect goods and services which have reached a new equilibrium price level to stop going up so fast. But those are just the goods and services that moved first. With 40% more money and an economy that’s only 5% or 10% bigger, we should expect prices to eventually rise about 30%. Some more, some less, of course, and if money velocity stays down forever then it will be 20% and not 30%. But this is the point. Peak inflation does not mean peak prices. Prices continue to rise at a rapid rate, and there is as yet no sign that the pressure to do so is ebbing.

Categories: Causes of Inflation, CPI, Federal Reserve, Tweet Summary Tags: core cpi, core inflation, CPI, inflation

High Prices Don’t Cure High Prices

April 23, 2022 Michael Ashton 10 comments

This was an interesting week, in which it seemed that equity investors finally and abruptly got the message that high inflation is bad for the market; increasing interest rates are bad for the market; declining bid/offer liquidity is bad for the market; high energy prices are bad for the market; global geopolitical unrest is bad for the market; and a strong dollar is (eventually) bad for the market. The last two days in the stock market was a remarkably steady and orderly melting. Will it continue? Well, none of those trends I just mentioned look as if they are about to change significantly, so the only question is whether the extraordinary popular delusion returns.

The proximate cause for the selloff seems to have been the hawkish talk from Fed speakers, including the floating of the trial balloon early in the week about the possibility of a 75bp tightening. By the end of Friday, Cleveland Fed President Mester was actively pouring cold water on the notion that anything so aggressive was out of the question, while still talking in terms of 50bps increments.

I admit that as of only a few months ago, I didn’t think the Fed would hike rates more than about 75bps in total before they lost their nerve. On the other hand, they’re about 500bps behind the curve, so color me surprised…but not impressed.

To be sure, I also thought the stock market would have reacted before this point. And I do think that it is easier to talk about how much you’re going to work out this summer until it gets hot. So we will see.

But, on to my real topic today: the annoying canard that “high prices are the cure for high prices,” which is a phrase so absurd on its face that the discussion really shouldn’t go much further than that. The phrase implies that we can’t have inflation because if we have inflation, then prices will come down. It’s one reason that people are expecting used car prices to drop by as much as they previously rose – because “no one can afford a car at those prices!”

The idea is that as prices rise, the amount of money in your pocket can’t buy as many things. Therefore, real demand must suffer because higher prices mean that people can buy less stuff. Ergo, inflation causes recessions (which is weird, because we are always told how expansions cause inflation – which means that expansions must cause recessions. Are you feeling a ‘down the rabbit hole’ sensation yet?).

This is another example of a stock-flow fallacy. Or maybe it’s a fallacy of composition. It’s a micro/macro mistake. The point is that it doesn’t work that way.

The system can’t run out of money. If prices go up 25%, it doesn’t mean that you can buy 20% less stuff. Well, perhaps you can buy 20% less stuff, today, until you run out of money. But the person who sold you the car now has 25% more money than he would have previously, had he sold the same car before. Maybe you are out of money, but he has 25% more money. The money doesn’t leave the system when you buy something. It only leaves your wallet. (The stock market works exactly the same way, and no one ever questions why stock prices can’t keep going up because investors are using up all of their money, right?).

Now, if the total amount of money in the system is the same today as it was before the 25% increase in prices, and the velocity of exchange doesn’t change, then yes – that 25% price increase won’t stick because in aggregate we will be spending the same amount of money at higher prices, which means we take home fewer goods and services. If on the other hand the amount of money in the system went up by 25%, then total expenditures (if velocity is roughly constant) will be the same in unit terms as before. The system doesn’t grind to a halt and force prices lower. The system reaches equilibrium at prices that are 25% higher. By the same token, if there is 40% more money in the system, then those 25% price increases won’t be enough, there will be shortages, and prices will keep rising.

This seems like a good point to recall that M2 money since the end of 2019 has risen 42%. Tell me again why Used Car prices need to retrace so much?

The real question, to me, is why more prices haven’t gone up 42%. My answer is that we are still in the adjustment period. It takes time for that money to wash around the system, and it’s still on the rinse cycle.

Categories: Causes of Inflation, Theory Tags: demand destruction, Fed, inflation, monetary policy

Summary of My Post-CPI Tweets (March 2022)

April 12, 2022 Michael Ashton Leave a comment

It’s #CPI #inflation day again, and a watershed one at that. If you had told me back at the beginning of my career in 1990 that we would see 8.5% inflation again, I would not have been surprised. If you had told me it would take 32 years, I would have been flabbergasted.
But, here we are. The consensus Bloomberg estimate is for 8.4% on headline inflation with 6.6% on core. That’s monthly of about 1.25% and 0.5% (!) But last month, the interbank market was looking at an 8.6% peak, so I guess that’s good. Energy has come off the boil some.
But this is the first number that is fully post-Ukraine-invasion so it will still get a big dollop of energy inflation.
Before I go on: after my comments on the number, I will post a summary at https://mikeashton.wordpress.com and later it will be podcasted at http://inflationguy.podbean.com . And all of that also will be linked on the Inflation Guy mobile app. Please stop by/tune in.

First, the good news. I expect today’s figures will mark the highs for the year. The comps get really hard hereafter: in April 2021, Core CPI rose 0.86% m/m, 0.75% in May, and 0.80% in June.
The bad news is that inflation might not ebb very far. The last 5 monthly core prints have been between 0.5% and 0.6%. The central tendency of the distribution appears to have moved up from 2-3% to maybe as high as 6%+.
That means that even when inflation is at an ebb, we’re looking at 3-4 ish, not 1ish. More good news though! The Fed in theory has total control of this. If it aggressively shrinks the balance sheet, then it can wring inflation out of the system.
I have no doubts that the Fed has the tools. There have been signs they aren’t focusing on the right ones. And there’s at least new vigor in the talk. But I am still skeptical that they are willing to break things.
By aggressively shrinking the balance sheet, I don’t mean $60bln a month; I mean taking the whole thing down to $2-4T in a reasonably short period of time.
But while it now looks like the FOMC will bull ahead with 50bps this month (surprising me), I just can’t bring myself to believe that it will crack the stock market and keep tightening through the recession we’ll get in late 2022/early 2023.
275bps of rate hikes? Color me skeptical as soon as the growth data starts to flag a bit, or unemployment ticks up.
That’s really the longer-term question. Will the Fed do what it takes to break the cycle they put into motion, by reversing it? AND will they resist responding to the next recession with more of the same? I have my doubts. Would be happy to be wrong.
Wages, food, and rents have been booming. There is some feedback going on here. Of course, the main culprit continues to be the huge increase in the quantity of money over the last few years. The rest of it is micro.
But if you’re looking at supply chain issues – they haven’t gone away. In some cases they’re getting worse. As a reminder, though, that’s how inflation manifests, is in shortages of things that are over-demanded thanks to the money gusher. Prices adjust in response.
The bond market is starting to adjust to the realities of a hawkish Fed although not yet really putting rates at anything we would consider neutral (with a 10y rate around GDP+desired inflation, say 4-5% total).

Over the last month, inflation expectations have been broadly unchanged to slightly lower – although a lot of that is carry going away. Real rates are up 50-100bps, and nominal rates up 80-85bps. That’s big, but not nearly big enough to make a serious difference.
Why hasn’t the stock market begun to reflect the higher inflation? Partly because inflation expectations still haven’t firmly broken higher. And, after all, real rates are still slightly negative. But we’ll get there.
Now, in today’s number we will look aghast at the food category. High and persistent inflation in food and energy is not something policymakers can do a lot about, but it IS what leads to global political unrest…which leads to more supply chain problems and de-globalization.
Rents will remain high, currently trending towards 5-6% as Primary Rents continue to adjust post-eviction-moratorium.

And Owners’ Equivalent Rent remains high but steadier (at least recently). This is likely to remain so for the rest of 2022. Remember, the rent pieces are the big slow-moving pieces. Usually slow-moving, that is.

