BLS reported the consumer price index rose 3% year over year in June. This is a near round trip between the 0-2% range of the previous decade and the 9% peak, and now falling back to 3%, while the FRED card shows above.
Over the past year I have written extensively about inflation – what people are wrong about it, why the FOMC is usually late to the party, and what the various causes of inflation actually are (real, modeled, and imagined).
All of this space research has led me to ideas about inflation, many of which are out of step with the mainstream. Here are 12 ideas that are (or were) anti-inflation thoughts.
1. Inflation peaked in June 2022; After hitting new highs a year ago, it has been falling rapidly ever since.
I’ve been posting on it since June 2022. This was a contrarian stance for most of the time since, but after the May and June CPI reports, this idea finally entered the mainstream (traders had figured this out around October 2022).
2.”Long and variable delays?: “FOMC rate hikes and other Fed policy actions are all felt in the broader economy Ultimately. Exactly how long this takes is up for debate. The economists who came of age in the 1970s and 80s all seem to be attached to an outdated model.
In the 1970s, when inflation was persistent and home loans were in the double digits, it was fair to assume that it would have taken up to 18 months for FOMC policy to kick in. Especially considering how opaque the Fed was back in the day when it didn’t even tell you when it was raising or lowering rates – you’d guess from the bond market! Prior to 1994, the central bank did not issue policy statements or hold press conferences.
But today? Those 18 months certainly seem like a long time.
The modern economy runs on credit, and the Fed has been transparent, telling the market exactly what’s going on. go do. This should translate into a much shorter lag between the action of the Fed and the reaction of the economy.
3. Is labor inflationary or deflationary?: The biggest factor in wages has been a shortage of workers in many industries; what is needed are more workers. I find it hard to see how higher rates make this happen.
Wages in the bottom half of the economy have lagged the most important measures (productivity, CPI, corporate profits, etc.) for the past 3 decades; they were one deflationary factor in the economy. BUT the widespread labor shortage in the United States has led to even the lowest paid workers getting raises, which the FOMC believes is inflationary.
Economists like Lawrence Summers are stuck in a 1970s mindset. His claim that the only way to end inflation was to put 5 million people out of work was not only wrong, it relied on an embarrassing and outdated model (it was also unnecessarily cruel). It’s a good thing so few listened to him; he better not be the chairman of the Fed – the resulting recession would have been disastrous.
4. transient wasn’t wrong, it just took longer than expected.
A once-in-a-century pandemic with unprecedented global lockdown has simply taken much longer to unfold than expected. There was literally no modern analogue or comparison, and everyone was forced to make a guess.
That said, 27 months instead of 12-18 is less of a miss than many claim.
5. Inflation models are inaccurate. PCE, CPI and pretty much every inflation model I follow is flawed but useful. Those that are consistent can be used as a benchmark for historical analysis. However, relying on them to make policy decisions in real time is deeply problematic.
They are late, they make assumptions that can lead to biased results, and they assume the world is less complex than it really is. They rely on historical data, which can lead (as is the case in the current situation) to tentative results as new situations arise.
Any organization that does not understand this risks making substantial mistakes in decision-making and policy.
7. The Fed drives up house prices: Three factors have reduced the supply of single-family homes, thus fueling housing inflation:
A) Big post-GFC drop in new home construction;
B) Pandemic home purchases without a corresponding sale,
3) 2017-21 era mortgages from 2.75% to 4.0%. These low rates lock in homeowners who can’t afford to pay 7.5%+ for a new mortgage on another home.
All of this adds up to a huge shortfall in the supply of homes available for sale. We can’t change what builders did from 2007-2020, or change buyer behavior in 2020-22, but we’re locking in potential sellers because of higher (too high) mortgages. Higher rates only make this situation worse.
8. Fed pushes OERs higher: Faced with the housing shortage, the rapid rise in rates has perverse caused more, not less inflation. At least, in the owner’s equivalent rent (OER) portion of the CPI.
9. For lower inflation, lower rates: The main drivers of current inflation NOW are apartment rental costs, shortage of houses and too few workers. Raising rates will not solve these problems and will no doubt make them worse.
Rising FOMC rates from these levels not only makes the OER worse, but reduces the supply of single-family homes, makes homes more expensive, but also sends more people into the rental market, which increases apartment rentals.
ten. Consumers AND businesses drove inflation: Yes, consumers are suffering Since inflation, but when they voluntarily pay for goods and services, regardless of price increases, they cause inflation. This is true for basic necessities (food, energy, clothing), in discretionary items (travel, 2n/a houses), and more particularly luxury goods (watches, sports cars, bags, jewellery). Excess demand for goods during the pandemic has led to goods inflation; the excess demand for services after the reopening led to service inflation. Following each of these surges, there were somewhat different types of inflation.
11. Lose the 2% inflation target: Seriously. After the GFC, the economy was sluggish and the ZIRP/QE had driven rates close to zero, 2% was a reasonable rate Upside down target. But after $5 or $6 trillion in fiscal stimulus and mortgage rates at 7.5%, maybe 3% — or even 2.5% — makes much more sense as a inconvenience inflation target.
12. The Fed has already won: Mission accomplished! Jerome Powell can take the summer, fish in Jackson Hole and relax for the rest of the year. There is no need to increase the rate further because the battle is already won.
To be fair, the Fed was late to get out of zero, late to recognize inflation, late to act, and it is now late to recognize that inflation has fallen dramatically. Yet even a blind squirrel finds a nut once in a while, and he should take the win and stop here.
They risk snatching defeat from the jaws of victory…
Inflation expectations are useless (May 17, 2023)
What the Fed is wrong (December 16, 2022)
What is driving inflation: labor or capital? (November 7, 2022)
How the Fed Causes Inflation (Model) (October 25, 2022)
Why is the Fed always late to the party? (October 7, 2022)
The transient is taking longer than expected (February 10, 2022)
Who is responsible for inflation, 1-15 (June 28, 2022)
Deflation, punctuated by spasms of inflation (June 11, 2021)
What models do not know (May 6, 2020)
Confessions of an inflation truther (July 21, 2014)