Earlier today, I wrote a post, “How long will inflation last?”
https://discussion.fool.com/how-long-will-inflation-last-3509003…
Unfortunately, this thread was derailed and ran into the weeds.
I really would like to hear the opinon of METARs on this specfic question:
How long will elevated inflation last?
What do you think its course will be?
How will the Macro economy respond?
How will the Fed respond?
Wendy
Well Wendy I’ll play along. I originally thought inflation would last 18 to 24 months before subsiding to 2% or so. My mind has been changed as the facts have changed. Ukraine has changed things. My gut reaction is a 30 to 40% step change in prices over three to four years,with inflation slowing down by 2026 to two to three percent.
The FED has started too slowly,and will probably overdo it with raises. A recession will ensue,and the cycle will continue.
The long term backdrop,20 to 50 years, is deflationary due to the varied and highly productive use of artificial intelligence and robotics and software,oh my.
Jk
My WAG, often wrong, seldom in doubt, is that inflation will surge, be tamped down by 50 basis point hikes, followed by inflationary ‘wildfires’ over the next few years - not weeks or months.
I am controlling my ‘personal inflation’ with a paid-off home that is smaller than the one we owned when we retired three years ago, close proximity to grocery stores and our daughters farm with eggs, produce and fruit bushes and trees, and even a year or two supply of tinned fish and oats.
I still hold a large cash position with the intention of adding to my boring stock holdings whenever the markets have another ‘taper tantrum’ following a 50 bp rate hike.
Stocks, caah, lbym. For me, same process whether we have inflation, stagflation, recession, new pandemic or whatever.
Shaking the Magic 8 Ball.
The answer is appearing.
“Reply hazy, try again.”
I think the Magic 8 Ball is confused about the cause of inflation.
Is this inflation a local to the US situation caused by the classic supply and demand scenario of too much money chasing too few goods?
Or is this inflation global caused by supply chain issues precipitated by a worldwide and an ongoing pandemic which has impacted labor as well as materials, and is now being amplified by a war creating shortages and dislocations in commodities?
If you can answer those two questions, you might get a different answer from the Magic 8 Ball.
How long will elevated inflation last?
What do you think its course will be?
How will the Macro economy respond?
How will the Fed respond?
Wendy
The FED is continuing to respond. The taper is done. Interest rates will rise all year long. Bond buy backs will soak up liquidity tightening the money supply and denying the wealth effect. The consumer outlook with cool. The USD will appreciate. Commodities will be deflationary from here. We are entering disinflation as a macro event. Inflation MIGHT BE 2% before June 2023. We MIGHT HAVE a recession that is mild this year. When? How bad? etc.....no one knows for sure.I think inflation will last until we have stronger antitrust enforcement.
The reason the stock market is mostly holding steady is because profits continue to grow. Why would a company want to solve its “global supply problems” when scarcity and parts shortages are driving the prices for goods sold higher? Executive Compensation has been doing very well.
For those who worry about “the price of bacon”, we’re seeing record Executive Compensation in the four companies that control the meat packing industry (i.e., Tyson, Cargill, JBS, and National Beef) and the delta between what a farmer gets for a hog and what the meat sells for in a shrink-wrapped package has never been greater.
4 Major Meat Companies Accused of Price Fixing
https://www.livekindly.co/meat-industry-price-fixing/
intercst
I think inflation will last until we have stronger antitrust enforcement.
Yep but only in small part. It would chop down some of the disposable income that is causing the inflation demand. Raising the taxes on the top two brackets would do far more and not just be targeted years from now after the courts get done with antitrust. Corporations have the rights to appeal etc…
How long will elevated inflation last?
It does depend on the Fed … the Fed making projections to decide policy when their policy will decide projections always amuses me … but this board has been pretty useful in pointing out the increasing power of labor - which is inflationary - coupled with companies’ comfort with profiteering from supply chain problems. But is it transitory? Well the Biden post COVID handout has just about been completed I believe, and this one-off effect was behind the original transitory theory. But remember to a great extent that money will be recycled through the economy, again and again, some-one’s expense is another’s income … though attenuated by taxes and Job Creators’ skim.
What do you think its course will be?
Stay at 8% until the Fed reduces the extra demand from high asset prices so as to equilibrate supply and demand. Plus when any excess inventory shows up like in late 2000.
How will the Macro economy respond?
Of necessity a demand reducing policy (ie the Fed) will hurt. Basic industries should do OK; luxury not so well as capping asset prices crimps the rich. But I would expect a bit of an implosion eventually - these things always seem to gain momentum and overshoot.