On the other side, I think there is a chance that Used Cars are a drag although prices themselves aren’t going to go back to the old levels. Might retrace a bit, but the new price level is higher – that’s what the money does. So rate of increase will decline. Level? Not so much.
But airfares and lodging away from home may be adds. Look as usual for the breadth; the odd stories will be the categories that did NOT rise.
I’m also still watching the Medical Care subgroup, as the inflation there has remained surprisingly tame through all of this. Only Medical Care and Education/Communication are below 2.5% y/y among the major categories! They’re due to participate eventually.
Here we go. Three minutes. Good luck. Take a picture to remember this by. At least until we get higher numbers in 3 years.

Pretty close. The headline number showed 8.5% y/y because the monthly number was just a little higher than expectations. But with all the volatility, that’s a great consensus estimate. Core was quite soft, at 0.32% m/m. Well, that’s soft these days.

Y/y core CPI therefore was only a snick or two higher, 6.44% y/y vs 6.42% y/y last month. As a reminder, hard comps are coming up so that probably marks the highs in both headline and core. Question is how far and how fast they drop.
That was the lowest core CPI figure since the three soft ones of July/Aug/Sep last year. We’ll look at the components.
A big culprit was, as I thought it might be, Used Cars. The private surveys had had a decent drop recently; in the CPI they were -3.8% m/m so that the y/y is “only” 35.3%.

Airfares, were +10.7% m/m. Lodging away from home +3.28%. But those are smaller weights. New Cars were only +0.18% m/m, so it does look like while New Car prices are going up, Used Car prices are also going down to re-establish a more normal relationship. This will take some time.
Car and truck rental was +11.7% m/m. That’s remarkable too. Rental car companies are having trouble getting enough new cars, and that’s one reason used car prices won’t plunge any time soon. But also, people are traveling again!
Food & Beverages: +0.96% m/m, +8.5% y/y. Food prices won’t recede soon. In addition to the loss of Russian and Ukraine supplies, there has been a recent culling of chickens due to bird flu. Like we needed that.
Core inflation ex-housing declined from 7.6% to 7.5%. Big whoop.
Core goods prices, thanks significantly to Used Cars, decelerated to 11.7% from 12.3%. But core good prices accelerated to 4.7% from 4.4%. Until the last 3 months core services hadn’t been at a new 30-year high, but they are now.

Remember, services prices are the slower-moving ones. BTW, this month Primary Rents were +0.43% (y/y up to 4.54% from 4.31%) and OER was also +0.43% (y/y 4.45% vs 4.17%). Both still headed higher but both slightly lower than last month.
In Medical Care: medicinal drugs was +0.23%; Doctor’s Services +0.49%; Hospital Services +0.40% for an overall increase in medical care of 0.55% m/m. Y/Y up to 2.86%.

Education/Communication was DOWN m/m, -0.17%. It’s really the only holdout category here. And if you want to find a place where there should be adjustments to LOWER quality post-COVID (implying more inflation), this is it!
Haven’t talked abt Apparel for a while. The y/y increase there is now ~6.8%. Apparel is a category that has been in deflation on net since the Berlin Wall fell. We import almost all of it. And prices have recovered the entire COVID discount and don’t look like they’re slowing.

Looking at housing, it is now running a bit hotter than my model; however, I think we could get an offsetting snap-back above the model reversing the underperformance during the eviction moratorium.

The main problem with housing inflation isn’t that it is going to 18%, but that it is slow-moving and it’s going to stay high for quite a while. High means 4.5%-5.5%, maybe a bit more even; given its weight in the CPI that means core CPI isn’t going back to 2% soon.
Market check, just for comic’s sake: Stocks absolutely love the decline in used cars which led to a softer core number. Breakevens are lower, but not so much.
While I wait for the spinning beach ball, this is a good time to remind you that a summary of all of these tweets will be on https://mikeashton.wordpress.com within an hour or so after I conclude. Then later today I will have a podcast version at https://inflationguy.podbean.com
The median CPI chart kinda tells the story. This was really never ‘transitory.’ The entire distribution has been steadily moving higher and breaking from the old range to a new range.

People ask me the best inflation hedge these days? For most normal people with normal amounts of money (annual purchases of these are limited), i-series savings bonds are the best deal the US Government offers. Maybe ever, at least when real rates everywhere else are negative. “The interest rate on inflation-adjusted U.S. savings bonds will soon approach 10%” https://on.wsj.com/3rkEFVw
We put our database in the cloud so everything is super slow at the moment. I’m going to call a halt here. Some of my other regular charts will be in the post, at https://mikeashton.wordpress.com , so stop by later and check it out (or go there now and subscribe to the post).
Bottom line is that the basic story is the same. Broad and deep inflationary pressures. Don’t get distracted by the used cars thing; it didn’t create the inflation and it isn’t putting it out.
No sign yet that these pressures are ebbing. In fact, the acceleration in Medical Care bears watching. Also, the extended rise in food & energy is going to have other repercussions.
Is the Fed going to hike aggressively and (more importantly) squeeze down the balance sheet aggressively in this context? If stocks and bonds were going to be unchanged, sure. But they’re not going to be.
Treasury probably can’t sustainably manage the debt if long interest rates get to 5% (unless inflation stays at 8%). And stocks aren’t worth the same when discounted at 5% as when discounted at 1%. I am confident the Fed will blink. Maybe not as early as I originally thought.
One final word and chart. 75% of the weight in the CPI are now inflating faster than 4%. More than a third of the basket is inflating faster than 6%. This is an ugly chart.

Thanks for tuning in. Be sure to call click or visit! https://mikeashton.wordpress.com or https://inflationguy.podbean.com to get the podcasts. And download the Inflation Guy app!
Correction here…the y/y should move up to more like 4.9%, not 4.5%.
Highlighting that the number today was mostly dampened by used cars…looks like Median CPI will come in something around 0.5% again. Since September it has been 0.4-0.58% and the y/y will move up to around 4.5%. So don’t get too excited (equity dudes) about the softer core.

The Federal Reserve didn’t get any favors from the Bureau of Labor Statistics today. While the core CPI number was a little below expectations, that miss was entirely due to Used Cars. But while that category was an early champion of the “transitory” crowd, the fact that used car prices are declining slightly after a massive run-up is not a sign that the broader economy is slipping into deflation! It is a sign that that particular market is getting into slightly better balance.

Don’t confuse the micro and the macro. We get wrapped up in the supply and demand thought process because that’s how it works at the micro level. When we look at a product market, we don’t see ‘money’ as being a driver. It is, because you can think about the inflation of any item as (general price inflation) plus (basis: difference in the item and overall), where that basis is driven by those microeconomic supply/demand effects. The former term drives the overall level of inflation; the micro concerns drive the relative price changes. The used car market is getting into (slightly) better balance, but other markets are getting worse. Until the overall level of money growth slows a lot, and the aggregate price changes catch up with the aggregate change in the money supply, inflation is not going to vanish no matter what happens to “aggregate demand.”

As a reminder, M2 has risen some 40% since early 2020. Subtract out net real growth, and you’d expect to see 25%-30% aggregate rise in the price level – if M2 growth went flat. That’s why I say that if the Fed wants to crush inflation, it actually needs to cause M2 to decline, not just level out at 6%. I don’t see any chance of that happening because to do it the Fed would need to remove basically all of the excess reserves and make banks reserve-constrained in lending markets so that lending declines. This seems very unlikely! So will the Fed tighten 275bps? Someday…maybe over a couple of cycles when the real damage from inflation finally wakes them up. Right now, this is a short-term problem to them. I don’t think they’re willing to take a massive market correction to solve what they believe is a short-term problem.

Categories: Causes of Inflation, CPI, Federal Reserve Tags: core cpi, CPI, cpi report, Fed, inflation, interest rates

Anatomy of a Monetary Policy Error

March 7, 2022 Michael Ashton Leave a comment

Well, it isn’t as if no one warned that monetary policymakers were eventually going to get painted into a corner. Long before the Covid crisis, there were many voices warning that the Fed’s tendency to ease aggressively, but to find excuses to tighten slowly, would eventually get them into trouble. And here we are.

The Federal Reserve, prior to the Ukraine/Russia war, had started to talk hawkishly about raising interest rates; that talk, combined with 40-year highs in core inflation, persuaded Wall Street economists that the Fed would raise interest rates by more than 200bps this year.

