The Fed is Going to Look Great in About 6 Months… Inflationistas Are Just Playing Into Their Hands.

Has it occurred to any of the inflation doomsayers they might just be getting played by the Fed?  The Fed is going to look like a bunch of geniuses as the headline YoY inflation numbers mechanically come down over 2022 🙂

We KNOW that headline inflation is going to plummet in the next few quarters.  Why?  Because we will stop comparing prices today with (hideously depressed) prices 12 months ago that reflect a freakin global pandemic!  Auto prices are up 40% year over year right now, but that is comparing January 2021 with January 2022.  By the time we get to say August ’22 vs August ’21, the YoY change percentage increase is MUCH smaller because prices in August ’21 were already much higher

So, this was always a risk free way for the Fed to burnish its reputation, credentials, and “inflation fighting credibility.”    Powell already knows the trajectory of headlines over the course of 2022 – “Reported Inflation Numbers Fall From Record Highs“.  All he is doing is scooching in to take the credit. “Decisive Fed Action Reduces Inflation” has a much nicer ring to it (if you are the Fed).  

Responsible adults can (and do) differ on whether inflation settles back down at sub 2% (where it was pre-pandemic) or in the 2%-3% range.  Here, we should probably pay attention to what the Fed was saying 6 months ago.  They WANT inflation to overshoot their 2% target.  They were very clear on that.

My guess (and my inflation forecast) is probably inflation in the 2% to 3% range and risk-free treasury interest rates close to 2% BELOW inflation. Meaning people looking for a risk-free return will end up paying for the privilege.  Which is where I think the Fed wants to end up.  Why?  That’s for a later post.

For more of the data, I’ll just pull this quote from NYTimes

Mark Zandi, chief economist at Moody’s Analytics, which conducts economic research and risk analysis, put it clearly in a conversation on Wednesday. “Inflation has already peaked,” he said. “It peaked in October.”

How is this possible?

A close look at the numbers shows that the annual C.P.I. inflation rate reflects the very low base levels of one year ago, when the pandemic had suppressed demand and prices were low. The month-to-month numbers support a different narrative.  Consider that monthly C.P.I. rose:

.09 percent in October.
0.7 percent in November.
0.6 percent in December.
0.6 percent in January.

It’s true that this has been the worst year for inflation in more than 40 years, but we’ve known that for months. What these numbers show is that although inflation is high, it has also been fairly stable on a month-to-month basis. Mr. Zandi, who says he takes “a sanguine view,” expects that the annual C.P.I. numbers will start to decline in several months, whatever the Fed does. And much as annual corporate earnings look better when compared with low numbers a year earlier, the decline in the annual C.P.I. rate will look even better in comparison with the steep readings of the past year. That’s just math.

The Fed does need to raise rates considerably over a few years and reduce its swollen balance sheet, he said, but that can be good news because it means extraordinary measures are no longer needed and it’s time to “normalize.”

In short, it might be helpful to reframe the C.P.I. news.

Newspapers could quite accurately have run this much duller headline: Inflation Remained Stable, Well Below Its October Peak.

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