How will the Fed respond?
The Fed looks like hiking rates 0.5% a meeting and deflating their balance sheet by USD 95bn a month until they see some results. My guess is that as usual we get a real market swoon in October and then yet another Fed pivot. So rates get to what 2.25%? Then there’s a signal that that’s it.
The historical event closest to this in my memory is the 1973 Yom Kippur war in the middle east, which propelled the price of oil from USD 3/barrel to USD 12 per barrel as the Arabs cut production in protest at US’s support for Israel. (Supposedly … https://en.wikipedia.org/wiki/1973_oil_crisis#:~:text=By%20t…)
The central banks of UK and US responded as follows:
Early 1974, they hiked rates to contain overall inflation from the oil price rise. The stockmarket HALVED in price that year. (So did gold!!) This caused a severe recession. Central banks lost their backbone.
So at the beginning of 1975 interest rates were cut and a tsunami of money unleashed. The stockmarket DOUBLED that year. (So did gold!!). But then we got the inflationary 1970s until Volcker.
(This time round gold seems to want to go up … ???)
Anyway with excess demand, either interest rates go up and the Fed balance sheet shrinks (bad for stocks) or we get a recession (bad for stocks) or both (very bad for stocks).
(This time round gold seems to want to go up … ???)
gold and other resource will face a further appreciation of the USD.
How long will elevated inflation last? Don’t know.
What do you think its course will be? No opinion.
How will the Macro economy respond? Don’t know.
How will the Fed respond? Badly.
The Captain
Churchill said that Americans always do the right thing after they have tried everything else. Maybe that’s how the Fed will respond.
My rent has been falling because the $ is growing vs. the € – 1.1% March 1 to April 1
…as long as the central banks keep printing currency out of thin air - until the whole lot collapses and we start again. At least that is what history keeps telling me:
This was a fiat currency test case study and one of the earliest stories of fiscal mismanagement. Unbacked paper money and its early fate would foreshadow many of the hazards that awaited the rest of the world for centuries to come.
The list of subsequent collapsed currencies reads like a world history of war, strife, hyperinflation, and unchecked debt: the German Papiermark (1923), the Greek drachma (1943), the Hungarian pengo (1945), the Chinese CGU notes (1947), the Chilean peso (1975), the Argentinian pesos (1985), the Peruvian intis (1989), the Nicaraguan cordobas (1990), the Soviet rubles (1992), the Brazilian reais (1993), the Latvia dinar (1993), the Ukrainian karbovantsiv (1995), the Turkish lira (1997), the Romanian lei (2001), the Venezuelan bolivares (2002), etc.
https://www.fxempire.com/news/article/the-global-collapse-of…
From the ancient Chinese to the USA today - same story:
On August 15, 1971, President Nixon decoupled the U.S. dollar from gold in connection with international payments. That action made the U.S. dollar a pure “fiat” currency, with no backing other than the promise of the Federal Reserve to replace one dollar with another dollar. Today, as the Fed continues to devalue the currency and serious investors turn to gold reserves, we are beginning to see the collapse of the fiat system.
https://nationalinterest.org/commentary/the-collapse-the-fia…
I am controlling my ‘personal inflation’ with a paid-off home …
I appreciate your WAG, but confused as to why a paid-off home controls inflation more than a 30 year FRM? My 2% FR mortgage with 28 years left on it makes for a great inflation hedge, with it being probable that we can make more on the cash we could have used to pay off the mortgage rather than refinance it, even if that cash resides in a money market account.
We too have a large cash position, and will throw money at the stock market as we find opportunities. We are wrapping up the sale of a property with one of those treasured inflation hedges…a low rate 30 year FRM, and going heavier into cash, which is an inflation risk. I have concerns about where property taxes are heading in our area, though that should be covered by the escalating rents, and about property insurance due to increasing weather hazards, so it was time to lower our exposure to real estate, which still represents about 15% of our net worth after this sale. Mostly just looking forward to having one less property to worry about and playing more, but those are the economic trade offs.
We may use some of this cash to help Youngest buy a home, so that he can minimize the impact of escalating rents, which have become absolutely insane where he lives. It’s only crazy here. We will wait for a good entry point to do so, however.
IP
Unfortunately, this thread was derailed and ran into the weeds.
Rats, I responded to that thread.
The short version:
“JCs” will encourage the media to continue the “shortage” hype, because it’s profitable for them.
The slightest hint of recession will see recent wage increases taken away. Maybe the media can be persuaded to start hyping a “recession” narrative to intimidate employees to stay on, in spite of their pay and benefits being cut.