That was never going to happen, even if Russia had not invaded Ukraine. Not since the early 1980s has there been a tightening cycle of at least 200bps over 10 months that also ended with the overnight rate above where the 10-year rate had been at the beginning of that period. So the calls for 200bps of tightening with the 10-year rate under 2% was always an incredibly aggressive call. Moreover, those cycles where it did happen occurred in an era when the Fed Chairman didn’t go in front of the cameras every meeting to explain why the Fed was ‘trying to increase unemployment’ – and, in fact, back in those days almost no one outside of the financial community paid much attention to the Fed at all. Plus financial leverage, ancient source of dramatic accidents, was much lower then. So my operating assumption has always been that the Fed would probably tighten about 3 times this year, pausing in between each hike…or maybe hiking 4 times and then easing once. Especially since the Fed no longer controls the marginal reserve dollar (there being copious excess reserves), the effect of monetary policy moves is less clear…and this also mitigates in favor of taking time to assess the effect of policy moves by watching the economy evolve. Ergo, this tightening cycle was always destined to be late and halting, and focused on interest rates rather than on money supply. Such a trajectory already qualifies as a ‘mistake’ when inflation is threatening 8%.

But now there’s even more room for error. Because the skyrocketing energy prices trigger another mistaken belief at the Fed, which enhances the desire to tighten even slower/later.

The Fed thinks that rapid energy price increases have this effect on the economy: rapid increases in energy prices tends to cause slow growth or recession as those increases consume discretionary income and leave less for non-energy purchases. And recession causes a decrease in pressure on other resources, such as labor. Which, in turn, leads to lower pressure on core inflation. Since energy prices are mean-reverting (at least, the rate of change is!), the central bank is “supposed” to ignore inflation that is caused by energy price increases, since if they tighten according to some Taylor-Rule-like dictum then they’ll tighten into a recession and increase the amplitude of the business cycle. Ergo, the Russian invasion of Ukraine means that the Fed should tighten less.

However, that’s not the way this works.

Rapid increases in energy prices do in fact tend to cause recession. But inflation is not caused by too little economic slack, and disinflation is not caused by too much slack. Inflation is caused by money growth, period, and M2 money growth is currently above 12%. It is true that an increase in energy prices would lead to a decline in non-energy discretionary spending, which would limit core inflation, if money growth was low. But if money growth is high, the increase in energy prices just rearranges the relative price changes because there is plenty of money to go around. It doesn’t change the overall impact of the rapid money growth. (Small caveat: a scary recession would increase the demand for precautionary cash balances, lowering money velocity…but people are already holding such precautionary balances so it’s hard to see how that could be a large effect from this level). Ergo, when the Fed slows down its tightening campaign because of the way they believe inflation works, and especially if they decide to not shrink the balance sheet – because “higher long-term rates would be bad in a recession” – they won’t have any real effect on growth but they’ll be accommodating a much higher level of inflation.

And just like that, you have it. The genesis of a really colossal monetary policy error. Get ready.

Categories: Causes of Inflation, Economy, Federal Reserve Tags: Fed, inflation

The Re-Onshoring Trend and the Long-Term Impact on Core Goods

February 22, 2022 Michael Ashton 7 comments

I know that today, and probably for a little while, investors are focused on Ukraine and Russia. I am gratified that for what seems the first time in many years, notes about the conflict tend to include some form of the addendum “and its effect on domestic inflation,” albeit in many cases this is from the perspective of how this engagement will damage or burnish President Biden’s poll numbers at home and the prospects for his party in the midterm elections. How self-absorbed we Americans are! To be fair, in my opinion the importance of the US policy-response operetta was always less about Ukraine than about Taiwan. I hope that doesn’t turn out to be right.

However, today I want to talk about the re-onshoring trend in manufacturing, and the significance of this for inflation going forward.

One of my 2022 themes so far is that the conventional expectation for inflation to peak soon and ebb to a gentle 2% over the next 12-18 months is mostly predicated on the idea that the extraordinary spikes we have seen in certain categories (see: motor vehicles) will eventually pass, and inflation will return to the underlying trend. The simpler observers see it as 12 months since (mechanically) the spikes will all be out of the y/y number in 12 months. Some forecasters are giving themselves a little wiggle-room by saying it will take 18 months as the ports unclog and ‘other knock-on effects’ wash through. But in my opinion, the evidence is strong that the underlying trend is no longer 2%, but more likely 3-4% or higher. Part of that evidence is the great breadth that we have seen in the recent inflation numbers, which suggests either a riot of unfortunate coincidental events all in the same direction, or else a common cause…say, the rapid growth rate of the money supply, which as of the latest report is still growing more than 12% annualized over the last quarter, half-year, and year.

The forecasts of sharply decelerating inflation expect the parade of “one off” causes to end – and, crucially, to be replaced by unbiased random events that are equally likely to be up or down. This is ‘assuming a can-opener,’ and is economist malpractice in my opinion. Because of the continued rapid growth of money, and until that rapid growth slows drastically or reverses, the surprises are mostly going to be on the high side. That’s why I expect inflation to be lower at the end of the year than it is right now, but not lots lower.

All of this, though, obfuscates a trend that had started prior to COVID but has gained great momentum since. When President Trump was first elected, we’d suggested in our customer Quarterly Inflation Outlook that one of the following winds which had kept inflation low despite loose monetary policy throughout the 1990s and 2000s was in the process of stopping and potentially reversing. That following wind was globalization. I eventually ended up talking a lot about de-globalization. Here’s one article from four years ago. I really love the Deutsche Bank chart in it.

In a nutshell, the argument was that domestic goods prices had been kept abnormally low despite strong economic growth and loose monetary policy through the prior quarter-century because businesses had gradually over time offshored production and extended raw materials and intermediate-goods supply chains to cheaper manufacturing locations outside of our borders. But that’s a trick that can only be turned once. When most production is overseas and most intermediate goods imported from the Pacific Rim, costs will resume rising at the rate of inflation in the source country, adjusted for FX changes. For decades, we’d seen core goods inflation near zero despite services inflation in the 2-4% range, as this dynamic played out, but there was no reason that goods inflation should permanently be zero.

So I thought that in 2016 we were already coming slowly to a point where similar monetary policy going forward was going to result in less growth and more inflation because that trick had been used up. The election of President Trump merely accelerated that timeline and increased the probability that the trend wouldn’t only stop but could reverse, causing the division of growth and inflation for a given monetary policy to be distinctly bad and requiring much tighter policy.

COVID-19, and the global response to COVID-19, has more or less totally reversed the arrow of global trade. Businesses are pulling manufacturing back to the US and pulling supply chains back to the Western Hemisphere as much as possible. Geopolitical tensions between the US and Russia, and the US and China, combined with the increased appreciation of the optionality of inventories and the cost imposed by long and variable lead times, which is partly reflected in the need to hold more inventory. And that, in turn, drastically decreases the attractiveness of a long supply chain, especially with global tensions, the rise of democratic populism (“we want what’s ours, not some global citizenship award!”), and the persistent rise in energy and other costs of transportation (driver shortages, etc).

All of which arguments I’ve made before. But I’m not sure I’ve drawn the line clearly enough that the net effect of this changing dynamic – which results in manufacturers choosing higher costs rather than lower costs – is that goods inflation is unlikely in my view to return to being centered around zero. While core services are a bigger chunk of the consumption basket than are core goods, that’s mostly because of shelter services. Core goods is 22% of the consumption basket; core services (less rent of shelter) is 25%. So this is not something that can be idly dismissed. If the mean of the distribution moves from 0% to just 3%, that moves the “normal” level of inflation up ~0.66%. Obviously, I think in the medium-term the number is a lot larger than that, but the key is whether the effect is going to be persistent over a long period of time (think years or decades, not months). I believe it will far outlast COVID, because the causes go far beyond COVID.

