Wednesday, February 15, 2023

Mohamed El-Erian: "There Is More Inflation Complexity Ahead"

From Project Syndicate, February 9 [i.e. before yesterday's CPI print]:

As US inflation gradually eases, the claim that today’s inflationary pressures are the result of a temporary supply shock has re-emerged. While this thesis may be comforting, it could also encourage dangerous complacency, making an already serious problem much harder to solve.

CAMBRIDGE – Nearly two years into the current bout of inflation, the concept of “transitory inflation” is making a comeback as the COVID-related supply shocks dissipate. This comes at a time when it is critically important to keep an open mind about the trajectory of inflation, including by avoiding an over-simplified transitory narrative that risks obfuscating the real issues facing the US economy. 

“Transitory” is a comforting notion suggesting a short-lived, reversible phenomenon. Critically, the concept assumes away the need to adjust behaviors. After all, if an inflation scare is only temporary, the best way to deal with it is simply to wait it out (or, to use a policy and market term, “look through it”). That is why this narrative is particularly dangerous. By encouraging complacency and inertia, it could exacerbate an already serious problem and make it harder to solve.

 The US Federal Reserve’s initial response to rising inflation is a case in point. In 2021, the world’s most powerful and influential central bank rushed to characterize higher inflation as transitory. It doubled down on this approach even after the data went against it, refusing to pivot for too long. 

The Fed’s repeated mischaracterization delayed crucial policy responses at a time when the persistence of inflation was starting to influence corporate price-setting and workers’ wage demands. As a result, the Fed not only lost credibility but also inflicted unnecessary pain on millions of American households, particularly the most vulnerable segments of the population. 

While a few economists have never given up on the transitory inflation thesis, the vast majority already realized last year that it was a regrettable analytical and policy error. That makes the current re-emergence of this narrative even more perplexing.

 A recent article in Politico noted that “There is also at least some reason to believe that [the economists and policymakers] who assured [Americans] that inflation would be transitory, including Fed Chair Jerome Powell, might have been kind-of-sort-of right, though the transitory period was just longer and uglier than expected.”  

This is unfortunate. Not only does it force a time dimension on an inherently behavioral concept, but it also ignores the fact that the Fed’s initially fumbled response forced it into one of the most aggressive, front-loaded series of interest-rate hikes ever, including four consecutive 75-basis-point increases. Moreover, while US inflation has been slowing, it is dangerous to suggest that the problem is behind us....

....MUCH MORE

We are seeing a lot of "CPI is backward-looking" chatter. Newsflash - It always has been.

Additionally, the chorus is shouting " CPI Shelter costs aren't reflecting current leases".

Yeah, about that. None, I mean absolutely none of the people saying that now were saying that during the fall of 2021. The only person I recall pointing this out in real time was David Goldman now at the Asia Times, formerly:

  • Global head of credit strategy at Credit Suisse
  • Global Head of Fixed Income Research for Bank of America
  • Global Head of Fixed Income Research at Cantor Fitzgerald

In addition to apparently not being able to hold onto a job I think one of his requirements for moving on was a "Global Head" title. (JK, young Master. G.)

If interested see: January 2022 "David Goldman Looks At The Housing Component Of Official Inflation Statistics" and

Previous visits with Mr. Goldman on this topic:
October 2021
"Inflation depresses – later will clobber – stocks"
September 2021
Prices: "Rent blowout mysteriously missing from US report"
August 2021
"Home rents set to turbocharge US inflation"

Its almost as though he's trying to tell us something.

And from Charlie Bilello, a picture is worth a thousand [of my] words

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