Tuesday, November 8, 2022

Inflation May Remain Around 5% For Years

The view that inflation will be around for some time is growing. Many people in the inflation camp see at least 5% inflation will stay with us for most of the next ten years. This is something we should consider and note because the ramifications would be huge. It is a prediction that is likely and lives in the area between runaway hyperinflation and deflation.

The whole inflation regime dictates how everything is valued. It is important to remember inflation affects everything but not equally. My premise is that wealth will flow out of paper promises and fiat currencies and into tangible assets. Such a shift in where money is invested is a game changer. If I'm correct, this will result in a fundamental change in the economy.

The recent CPI numbers have come in hotter than expected. Headline CPI month over month was double expectations with core numbers rising 6.6% year over year. These numbers are the highest since August 1982. Going forward it is likely we will see inflation in services and "fees" continue to rise as the prices of goods begin to slow. Adding to our pain as consumers is the fact the CPI routinely understates inflation by using a formula based on the concept of a “constant level of satisfaction.” This was concocted by politicians and their advisers to reduce the cost of living adjustments for government payments to Social Security recipients, etc.

Services Inflation Continues To Rise As Prices Of Goods Slow

Source: Bloomberg

The argument for deflation is very clear, we have too much debt and when defaults occur it will trap us in a deflationary vortex. Most deflationists think by the time you factor in demographics we will find ourselves trapped in a long and painful deflationary cycle. The general consensus is that as people age they buy less and spend less. This leads people to see an aging population, such as we have in America, will add to the forces favoring deflation. 

The flaw in their thinking may lay in the fact that a lot of money will be spent by the government to maintain both their health and support those retiring with little or no savings. Also, when people retire most no longer contribute to the supply side of the economy but move completely to the demand side. How can we say older people consume less when they generate huge medical bills and have other special needs? Even if the cost is shifted to the government it still shows up as consumption.

Some people are predicting inflation will soon drop based on the idea much of the data reflecting inflation flows from past numbers that reflect what is already behind us meaning we are looking in the rear-view mirror and retail prices are about to drop due to high inventories. Still, some problems refuse to fit into the narrative that inflation has peaked. How do you pull forward rent, health insurance, energy, etc? 

Sure some deflationary numbers may be coming out on the retail side of things due to heavy inventories but this may not be enough to offset prices rising on the things we need. The problem is, inflation does not always cure itself. You can't tamp down inflation by merely talking about how high prices destroy demand. Many things driving inflation, such as rent increases are not all behind us. As leases expire each month renters are brought up to the current pricing. The same thing can be said about utility bills and other needed services. Do not expect the cost of shelter to fall. Too many of the costs feeding into this sector are still moving higher.

Unfortunately, those seeing deflation ahead base it on a horrible economy, falling liquidity, and the destruction of demand rather than improving supplies. We have to recognize the difference between supply-side and demand-side inflation. With this in mind, you could say, a broken supply chain also feeds into the inflation picture and could make a case that the supply chain is the economy.   

Recent "hotter than expected"  PPI data indicates inflation will be with us for some time. It seems to have deeper roots and may prove stickier than originally thought. The idea we may see both a weak economy and stagflation dovetails with a recent piece put out by David Stockman. Of course, this debate is far from settled. There is a lot going on and few pundits or economists agree on where this is headed. 

Below is a sampling of a few financial headlines from last month that indicate economy watchers are all over the place as to where the economy is headed.

             Fed’s Williams sees steep decline in inflation ahead
             Oct. 3, 2022, at 3:27 p.m. ET by Greg Robb

The 4% retirement spending rule may be too high. Could you get by on 1.9%?
            Oct. 3, 2022 at 10:59 a.m. ET by Mark Hulbert

           Europe’s red-hot inflation numbers may be ready to cool off, says Morgan Stanley
           Oct. 3, 2022, at 10:40 a.m. ET by Barbara Kollmeyer        


The elephant in the room remains that restrictive monetary policy  means that liquidity is vanishing and the risk-reward for loaning money on a promise is breaking. When credit fails to grow the economy rapidly falls into a recession or depression. When credit is a problem, how do we move the economy forward? The big question is whether destroying the wealth effect in certain sectors of our economy will offset the redeployment of wealth in others enough to halt inflation.

The massive mindless "exchange-traded-funds" trade where all ETFs own the same ten stocks has supported this market over the years. Unfortunately, this sector seems greatly out of wack and hugely overvalued. If money starts to flow out of the ETFs and this sector breaks markets may go into a free fall. This would be an indication the markets may be underpricing the duration of high-interest rates. 

Footnote; The following AdvancingTime article details how the CPI understates inflation by using a formula based on the concept of a “constant level of satisfaction” that evolved during the first half of the 20th century in academia. Politicians touting the benefits of this system created it as a way to reduce the cost of living adjustments for government payments to Social Security recipients, etc.