Categories: Causes of Inflation, Protectionism and Tariffs, Trade

Summary of My Post-CPI Tweets (January 2022)

February 10, 2022 Michael Ashton Leave a comment

Suddenly, going to #CPI Day is like going to the circus! Not least because of all the clowns opining about #inflation. For me, it’s just one more day as the Inflation Guy; it’s just that I have more company now since it seems EVERYBODY is an inflation guy all of a sudden.
Today we will set some more multi-decade highs in CPI, and in core CPI, and in Median CPI. The last three core CPI figures have been (after revisions) +0.60%, +0.52%, and +0.56% and the Street sees another 0.5% today.
It’s hard to disagree too strongly with that forecast, because the recent numbers have been very broad and not just used cars or Covid categories. Rents have been accelerating, as expected (more on that later). But it’s the breadth that has changed the story.
That said, I would not be terribly shocked with a somewhat softer used cars number this month, though I think New Cars will stay strong for a while, and we could get some weakness in airfares thanks to the brief Omicron scare.
Also, it’s February which means we are looking at January data – January data always have a larger error bar, which is why last week’s Jobs figure wasn’t really “surprising” econometrically. We also have the annual adjustments in seasonal factors and in component weights.
Those changes, despite some breathless analyses that circulated about how dramatic all of this will be and how profoundly it will affect CPI…won’t be the story. Sorry. The quick summary is that energy and vehicles gained 3% in weight and everything else lost a little.
Weights on apparel, medical care, food and beverages, rents, education/communication, and “other” all declined. But there were lots of little changes camouflaged in there. The weight of elder care just about doubled, for example, even while medical care as a whole went down.
But again – don’t stay up late worrying about it. It’s an effect that tends to dampen inflation slightly over time, since stuff that goes up gets a higher weight – and if it mean reverts, it has a higher weight when it goes down (and v.v.). But it happens every year.
With more volatility in the figure, it will matter more than most years, but the absolute value of the whole darn number is much larger too. I don’t worry about the second and third-order effects right now. There’s enough to look at with first-order effects.
OK back to the current market and today’s number. This chart shows the changes from 1 month ago for real rates, inflation expectations, and nominal rates. Some of the decline in infl expectations is carry, by the way.

As I said up top, expectations are for a big number this month, and we’ll see an even higher y/y next month before we get to a peak thereafter. So right about the time the Fed starts to raise rates, y/y inflation will start coming down. Mostly b/c year ago comps get harder.
Think that’s an accident of timing? It’s important to remember that the Fed is a political animal (ever since Greenspan), and it’s politically expedient to talk tough about inflation. It’s not politically expedient to crush markets, so they’ll try not to ACTUALLY be tough.
If y/y headline inflation starts to decline when they start to tighten, it will make it much easier to take it easy. I think the extent of rate hikes embedded in the curve right now are very unlikely. But the Fed will still TALK a good game.
Is the FOMC serious though? Well look at this chart of y/y changes in M2 in the US, Europe, and Japan. All are off the highs, but…in the US, money growth REMAINS very high; higher in fact than at just about any time other than the 1970s.

That doesn’t look like a hawkish central bank to me. And if they are just going to slow-play it while waiting for inflation to go back to 2%, they’re going to be disappointed. “Normal” is more like 4% now. And I’m not sure we’ll get back there quickly the way things are going.
A couple of items on rents, because that’s the big, slow moving piece with momentum. On the one hand, Owners’ Equivalent Rent has finally caught up with our model now that the eviction moratorium is over, but it has more to go. And parts of our model are less sanguine, actually.

The gap between asking and effective rents is also still wide, though narrowing. It will take another 3-6 months for it to close, and that’s when we can say the eviction moratorium is out of the data. This chart is as of the most recent data, quarter ended December.

Here’s something else fun. This chart is option-implied dividends on XHB, the SPDR Homebuilders ETF. It seems to have been leading rents by about 6mo. So again, we have at least 6 mo of further high prints in rents I think.

Anyway, the bottom line is that even if today’s number surprises on the low side, there are still high numbers ahead. And if it surprises on the high side, the Fed isn’t doing 50bp in March (unless they really change their talk first, because they aren’t into surprises).
Only market-clearing price if the market is free. With the eviction moratorium in place it wasn’t, and we’re still working through that.
Replying to @MarketInterest
Good luck! I will have a summary of all my tweets at mikeashton.wordpress.com sometime mid-morning and then I plan to put out an Inflation Guy podcast (inflationguy.podbean.com) sometime today.
Podcast #18 discussed how inflation is the cost of the option to be long cash waiting for opportunities. It was a good one. Are you curious how my investors are sidestepping that cost while retaining liquidity? Ping me via the contact form at enduringinvestments.com
Also look for the Inflation Guy app in your app store/play store (once we get enough users we will probably do livestreams to those users, rather than on Twitter).
That’s all for the walk-up. And still time to grab a coffee. CPI is in 5 minutes.

Welp, 6% on core. Now that we have exceeded the early ’90s high we can say it: highest core in 40 years.
Congratulations all around. Take a bow, fiscal spendthrifts. Curtain call, monetary firebugs. 0.58% on core CPI, 6.04% y/y.

Primary Rents were +0.54% m/m, 3.77% y/y. Wow. Owners’ Equivalent Rent was 0.42% m/m, 4.09% y/y. But hey, Lodging Away from Home fell 3.92%. Thanks, Omicron!!!!
Airfares, though, rose 2.3% m/m. There was some expectation of softness there thanks to the brief virus surge. But I guess it didn’t last long enough, since plans for flights have longer lead times.
Cars befuddled me. I thought Used might be soft, but they were +1.47% m/m (+40.5% y/y). I thought New Cars would stay strong, but they were flat m/m.
Food & Beverages +0.85% (not a core category obviously). Apparel +1.06%. Medical Care +0.66%. Recreation +0.88%. “Other” +0.76%. Criminy.
Medicinal Drugs +0.86% m/m. That’s NSA, so the y/y rose but only up to 1.33%. Still, drug prices are on the rise.

Hospital services +0.5% m/m, +3.6% y/y. But this has been more trendless around that figure. Doctors’ Services fell another -0.08%, down to 2.63%/yr. Why do people not want to pay doctors?
Overall, core goods rose to +11.7% y/y. Core services rose to +4.1% y/y. To review, the HOPE is that overall inflation settles down to…which one? Happy with 4.1% are we?

Lots of household services rose. Water/sewer/trash collection +1% m/m. Window/floor coverings +1.6%. Furniture/bedding +2.4%. Appliances +2.6%. Housekeeping supplies +1.6%. Tools/hardware +1.8%. These are NSA but still.
Core inflation ex-housing: 7.22%. I only have this series back to 1983. Fun chart.

Only two categories fell more than 10% annualized on the month: Car/Truck rental (-58% annualized), Lodging Away from Home (-38%). There were 20 that rose more than 10% annualized. To be fair, 6 of those were food and energy.
My first guess at median CPI is that it will be 0.54%, which would be the highest so far.
OK, four pieces charts. Piece 1, food and energy. We feel this but it almost seems like it isn’t a big story any more! At least it mean reverts…but the period of mean reversion might be longer this time because of knock-on effects (energy affecting fertilizer, e.g.)

Piece 2. No commentary needed.

Piece 3, Core services less rent of shelter. This is starting to be disturbing. For a long time this was steady to lower. Not clear it is any longer. It’s still pulling DOWN on core, but not as much.

[Piece 4] Rent of Shelter was SLIGHTLY higher in 2001, but otherwise you have to go back to the very early 1990s. And this is still going to go a bit higher at least.

Here is a plot of the distribution of price changes. About 80% of all categories are now inflating faster than 3%. About 65% of them are faster than 4%.

So, this is a record high for the Enduring Investments Inflation Diffusion Index. Not that any actual consumer needs to be told that inflation is hitting everything.

At this hour, 10y inflation swaps are up about 0.5bp. That’s less than you would expect just from 1y swaps are +20bps. It’s incredible how committed people are, mentally, to the idea that inflation will return to the neighborhood of 2%.
But look at this chart again. Four core prints in a row in a nice tight spread around a 6% or so annualized rate. The central point of the inflation distribution HAS SHIFTED. I don’t think it’s actually at 6%, probably more like 4%. But ain’t 2%.

