E-piphany

This is a single issue, of the November 2022 Quarterly Inflation Outlook.

The QIO is a 15-20 page quarterly discussion of current topics in inflation, including underlying dynamics, valuation, and related markets.

Executive Summary

• Although the result of the US midterm elections may produce technically divided government, such a narrow majority in Congress means that Republicans will be unable to effectively stop additional stimulus legislation – producing a new source of inflation risk that we didn’t expect as recently as a week ago.
• The Congress is also unlikely to be an effective check on the President, who is becoming more strident threatening companies with windfall taxes and other penalties if they don’t adjust prices to his liking. This is a likely precursor to the wage and price controls we fear.
• There are increasing signs, as inflation moves into Core Services ex-Rent, that a wage-price spiral and other feedback loops have added momentum to inflation, which will slow down its deceleration.
• Core inflation has likely peaked, and Median should peak soon.
• The Federal Reserve, we believe, will raise rates another 100bps over three meetings and then pause.
• Home prices do not appear to be in a bubble. While we think residential real estate will produce negative real returns from these levels, we do not see significant nominal price declines in an era of 4%-5% underlying inflation.
• Canada announced the cancelation of its 31-year-old inflation-linked bond program…a terrible decision.
• Our forecasts for 2023 inflation remain centered around 5.1% on median inflation (from 7.1% at year-end 2022 by our estimation).
• TIPS are now close to being reasonably valued on an absolute basis for the first time in years. We believe that it is reasonable to accumulate them at yields in the high 1%, low 2% range.