Just posted a lengthy description on inflation on Twitter and thought I’d copy it here so it’s easier for you to find:
Last night a client asked me if inflation has peaked. Great question. I think no, but let’s start on the other side. Used auto prices up 40% last year were a huge contributor to CPI. The Manheim Used Vehicle Index is still up y/y but has started to decline.
Energy prices are also up y/y, but have declined from highs over the last couple of months. We’re not seeing demand destruction yet, but at some price for oil and gas, we will. Finally, higher interest rates lead to higher mortgage rates which has to reduce housing cost soon.
Our argument for why inflation hasn’t peaked: – Housing is backward looking and new figures will represent deals made months ago. – Housing is up around 20% y/y but owners’ equivalent rent doesn’t reflect that.
– Spring planting in Ukraine is disrupted. Food prices will be up huge. – Fertilizer from Russia isn’t available so US crop yields will be down huge. – Prepare for food shortages and much higher prices.
– Ports in China still closed so supply lines still a mess. – Semiconductor/chip shortages still exist making production of complex things (like cars) difficult. – Unemployment at a level where everyone who wants to work is working. But, here’s what could happen…
The CPI isn’t a real number. It’s a number made up by the government. Department of Labor Statistics can (and does) “adjust” the actual numbers. Can we get a “good” CPI showing lower inflation and have the market rally on that – sure. Can happen. But…
In the end, the reported numbers might make the market feel good, but if ACTUAL #inflation is double the reported number, we’ll have demand destruction and a recession. (DKI has said since Feb. that we already have stagflation).
The Fed and the market can point to reported CPI numbers until reality forces them to deal with actual conditions. Plus, if actual #inflation is around 16% (our calculation), does it matter if it “falls” to 15%?
Key point – 80% of all dollars created in last 2 years. Fed balance sheet still $9 trillion (trillion?!) including mortgage securities they’re not supposed to own. And they’re still only at 75bp for the fed funds rate!
Inflation (real and reported at 40 year high). Unemployment very low. Fed carrying $9T in assets. Congress running multi-trillion dollar deficits. And we’re at 75bp?! We’ve been short (publicly) since beg. Jan. That’s why.