What will the Fed do? 25bps. Remember, when forecasters started saying 50bps was possible there was firm pushback from policymakers. Equity markets don’t believe that either. They will go slower than expected and stop earlier than expected, IMO.
A dove doesn’t change his stripes.
That’s all for today’s train wreck. I’ll have a summary up on mikeashton.wordpress.com a little later. And a podcast on inflationguy.podbean.com later today. And of course all of that will be linked on the Inflation Guy app. Thanks for tuning in!

I keep hearing talk about “the ongoing inflation debate.” This starts to be confusing. What exactly is this debate about? At one time, it was a debate about whether there would be inflation at all. “No way,” said the non-inflation camp, “there’s too much slack in the labor market.” That debate ended a long time ago, as inflation began to surge long before the employment gap closed. Then there was the debate about whether inflation was “transitory.” That debate, too, ended as it’s eminently clear that except in the trivial sense that all things are transitory, inflation right now is not. There was a debate about causes, as some people pointed to the clogged ports and said “see, that’s why we have inflation. It’ll decline once we get the ports moving!” Other people pointed to shortages of various things, like computer chips, that have knock-on effects in other products. At one time, the Biden Administration argued for spending another few trillion for infrastructure, because that would lower inflation by improving those bottlenecks. Seriously. And I think they believed it. But how does that explain rents? How does it explain core services inflation above 4%? It doesn’t.

I’ll tell you what does explain all of that, though: money supply growth still in the teens, and government still riotously spending as if we remain in a calamitous depression.

I mean, wouldn’t it be weird if the single clearest prediction of monetarism happened to be right but it was a total coincidence and not because monetarism is right?

Inflation is going to ebb in 2022, probably. It is at 6% on core, and that’s probably going to go a little higher before it comes down. But there’s nothing in the data to suggest that inflation is going to drop back to 2%. Or even 3%. There’s nothing in the data that suggests the culprit is clogged ports or other bottlenecks. I expect core inflation to slowly decelerate to the 4% neighborhood…but the last four months of Core CPI have averaged a 6.8% annual rate, and in a pretty tight spread of 0.52% m/m on the low side to 0.60% on the high side. You can make an argument that the new distribution is coalescing around 6%, and that is not at all inconsistent with 13% money growth.

If you want lower inflation, then the prescription is pretty plain: decelerate money growth to at or below the desired pace of nominal GDP growth (real GDP + desired inflation). And stop spending from the federal coffers as if there is no cost to doing so. You may end up with, and probably will, less real GDP and more inflation in the near-term than you’d like, but that’s the way you get back to reasonable inflation in the medium term.

Of course, that path would be disastrous for stock and bond markets, so I give it a very small chance of happening. Not zero, but it’s hard to do this when the Fed is now an overtly political creature. They give press conferences for goodness’ sake! How do you run difficult policy when you have to face the microphones every month? Ask the coach of any team that’s in a rebuilding year.

Monetarily-speaking, we need to be in a rebuilding year. But it’s so much easier to just extend and pretend…

Well, here is one positive thought anyway: I wonder if numbers like this will finally quiet the “BLS is cooking the CPI figures!” crowd. Because if they’re cooking the numbers, they’re doing a darn poor job of it.

Categories: Causes of Inflation, CPI, Federal Reserve, Tweet Summary Tags: core cpi, core inflation, CPI

Summary of My Post-CPI Tweets (November 2021)

December 10, 2021 Michael Ashton 2 comments

It’s #CPI Day again. And it’s official, this is now the MOST WATCHED economic number of the month. It’s crazy to think that if you had told me two years ago that we would be pushing 40-year highs on #inflation in 2021, I’d have thought you were mad.
Amazingly, economists’ predictions for today’s figure would take headline inflation to 6.8% and core to 4.9%. The month/month forecast for CORE is actually 0.5% – an amazing testimony in itself.
Some economists are ‘getting religion.’ The last couple of numbers have been shocking (especially last month’s). The September CPI released in Oct was only 0.24% core, but it was broad.
The October CPI released last month was 0.599%, AND it was incredibly broad. Median CPI rose 0.57% m/m – by far the largest increase since 1982. Not even close.

So this month, people aren’t looking for retracements in an outlier. There’s nothing much to retrace. Indeed, it looks like we might get another push from autos.
Used car prices in the CPI rose 2.5% m/m last month; it could be 4% this month. It COULD even be more than that.

New car prices have also risen 1.3% in each of the last two months. With used car prices skyrocketing, it’s hard to imagine new car prices flattening out. So from autos, you could contribute 0.2% to core, if they play to chalk.
Rents have also been jumping. Unlike Used Cars, only the timing was surprising. I thought it would take longer after the end of the eviction moratorium to see 5% rates of increase and more, but here we are. Both OER and Primary rents were +0.42%-0.45% each of last two months.
If that repeats, it adds another 0.16% or so to core. So then you just need to find price increases of 0.14% from everything else in the core categories, to get to your 0.5% forecast. So it’s not a big reach.
Lots can go wrong in any month, of course, which is why I try not to overanalyze the number pre-snap. But 0.5% doesn’t seem wildly off as a baseline guess, to me. (The inflation swaps market sees more like 6.9% on headline, so upside risk.)
The bottom line is this: although next month we may get some drag from gasoline thanks to the sharp fall in wholesale prices at the end of November, we’re still very likely to hit 7% on headline and will certainly exceed 5% on core over the next few months. That’s amazing.
It gets more amazing: Because of easy comps from last year, averaging 0.06% on core for Dec, Jan, Feb, it doesn’t take a lot of imagination to get y/y core to 6% by the end of Q1. Then it should recede…but it’s not going back to 2%.
So to put it bluntly, inflation right now is not aiming for the 5 o’clock news. It’s aiming for the history books.
Why is this happening? Simple: too much spending, too fast, financed with newly created reserves. Period. The shortages result from getting incomes back above pre-covid levels before we were ready to provide the goods and services to the people waving dollars.
Going forward it is hard to see how this resolves easily. There are still many more people not in the workforce than there were pre-pandemic…but more income, by a lot. Demand>supply, and financed by 12% money growth.
Moreover, one final thought and a h/t to Barclays for their chart of the HH index. The Herfindahl–Hirschman Index is a very widely-used (especially in antitrust) measure of market concentration. Over the last few decades, it has risen precipitously, meaning more concentration.

When market power is concentrated, so is pricing power. And those mega-firms that now dominate just about every niche in American life have re-learned that price increases can stick in this kind of environment. Who can blame them? You build market power for exactly this moment.
It’s hard to unscramble this egg. So hang on to your juevos, number in a few.
Cents and Sensibility: the Inflation Guy Podcast
inflationguy.podbean.com
As a reminder, I will have a summary of all my tweets at https://mikeashton.wordpress.com sometime mid-morning and then I plan to put out an Inflation Guy podcast (https://inflationguy.podbean.com) sometime today.

Yawn. CPI as-expected. Just a soothing 6.4% annualized pace of core. 0.53% m/m,

Core was actually VERY close to printing 5.0%. Using the seasonally-adjusted numbers you’d get 4.96%, which would round up. NSA numbers give you 4.93%. Doesn’t matter; will be over 5% next month.
So, highest headline inflation since 1982, highest core since 1991, with more to come on both.
Running through the usual suspects: Used cars were 2.50%. That’s less than I expected. There’s still make-up there next month, believe it or not.
Owner’s Equivalent Rent +0.44% again this month. Primary Rents +0.42% again this month. Eerily steady at a high level. This month, Lodging Away from Home was +2.98% m/m. Consequently, the Housing subgroup was +0.52% m/m, 4.8% y/y.
I mentioned Used Cars; New Cars was 1.13% (seasonally adjusted) m/m. Car and Truck Rental +1.1% m/m. Airfares this month (a “Covid category”) +4.75%
So with airfares, lodging away from home, used and new cars, motor vehicle insurance (+0.66% m/m)…doesn’t look like this wave of COVID is doing much to hold down prices.
An eye on Medicinal Drugs is warranted. y/y it’s back to flat. Doctors’ Services also up smartly this month, 4.26% y/y. Hospital Services down m/m but still 3.5% y/y.

Overall, Core Goods rose to 9.4% y/y, with Core Services up to 3.4% y/y.
Interestingly, two of the eight major subgroups declined m/m: Recreation, and Education/Communication. And we still got 0.5% on core!
Here are core goods and core services. Supply chain still an issue for goods. Core services the highest since 2008, and will go higher still thanks to rents.