 (Republishing this article is permitted with reference to Bruce Wilds/AdvancingTime Blog)


  1. I agree with you that inflation will likely remain high for at least several more years. I don't believe the Fed has the courage to raise rates to 6+%, which is what would be necessary to truly bring down inflation within a couple years. Moreover, as you said, the govt. and Fed changed the way they calculate inflation in order to artificially lower it to a more acceptable number. The fact is that the govt. needs >2% inflation in order to continually reduce its debt burden, so that they can keep borrowing 1 trillion+ per year to maintain their power. Can you imagine what would happen if the govt. had to balance its budget and cut 1 trillion a year in spending? They'll use every trick in the book to keep this from happening, even if it means many years of 3+% inflation and screwing over the middle class.
    Despite the higher interest rates, it looks like the consumer is still strong and the stock market just keeps going up. I admit that it is perplexing to me. I've been sitting in mostly cash for months waiting for the market to tank 25-30% and then swoop in and buy stocks and bonds at bargain basement prices, but the market remains irrational. I don't know what's going on, really. What's your take?

  2. The Fed can raise or lower rates all it wants and it still won't fix the inflation problem because this inflation is not a direct result of fiscal or monetary policy. It is a direct result of the BS Covid lockdowns and what it did to the global supply chains. It's not just the US dealing with inflation, it's also a problem in Europe as well.

    Here in the US farmers were destroying their crops and livestock during the lockdowns because they couldn't get their products to market. Prior to the lockdowns it was unheard of to walk into a supermarket or grocery chain and see empty shelves. Now it is a common occurrence where I can go into a supermarket like Aldi's or Walmart and find diary products like milk, out of stock. I can go back 3-4 days later and it's back in stock.

    So what do I do, now? I buy more than I need too because I don't know if it will be in stock when I return. There's your inflation, too much money chasing the same products.

  3. Who would of thought getting eggs and milk would be a problem at Kroger in Indiana, but it is. Not only is their stock super low but the prices going up.

    1. And you just confirmed the inflation....."Shortages".

    2. No, it is not only shortages. You've said this before but I must push back on this.
      Price inflation is caused by *two* forces, Supply and Demand. Period. The current inflation we're experiencing in the USA is due to *both*: 1)supply not keeping up with demand, and 2)too much demand, i.e. people having and spending too much money.
      There is no question that the trillions in govt. spending and direct transfer payments, combined with the easy money Fed policy for years, contributed to this price inflation by creating excessive artificial demand, which also itself indirectly causes supply shortages due to too many people with too much money buying up everything.
      The Fed is doing the right thing, but they are fighting the reckless fools in govt. who keep spending like drunken sailors. In the long run, the Fed will win if it raises rates high enough and stops printing money and loaning it to the clowns in Congress. We'll see.
      Remember the old proverb: "Don't fight the Fed".

    3. And I have to push back as well because you just confirmed that inflation is in fact caused by shortages i.e. supply and demand. Supply chains were broken from the Covid lockdowns. Businesses either closed temporarily or closed for good. Farmers had to destroy their livestock and crops were left to rot or not planted at all. Cargo ships in queue lines in Long Beach, California having to wait to unload their cargo due to Covid lockdowns. They just did not have enough workers. Florida Governor DeSantis offered to have those cargo ships come to Florida ports to ease the backlog of goods waiting to arrive on US soil and California Gavin Newsom, "REFUSED" the offer. This all caused massive shortages and it continues to this very day. You just can't pull the plug on global supply chains and NOT expect to have shortages.

      Apple is having trouble meeting iPhone demand because of China's zero Covid policies. People are still willing to pay high prices for Apple's flagship phones but they instead have to wait and that includes the UK and EU where it's even more expensive because the Dollar is so strong.

      In the EU, the World Economic Forum member States such as in the Netherlands want to put farmers out of business. The same in Spain, Italy and other places. You honestly can't tell me that would help ease shortages? It can't and The Fed is not the one telling EU member States not to grow food. This is all political and not based on Fed Policy.

      The Fed can raise or lower rates all it wants, and it won't change the shortages we are experiencing today. I can still walk into a supermarket or grocery chain and those places are still short staffed, again all because of the Covid policies dictated by Washington bureaucrats but go ahead and continue to believe The Fed is responsible for the current shortages.

    4. I never said that the shortages played no part in price inflation. I said that *both* the shortages and artificially goosed demand play a role. You seem to be blaming all or most the price increases on the shortages.
      I suggest that you read articles on economics and finance from reliable sources instead of listening to Glenn Beck and Alex Jones, both dishonest charlatans who have made millions from fearmongering.
      You will see that as the Fed Funds Rate rises, the inflation rate will come down. It is inevitable.

    5. Ah, I see, so you lose an argument and you go personal. I don't listen to Alex Jones. The Glenn Beck AI reference was in regards to a book he reviewed that took its sources from Stephen Hawking, you know world renowned pretty smart guy in a wheel chair with Lou Gehrig disease who warned the world about the dangers of AI but nice try.

