NEW YORK, NEW YORK – JANUARY 12: Eggs are seen on shelves at Pioneer Supermarkets on January 12, 2023 in the Flatbush neighborhood of the Brooklyn borough of New York City. The outbreak of avian flu, also known as bird flu, has caused a shortage of eggs as well as an increase in prices in stores in some parts of the country. (Photo by Michael M. Santiago/Getty Images)
Michael M. Santiago Getty Images News | Getty Images
Since the inflation debate began to escalate towards the “end” of the pandemic, I have been making the case that inflation, as suggested by the Federal Reserve, will be transitory.
Transitory was never meant to suggest that the burst of inflation was only a few months away.
Historically, even in the 1970’s and 80’s, post-war/pandemic inflation for the first few years has declined and sometimes reverted to deflation.
There is a growing amount of data to support this position even though the Fed, and many other economists, are constantly worried about the emerging wage/price spiral.
The data, so far, simply do not support these concerns and confidently strengthen the case for disruptive, but temporary, inflation, as we have seen after other catastrophic events, such as major global conflicts, and / or, previous pandemics.
Let’s look at the supporting data.
The first, and most important for all consumers, is the consumer price index itself.
The CPI, which measures the basket of goods most often bought by consumers, housing, food, energy, clothing, etc., not only stopped rising but, in yesterday’s report, showed the first monthly decline since inflation broke out.
While inflation increased by 6.5% on a year-over-year basis, consumer prices, over the last six months, advanced at less than 2% annualized rate … right in the Fed’s declared target.
Core consumer prices are also falling sharply and rapidly from their mid-2022 peak.
But wait, there’s more!
The Fed’s preferred measure of inflation, called core PCE, (the personal consumption expenditure deflator) has also eased to 4%, still above the Fed’s target rate but down significantly from post-pandemic highs.
In the last three months alone, the annualized core inflation was at a rate of 3.14%, down from 4.5%, on a six-month basis, earlier. All other inflation measures have followed the same trajectory since June 2022, although some components, such as shelter, have been sticky.
The data used to calculate house prices and apartment rents tend to be old and outdated.
More recent measures show that like energy, food, manufactured goods and raw commodity prices, housing costs have fallen and may be falling faster than official data suggests. Look at lumber prices, down to over $400 per thousand board feet from a peak of over $1,500.
While the Fed has yet to acknowledge these developments, financial markets have.
Inflation expectations, as measured by so-called “breakevens” have collapsed. The St. Louis Federal Reserve’s measure of where inflation is expected to be five years from now, as measured by bond market activity, has fallen sharply, from a peak of 3.59% on March 25, 2022, to 2.21%, on Thursday.
A similar decline was seen in the 10-year breakeven rate.
My friend and colleague, Tom Lee, from Fundstradt, stated that 59% of the CPI components are actually deflating, or collapsing, in prices, suggesting more moderation on the inflation front in the coming months.
We haven’t seen a decline in service sector inflation, yet. However, air fares have come down and some service prices have come down.
Wage inflation, the Fed’s biggest concern of late, has also moderated, suggesting that the feared wage/price spiral is no longer a threat to the economy.
While it is true that the US labor market remains very strong during the most aggressive rate-hiking cycle in modern history, layoffs began to accelerate when average hourly earnings, according to the latest job report, rose 0.3% last month and have, essentially, moved slanted for the last five months, mirroring all inflation data collected since then.
While inflation may pick up again, energy prices have rebounded a bit lately as China reopens its economy from a nearly three-year lockdown. Demand for goods and services from China could, perhaps, add pressure on prices.
But China’s economy is more likely to export deflation as it struggles with an unsold housing overhang, a glut of commodities held domestically and a decline in global exports.
The war in Ukraine, if not ended soon, can also have a negative impact on the cost of energy and food, but not at all showing up in the data.
In fact, at least domestically, every market indicator points to a fear of slower than rising inflation, which the Fed has yet to acknowledge.
The spread between the 3-month T-Bill and the 10-year Treasury note, as of early Friday morning, was 1.1 percentage points. It topped 1ΒΌ percentage points Thursday.
This marked the deepest inversion of the yield curve since the heady days of the early 1980s when the US suffered a very deep “double-dip” recession, caused by the Fed being too aggressive, therefore, fighting inflation, albeit with higher rates. from inflation.
The market is not the only indicator that says inflation has peaked, the data itself, makes the same case.
Inflation is dead. Long live inflation!