Core inflation ex-housing back up to 5.72% y/y. It was higher in June at 5.81%. But otherwise…back to early 1980s.
So let’s see. Only category that declined at a faster than 10% annualized rate was Jewelry and Watches (-20.5% annualized m/m).
The list of categories >10% annualized growth. Excluding the 6 food/energy line items there: Mens/Boys apparel, public transport, lodging AFH, Used cars, Women’s/Girls apparel, New cars, Motor vehicle parts/equip, misc personal goods, car/truck rental, tobacco,househld frnishings
Looks like the median CPI category will be an OER subindex, which gets separate seasonals, so hard to forecast exactly but another 0.44% m/m or so from Median pushing it up to 3.5% (just my early guess).
Median m/m. One exhibit in the ‘broadening’ argument.

Once again, not a lot of huge outliers here. Although November and December numbers get harder to tell because the seasonal adjustments are more important (e.g. lodging away from home, negative before SA but strong after SA).
Why did Recreation decline? Well, thinks like “admissions”, photographic equipment, cable/satellite television service all declined. So the cake we are supposed to eat is at least getting cheaper.
Fascinatingly, 10-year breakevens are down HARD, -4bps on the day to 2.45%. With core pushing 5% and rising. Wonder what kind of number folks needed to stay long??
Here are the Four Pieces. Food & Energy. Near multi-decade highs as well. And it’s not just energy – there are ripple effects in fertilizer and therefore food. The Food subindex itself was +5.82% y/y.

Core Goods – here is where the supply chain argument is most-salient. Obviously cars are in here and a big part of it. But not all of it! it will come down, but all the way to zero? I have my doubts. And…not soon.

Core services ex-shelter. Still the best news out there. Medical care not unreasonable. Mind you, this would have scared me two years ago, but right now it looks soothing compared to the other charts.

And the part that was the most-predictable (but took an amazingly long time for people to catch on to): rent of shelter. This has another 1% or more to go, at least. And it’s a big chunk of CPI.

The distribution of price changes by CPI component weights. Less of a distribution than a splatter, at the moment. Not much going up less than 3%!

And let’s put numbers on that. Only 20% of the consumption basket has risen LESS than 3% over the last year.

Almost double the weight of the categories slower than 3%? The categories faster than 4%.

Lastly, the Enduring Investments Inflation Diffusion Index reached a new record high. The inflation pressures now are broader than the deflation pressures in the Global Financial Crisis.

So wrapping this up…what does this mean for the Fed? In the Old Days, the Fed by now would have already tightened a bunch. Currently, we’re talking about reducing the amount they add in liquidity, maybe a little faster. And possibly raising rates in 2022. That is, UNLESS…
…unless stocks drop like a stone. And honestly, it’s not really clear to me that the government would care to see much higher interest costs on the debt. Only way Japan has survived its mountain of debt is that is it almost interest-free, after all.
But maybe the hawks will storm the Eccles Building and the Fed will not only raise rates, but also slow money growth (these were once tightly connected; now not so much, and it’s the money growth part that matters not the interest rate part). We can hope.
In a recent podcast, “How Many Swallows Make a Spring”, https://inflationguy.podbean.com/e/ep-12-how-many-swallows-make-a-spring/ I expressed my opinion that once the peak is in, the valley for inflation won’t be as low – because we have semi-permanently moved the distribution.
So we’re not looking, in late 2022, or in 2023, to get core inflation back to 2%. It’s just not going to happen unless housing collapses (which could happen – lots of weird things could happen – but we don’t base outlooks on what weird things COULD happen).
IMO, we’re now in a land of 3%-4% core, maybe if we’re lucky it’s 2.5%-3.5%. Getting it back to 1.5%-2.5% will take strong leadership (HA!) and a long time.
Recently, 10-year inflation breakevens reached 2.78% – matching the all-time highs (since TIPS were issued in 1997) from 2005. If you think about breakevens in the same way you think about TS…
So, as I wrote last month, you haven’t missed this trade yet. https://inflationguy.blog/2021/11/18/you-have-not-missed-it/
Thanks for tuning in. I’ll have the collated summary of these tweets up on my blog within a half hour or so, and will drop a podcast summary of it later. Retweet, call, click, visit, like, upvote, forward, or whatever the kids say these days.

The wonderful thing about December trading is that none of the market moves need to make sense. As I write this, stocks are up and inflation breakevens are down. It’s almost as if high inflation that didn’t actually surprise is somehow helping the ‘transitory’ story. Breakevens act as if the Fed is about to be aggressive and suck liquidity out of the system. But if that’s true, then it’s weird that stocks are higher because an elevated discount rate, with the stock market at record multiples, cannot be a good thing.

There is one way that those moves could be consistent, and that’s as if investors now believe that the inflation spike will indeed be transitory, and that the Fed won’t need to do anything after all. If it was all about some supply bottlenecks that will shortly resolve themselves, and the party can continue, then it would make sense to push inflation expectations lower and also not deflate stocks.

But to be clear, there is absolutely nothing in today’s number that would give any shape to that fantasy. For the third month in a row, the inflation figures were high and the price increases were spread across a very wide variety of categories. There is no one-off to point to. Used Cars adds something – but we haven’t yet seen the peak in that – and that rate of change will eventually ebb. At the same time, other categories are showing new life. This is a much more dangerous look than it was in the first half of 2021, when we expected broadening but it was still believable that “COVID categories” could be the main story. That story is dead and buried. This is not about the pandemic any longer; it is about policy response to the pandemic. It is almost entirely policy error. I will show again the picture from last month, which sums it up. Supply has done what supply usually does following a recession – if anything, it has recovered faster than usual and is back to trend. It’s demand that is far above normal, and that’s not an accident and it isn’t due to COVID. It is a policy error, and it will take many tears (and maybe many years) to reverse.

Categories: Causes of Inflation, CPI, Tweet Summary, Uncategorized Tags: core cpi, core inflation, CPI, inflation, interest rates

You Have Not Missed It

November 18, 2021 Michael Ashton 8 comments

Recently, 10-year inflation breakevens reached 2.78% – matching the all-time highs (since TIPS were issued in 1997) from 2005. If you think about breakevens in the same way you think about TSLA, then it may seem to you that this is a very bad time to buy inflation. No one who bought 10-year inflation at 2.78% or in that neighborhood has ever had a mark-to-market gain.[1] Heck, for a couple of decades it has been a fairly automatic trade to dump 10-year breakevens once they got a bit over 2.50%. Moreover, with y/y inflation at 6.2% – even if it goes a little higher still before it ebbs – it certainly seems like the worst is behind us, right?

I hear from a lot of investors who are afraid that they “missed the trade.” The first spike happened so quickly that not many people outside of the inflation geeks had time to get on board. And we’re only just now figuring out (well, it’s only just now becoming common knowledge) that the “transitory” effects have lasted and are lasting a lot longer than we were told to expect. These tactical traders feel like they missed a once-in-a-generation, if not a once-in-a-lifetime, trade in inflation, which is now over.

Relax. You have not missed it.

Okay, perhaps you should have bought inflation when 10-year breakevens were at 0.94%. At that level, the market was making a huge bet that inflation was forever dead. There was almost no risk in buying inflation at that level, as I pointed out at the time. That was the right trade, and the easy trade, and I know you’re committed to buying those levels the next time you see them. Unfortunately, you won’t. Those levels won’t be seen again for decades, if ever. The only way they could happen is because there was no natural bid for inflation risk, no one who was worried about it. No matter what happens to inflation from here, lots of people have learned that it’s something you ought to be worried about, especially if you can hedge it essentially for free as you could 19 months ago.

But that doesn’t mean you oughtn’t buy longer-term inflation even though the current levels are high. The chart below shows 10-year inflation breakevens, in white, versus contemporaneous core CPI in blue.