      Here's a little Eco 101 for you. If I have 10 customers waving $100 in my face wanting to buy my $10 item, I am going to take the highest bidder. That's just how Capitalism works. There is too much money chasing the same amount of goods because of the shortages created by the lockdowns which makes the shortage problem even worse because people will buy more of the same even if they don't need it. So you create even more shortages and that drives the price even higher.

      But keep blaming The Fed, sheesh!

    6. This will be my last reply as I don't think either of us will ever concede and it is futile to continue arguing. Anyway, you're the one who mentioned Glenn Beck. You also mentioned the WEF, which is a big topic for Alex Jones. It's good that you don't follow him. The WEF is a group of wealthy aristocrats who hate the middle class and want to subjugate them for their own gain. They use climate change to promote policies which will weaken and impoverish the unwashed masses and bring them further under the control of the technocrats and aristocrats. Maybe we agree on that. Back to inflation...
      I'm not seeing the huge shortages recently that you talk about. There was a brief period in 2020 and 2021 where supplies of some items dropped considerably due to millions leaving the workforce, mostly Baby Boomers, and govt. mandated lockdowns and other policies reducing output, but that situation has steadily improved over the last 2 years. Then you had the panic buying during the pandemic which contributed to the shortages, but again, I'm not seeing that now. The Russia-Ukraine war has reduced supplies of oil, gas, and other commodities, so this has definitely played a role in price increases, as even if our production remains the same, we're exporting more to Europe, making it more expensive for ourselves.
      So, yes, the supply side has indeed contributed to the inflation, but you dismiss the other side of the equation. The supply reductions wouldn't matter if demand went down, which in a normal, non-manipulated economy, it would. However, when you have 0% interest rates, people can buy more on credit and still get cheap loans, keeping that spending going. Then you have the govt. fools borrowing 5 trillion dollars from 2020-21, and a trillion this year, and spending it into the economy, almost all money literally created out of thin air by the Fed, not money loaned to the govt. by its citizens buying govt. bonds as it should be, but instead new money flowing in from outside. 6 trillion dollars is about 25% of the U.S. annual GPD. Divide that by 3 for the years 2020-2022 and you get: ouila!, about 8%. Mmmm..., that number sounds familiar. Lastly, you have about 5-6 million illegal immigrants who have moved here in the past 2 years, which has increased our population, and demand for goods and services, by about 2%.
      It ain't just about supply. Without the artificially increased demand, the lower supply wouldn't matter as much.
      BTW, have you actually completed a university course in Macroeconomics, since you mentioned "Econ 101"? As a matter of fact, I have.

    7. Dave, this is my last post regarding this issue. I don't listen to Glenn Beck neither Alex Jones. I however am beyond fascinated by artificial intelligence. In this space I have referenced Stephen Hawking who warned humans about the dangers of AI. That is what Glenn Beck covered and it was a review of a book. It was well done.

    8. Now moving on to my last comment regarding who created this mess. You fault The Fed. I fault the Covid Lockdowns. The lockdowns started this whole mess. Consider if you want, the following.

      In 2020 John Williams from Shadowstats.com had revised his inflation forecast which was then running a hot 10-12% and that was 6 months into the lockdowns.

      People were forced to stay at home and were given free money which fueled asset prices because they had nothing better to do with their money and some didn’t even have to pay their rent. Some lucky ones who had mortgages were given a moratorium.

      Then as a direct result of the Covid lockdowns you had tens of million leaving the workforce, The Resignation". It was the lockdowns which created the labor shortage. Companies were now desperate to find workers. Walmart which were paying on average $9 minimum wage had to now increase their minimum wage to $15 an hour.

      The same applied to Grocery, fast food, home improvement chains. Using Taco Bell as an example, they were charging $5.49 for a lunch box. After the lockdowns and their minimum wage increase on average of $14 hr, they were forced to raise menu prices. That same lunch box is now around $10. Guess who pays for that? It is the consumer. There's your inflation.

      Jerome Powell wasn’t the one who decided to lock everything down and forced people to stay at home. He wasn’t the one who caused tens of millions to leave the workforce en masse. It was the Government who forced the Covid lockdowns.

      It was the lockdowns that did it and not Fed Policy. The Fed was forced to react to a chain of events well after inflation took hold because of the lockdowns.

      Here’s another reason why inflation is likely here to stay and the Fed may not be able to control it. There are reports that global fertilizer production could be down as much by 50% in 2023 because of the ongoing war in Ukraine. Try feeding 8 billion people with 50% fertilizer production. Some will go hungry, some may starve. Those that don't have access to food will have to pay more.

      This was not Fed policy that caused this, but out of control governments who just want war and sold the public on lockdowns. Also consider that global energy production is in decline according to geologist Art Berman. Expect to pay more for fuel. Can use say I-N-F-L-A-T-I-O-N? I can !

  4. I don't think inflation can be controlled at 5% as measured by the government. The Fed has a choice, either get it back down under 2-3%, or let it run continuously higher in waves.