Monday, March 15, 2021

Upfina on Inflation

 Two posts from last week. First up, March 10:

Inflation Is Coming But Will It Be Transitory?

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....Inflation Is Coming This Summer

As you can see from the chart below, the NFIB actual price changes index adjusted for gas prices implies core CPI will rise to about 2.9% in the next 6 months. This same chart implies core PCE inflation will rise to about 2.4% this spring. The most interesting aspect of this coming spike in inflation is that policymakers think it will be transitory. That reaction makes the inflation spike more sustainable.

The more ‘establishment’ an economist’s thinking is, the more likely they are to expect inflation to be temporary. There is huge recency bias on inflation because very loose monetary policy hasn’t caused inflation in the past 10 years. The difference this time is fiscal policy is very loose. Plus, the economy is about to reopen which hasn’t happened in decades (hasn’t gone from closed to reopened). The bond market disagrees with most economists. There is no chance the Fed will hike rates this year. There is nothing to stop the coming inflation.

The biggest suppressant of core CPI has been shelter inflation. New and existing home prices have risen, but rent inflation has been low due to the moratorium on evictions and the weakness in cities. If shelter inflation spikes in the next 6 months, we can get to 3% core CPI.

As you can see from the chart below, the median consumer expectation for rental costs is a 9% increase in the next year which is up from 6.4% in January....

....MUCH MORE

And March 11:

US Stimulus & Impact On Inflation

Some investors who don’t follow government inflation reports closely were surprised by CPI staying below 2% in February, but they shouldn’t have been. Firstly, we aren’t headed for hyperinflation or even high inflation above 5%. Secondly, the spike in CPI will come from the stimulus, reopening, and base effects. The stimulus just passed and the base effects don’t start until March. We will have higher CPI next month. The reopening should boost inflation sometime starting this spring or summer.....

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....Massive US Stimulus

The social media posts that say America isn’t doing enough to help people during the pandemic compared to other countries are usually out of context. The full context is America will have done the most to boost the economy and has one of the best vaccination efforts. At the current pace, the US will be 75% vaccinated within 5 months. The U.S. is the 8th most vaccinated country according to Bloomberg. Israel is now fully vaccinated. This has pushed its 7 day average of cases per day down from 8,395 on January 14th to 3,144 on March 10th. 

....MUCH MORE

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