Obviously, I’m comparing a 10-year forward-looking rate to a 1-year backward-looking rate, but my point isn’t that there are good times and bad times to buy breakevens based on what has recently happened. In fact, my point is almost the opposite. My point is that historically, it has paid to ignore what has recently happened, and focus on whether or not breakevens are a bargain relative to the equilibrium level. Over the period since TIPS were first issued, core CPI has ranged from 1% to 3%, and averaged almost exactly 2%. That’s the blue line. The question then, is not whether breakevens are a good deal here if inflation is going to go back to a sedate 1%-3% range for the next decade; in that circumstance they certainly aren’t. On the other hand, they aren’t a disastrous trade in that case, but certainly not a very good one. The real question, though, is whether the equilibrium range going forward really is going to be centered around 2%. Because if instead it is going to be centered around 3%, then you’re buying breakevens below the midpoint of that future range (and you get great near-term carry in the bargain).

There are a number of reasons that I think we have moved into a new post-2% regime. A lot of those reasons were already hinted at prior to the current crisis and the ensuing irresponsible policy response. For example, one following wind that the global economy enjoyed from 1993 or so until the mid-2010s was a gradual increase in globalization. The movement of production to lower-production-cost countries, especially in an era of cheap transportation and low tariffs, was a net gain to society in the classic Ricardian sense, and allowed all economies to have a better growth/inflation mix. However, that impulse was already starting to wane prior to Trump, and in the last 5 years the globalization arrow has clearly reversed in no small part because of intentional policy decisions to do so. That’s just one example of how the cycle, in my view, was already reversing.

Since the policy response to COVID, however, the inflation idyll has been decisively shattered. Manufacturers in many industries have been forced to shift strategies about passing through costs – strategies that are very hard to restore to the old way. The high inflation prints, especially in the context of product shortages, have emboldened labor in ways we haven’t seen for some time. Increased unionization is likely to follow an increase in the level and volatility of inflation, which naturally will help institutionalize levels of inflation that are not outrageous in the grand scheme of things but which are still damaging compared to the Way Things Were.

Thus, I think we are out of the 2-percent-as-the-center-of-the-distribution era, and into an era where the middle is more like 3%. The bad part is that inflation regimes don’t usually stay stable except at low levels, so that we are going to have higher inflation volatility, and there’s a decent chance that equilibrium level bleeds higher over time.

That’s the bet with 10-year breakevens. In the short-term, some of the “transitory” factors are going to ebb (prices won’t fall, but their rates of change will), although other factors will emerge too. The inflation derivatives market is pricing in headline inflation over 7% in the next few months, but that will likely be the peak. But rents are going to be pushing up, and core and median inflation are not going to go back to 2% very soon. I’ve seen some forecasts that by late 2022, core will be around 1.5%. I think that’s wrong by 200bps.

There is one final point that I will explain in more detail in another post. Breakevens also should embed some premium because the tails to inflation are to the upside. When you estimate the value of that tail, it’s actually fairly large. But for now, let me just assure you: the train has left the station, but it is still making stops. There’s time to get on board.

[1] Sticklers will note that this isn’t quite true. In 2005, headline inflation reached 4.7%, so an owner of breakevens might actually have had a net profit on income and inflation accretion, at least for a while, even though breakevens retreated from there. But it still wouldn’t have been a great trade and you would have had to be nimble to make any money at all.

Categories: Causes of Inflation, TIPS Tags: breakevens, inflation

Summary of My Post-CPI Tweets (October 2021)

November 10, 2021 Michael Ashton 1 comment

Hello #CPI Day. Is it my imagination or do these keep getting better? Today we should see a 31-year high in headline inflation and the second-highest Core #inflation in 30 years. And, honestly, there’s a chance we break June’s high on core.
It actually doesn’t matter much if we move to 30-year highs on core this month because it will certainly happen over the next few. We are entering the easy-comparison part of the year. Oct ’20 through Feb ’21 had a CUMULATIVE 0.42% on core CPI.
And it isn’t just core. Last month, the theme of broadening price pressures took a big step forward as MEDIAN CPI had the largest m/m jump since 1990.
A lot of that has to do with rents, which are starting now to catch up after the lifting of the eviction moratorium. As expected. There is a lot more to go on rents.
So the underlying themes this month are the same as they have been recently: broadening pressures and less attention on the one-off COVID categories…although…
There will be plenty of volatile noise – that’s not going away soon, and it will contribute to inflation expectations since people encode price volatility as increase. Food inflation will probably be the highest in a decade.
Wholesale gasoline has risen 10 months in a row. Hey, how long has Biden been President, roughly? I mean, counting his naps? (Sorry, that’s piling on and a 15-yard penalty.)
Used cars (and new cars) are also a risk this month. Last couple of months, used cars were a drag as the spike was fading. Not so much. Private surveys are spiking again. We probably see that this month, “a chunky amount”. Here is the Black Book survey.

And here is the change, vs the CPI for used cars, lagged. You never know about the lags though.

Now, policymakers are expressing the opinion that the very high inflation numbers we are seeing now will fade later in 2022. They’re right. There are some signs here and there that certain bottlenecks are easing.
The inflation noise is going to gradually lessen. Unfortunately that means we’re seeing more of the SIGNAL, which remains strong. Pressures OUTSIDE of the ‘reopening categories’ are broad. So core inflation will stay high (just not THIS high, probably) through 2022.
And as shortages get resolved, they’ll likely resolve at HIGHER prices, not lower. See my article “Shortages are Unmeasured Inflation.”
& the causal elements remain. The Fed is tapering but credit growth has been hot.The idea banks are being stingy w/ credit is either false, or they’re being replaced by non-banks. M2 growth is down to ~13%, but that’s still WAY too fast. Especially as velocity recovers.
Onto this month’s report: the Street is expecting a soft +0.4% on core, which would be the highest since June. I kinda think that’s the best case unless OER and Rents abruptly slow down again. Last month’s 0.24% on core only happened because the one-offs pulled it DOWN.
The interbank inflation derivatives market has y/y headline hitting 5.94% today, breaking to 6.5% next month, and staying over 6% until April. (Some of that is due to base effects in energy and core.)
I expect Rents to continue to move higher. Looking for that, & watching Median CPI. It’s at 2.42% y/y and will be higher this month; will be over 3% before very long. That’s where I think everything ends up settling out, late in 2022: 3.5%ish. Not as bad as now…but not good!
Good luck this morning. I will have a summary of all my tweets at https://mikeashton.wordpress.com sometime mid-morning and then I plan to put out an Inflation Guy podcast (https://inflationguy.podbean.com ) sometime today. And let me take a moment this month to say: Thank you Veterans.

Welp. Golly. 0.60% m/m on core CPI, putting the y/y up to 4.58%. A new 30-year high! And easy comparisons still to come…

So let’s see. Used cars +2.5% m/m, which we sort of expected. OER +0.44% m/m, and Primary Rents +0.42%, which we sort of expected.
Apparel? 0.00% m/m. Which means all the other 7 major subcategories contributed. Recreation +0.69%. Medical Care +0.50%. Housing +0.72%. Food/Bev 0.84%. Other +0.85%. Educ/Communication only +0.16%. Transportation +2.37%. Broad.
Airfares: -0.66% m/m. But lodging away from home +1.35%. If you consider used cars a covid category (I don’t), then covid still net adding to this number. But then, everything was.
New cars +1.36% m/m after +1.30% last month. Used car prices can’t be above new car prices for long – but one way to resolve that is new car prices up, not just used car prices down.
Car and truck rental +3.1% after -2.9%.
In Medical Care, “Medicinal Drugs” +0.59% m/m. It is still down y/y, but is this a sign up upward pressure in a category that has been soft for a while?
Doctors’ Services flat, but Hospital Services +0.45% m/m, up to 4.04% y/y. I wonder if laying off lots of unvaccinated nurses will lower prices for health care? Hmmm. Guessing no.
Overall Core Goods rose back up to 8.4%. But more disturbing is core Services jumping to 3.2%. Again, a lot of that is in rents.
Food prices y/y up at 5.33%.
Oh my. Oh my oh my. My first guess at median CPI is +0.57% m/m. That would EASILY be the highest since 1982 if I’m right.
The really scary thing is that I’m looking for a big outlier. And I can’t really find one.
Postage and delivery services were up +3.87% m/m. But that’s 0.11% of the CPI. Cigarettes +2.08%, but that’s 0.53% of the CPI. Health Insurance +1.99%, and that’s 1.2% of the CPI. Airline Fares, +3.5%, but 0.6% of the CPI.
The only category that declined more than 10% annualized was Jewelry and Watches (-26% annualized m/m). There were 19 that ROSE more than 10% annualized.
Core CPI ex-shelter back up to 5.35%. Sure, a lot of that is autos. But you kinda want that to go down especially when shelter itself…
OER is catching up to the model…but the model is running away from it too.

Here are the four-pieces. Piece 1, food and energy. Highest since just before the GFC.

Piece 2 – Core goods. Near the highest since 1981 (only the bump in June was higher).

Piece 3: Core services less rent of shelter. At last! Something that isn’t near 30-40 year highs. But these are the slower-moving pieces. Maybe it’s because they haven’t had time yet to adjust…

Piece 4. Rent of Shelter. The part everyone was hoping wouldn’t follow home prices and asking rents. Sorry about that. It’ll shortly be at 30-year highs too.

So this is starting to be less-subtle. Last month’s distribution of y/y changes vs this month (“OCT”). Left tail vanishing. Right tail growing. And whole middle shifting to the right. Not subtle. Not isolated.

Here is the weighting of components of CPI that is inflating faster than 4% y/y. Almost 40% of the entire basket.

10y breakevens +5bps on the day to 2.69%. But that’s okay, Secretary Yellen tells us there’s no way that inflation expectations get unanchored.
I suppose it should be no surprise that the Enduring Investments Inflation Diffusion Index has reached an all-time high.

OK, let’s sum up. Different month, same story. There is still noise associated with “shutdown categories” and specific bottlenecks. But the underlying “signal” of inflation is getting stronger, as the pressures get broader. You can’t blame all of this on Long Beach.
Those pressures don’t come from the bottlenecks and shortages. They come from the fact that people can afford to pay higher prices because there’s more money in the system. Here is a chart of personal income vs GDP. Demand and supply. Where did the difference come from???

This ain’t rocket science. If you want the fire to stop, remove the oxygen. Oh, wait, actually that IS rocket science. Like, actual rocket science.
The Fed is finally slowing the rapid increase of its balance sheet. Be still my heart. Honestly, I don’t think they’ll even finish the taper, much less start to raise rates. Especially under Brainard. So buckle up. Lock in long-term contract prices.
I need to go take a shower. As much as the trajectory of inflation makes it fun to be “Inflation Guy,” this is monetary malpractice and it’s disgusting. This didn’t have to happen. Sorry. That probably shouldn’t be tweeted.
Anyway – the beatings will continue until morale improves!
Thanks for tuning in. There will be a tweet summary on https://mikeashton.wordpress.com in a little while.And I’ll drop a podcast later today. Interested in the new strategy we’ve launched, or want to work with us to launch one for your clients? Go to https://enduringinvestments.com & contact us.

Seriously, this month’s report – while expected, at some level – turns my stomach. We have learned these lessons, painfully, long ago: you can’t spend in an out-of-control fashion and you can’t print the money that you’re spending. That’s fiscal policy 101 and monetary policy 101. Flunk them all, I say.

The good news is that we no longer need to argue about whether or not inflation is coming. It’s here. We don’t need to argue about whether inflation will broaden beyond the re-opening categories. It has. The only questions are: how much? For how long? And how do we stop it? The third question we already know the answer to: restrain money growth; even shrink the money supply if velocity continues to rebound. No, that’s not against the rules. But it is against current monetary orthodoxy, which regards no particularly interesting role for the quantity of money. Flunk them all, I say.

The answers to the first two questions, how much and for how long, depend on how long it takes for policymakers to change course. On the fiscal side, there seems to be growing resistance to the idea that you can spend any amount of money because you can always print a trillion-dollar coin. But there are still some who profess to believe that if you spend more, you can solve bottlenecks by improving infrastructure. Maybe, if this was about infrastructure. But it’s not. It about spending in an out-of-control fashion and printing the money that you’re spending. On the monetary side, our choices seem to be another ride with Chairman Powell – who is the one who brung us to this party and I don’t really want to dance with him – or Lael Brainard, who thinks Powell has been too hawkish.

Do you see the problem?

Categories: Causes of Inflation, CPI, Federal Reserve, Tweet Summary Tags: core cpi, core inflation, CPI, Fed, inflation

Shortages are Unmeasured Inflation

October 24, 2021 Michael Ashton 5 comments

Recently, I’ve been saying occasionally that “shortages are unmeasured inflation.” In some conversations I have had, it became apparent to me that people were taking this statement as being a throwaway line: “inflation is bad, shortages are bad, therefore they’re kinda the same.” But what I mean is actually more profound than that, and so I figured I would explain and illustrate, and hopefully thereby to convince.

Let’s use some charts.

What has happened since the large increase in federal spending and transfer payments were implemented in several waves since the shutdown began is that demand in many product markets has shifted outward. This implies that output “Q” moves from c to d while the price level “P” moves from a to b. [1]

So a strong increase in demand causes an increase in the quantity exchanged at the new equilibrium, and an increase in the price of the good or service at that equilibrium. This is the nice, smooth, continuous markets, instantaneous-adjustment picture from Econ 101. It’s also not the way the real world works, especially with large shifts in demand.

If price only adjusts partially, maybe if “anchored inflation expectations” or a fear of being accused of gouging restrained vendors from raising prices enough to ration the available supply, then a shortage results. This is the same thing which occurs classically if a price cap is instituted from the outside. Now price moves up from a only to b’, but the quantity demanded at that price is at d’. Thus, the bracket on the chart below shows the size of the shortage at that price, where consumers want d’ but suppliers can’t/won’t provide that much.

Note that this shortage is a direct substitute for the increase in price that would otherwise happen if prices could instantly and fully adjust. Moreover, the picture is somewhat worse in the short-term because the supply curve – in the short-term – is much more inelastic at some point (because, for example, no matter how high the price gets we can’t deliver more used cars in the short run). So, in the picture below the short-run supply curve in blue implies that the large increase in demand pushes prices to b’ with output only at d’, until supply eventually adjusts to the long-run supply curve S(lr), when we end up in the new market-clearing equilibrium.

In this case, the difference between b and b’ is “transitory” inflation, caused by temporary supply constraints. But note that in this picture, there is no perceived shortage. The market clears at b’ and d’. In other words, the conditions leading to the “transitory” increase inflation are not the same ones leading to the shortages.

We can combine these; if in the last picture above vendors also constrain prices to b, then there is a shortage as the quantity demanded stays up at d rather than at the market-clearing level d’. But, again, in that instance the shortage reflects the fact that prices should have adjusted to b’ but did not. Also in that case, it would be inaccurate to claim that the inflation was transitory, since prices should remain at b even when the supply eventually adjusts to the long-run equilibrium. It would be the shortage that was transitory.

In theory, if we knew the shapes of the curves of supply and demand for each product market, we could estimate how much higher prices would be at equilibrium and therefore how much additional inflation the shortage implies. We could directly translate the shortages to an “equilibrium” price level and therefore inflation. It strikes me as plausible that we could develop a rough estimate of such a number, but I leave that to the PhD candidates looking for dissertation topics. In the meantime, just remember that with inflation over 5% presently and shortly headed above 6%…the inflation rate is understated, and we know that because there are lots of shortages.

[1] If the deficits, funded by Fed purchases of Treasuries, had just offset the loss in incomes due to the shutdown – perfectly, across all individual markets – then there would have been no demand shift and no net change in output or prices. And if the deficits had not been accompanied by an increase in the Fed balance sheet, then it would have been individuals buying the bonds and so the only effect would have been because the marginal propensity to consume of the people receiving transfer payments is higher than the marginal propensity to consumer of the people buying the bond issuance. But in this column I’m trying not to muddy the discussion with the argument of whether we need both fiscal and monetary stimulus to cause inflation. I’m just focused on the narrow question of what it means when I say “shortages are unmeasured inflation.”

Categories: Causes of Inflation, Economics, Theory Tags: transitory inflation

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You Have Not Missed It

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