So, my outlook is continued rising prices, coupled with stagnant or falling wages.
Steve
Well the Biden post COVID handout has just about been completed I believe, and this one-off effect was behind the original transitory theory. But remember to a great extent that money will be recycled through the economy, again and again, some-one’s expense is another’s income … though attenuated by taxes and Job Creators’ skim.
That has already taken a chunk out of the excess cash in the economy.
https://www.washingtonpost.com/business/2022/02/23/savings-b…
Americans are sitting on $2.6 trillion in extra savings, a separate Post analysis shows, and signs abound that they are opening up their wallets on long-delayed spending on travel, dining and other experiences that have been on hold since lockdowns swept the country almost two years ago.
Balances are already significantly down from their peak and are forecasted to fall further:
Bank Deposits Could Drop for First Time Since World War II
https://www.wsj.com/articles/bank-deposits-could-drop-for-fi…
That would suggest to me that the (excess) recycling might be short lived. Things like rent inflation have already eating away large sections of the bottom quartile of excess savings.
I am controlling my ‘personal inflation’ with a paid-off home that is smaller than the one we owned when we retired three years ago, close proximity to grocery stores and our daughters farm with eggs, produce and fruit bushes and trees, and even a year or two supply of tinned fish and oats.
I’m controlling my personal inflation rate by holding two sub 4% mortgages.
For those who worry about “the price of bacon”, we’re seeing record Executive Compensation in the four companies that control the meat packing industry (i.e., Tyson, Cargill, JBS, and National Beef) and the delta between what a farmer gets for a hog and what the meat sells for in a shrink-wrapped package has never been greater.
What about Smithfield? It’s the largest pork producer in the US.
PSU
IP writes,
I appreciate your WAG, but confused as to why a paid-off home controls inflation more than a 30 year FRM? My 2% FR mortgage with 28 years left on it makes for a great inflation hedge, with it being probable that we can make more on the cash we could have used to pay off the mortgage rather than refinance it, even if that cash resides in a money market account.
Nobel Prize winner Robert Shiller has some interesting thoughts on residential real estate.
From Barron’s
Once upon a time, a young family bought a modest three-bedroom Cape, the worst house in the best location in a prosperous suburb. Many years later, during the housing frenzy of 15 years ago and after the kids had grown and moved away, they received an unsolicited cash bid—for 20 times what they paid. That became their nest egg, which provided a comfortable retirement.
It’s all true, but it might as well be a fairy tale. Such an escalation of home prices is unlikely to repeat, especially from here after their frantic climb. Over the long term, history shows the stock market has returned about twice as much as residential real estate. And it’s done so with far fewer headaches than the attendant expenses of upkeep, which have come as a shock to many recent home buyers.
What have they been thinking? Homebuyer behavior in hot and cold markets: A ten-year retrospect
https://www.brookings.edu/bpea-articles/what-have-they-been-…
But—in contrast with the early 2000s—buyers’ expectations of large future price gains do not appear to be driving the market, the paper suggests. During the 2000s bubble, price-gain expectations over the long term (10 years) ran well above short-term expectations (1 year). However, starting in 2013, short-term and long-term expectations converged and, in fact, in 2021, many buyers expected price gains to moderate in the years ahead.
When I bought my current home 10 years ago at the tail end Great Real Estate Bust in 2012 I paid cash for it. I happened to have sufficient funds sitting in a money market fund at 2% interest to cover the purchase, and it didn’t make much sense to take out a 3% mortgage if I had the cash sitting there.
And why did I have sufficient funds sitting in a money market fund to buy a home? Because I had slavishly used a “rent vs. buy” calculation to inform my real estate decisions over the previous three decades. That kept the money most people have tied up in a home invested at a much higher return in the stock market.
intercst
The FED will get inflation under 3% by the end of 2023. The much higher short-term rates will cause a mild recession by reducing demand.
Trimmed Mean PCE Inflation Rate
Observation: Feb 2022: 4.01
Updated: Mar 31, 2022
https://fred.stlouisfed.org/series/PCETRIM1M158SFRBDAL
I was on Team Transitory until things changed. What changed specifically? 1. War in Ukraine. 2. Supply chain snafu not being fixed. 3. Surging demand. 4. Worker shortages. 5. And last on the list, helicopter money.
Oil prices percolate into everything, from production of goods to farming, to transport of finished goods to market, to fertilizers and pesticides to plastics and lots more. This was an unknown unknown just two months ago.
Worse, those late goods change the production cycles throughout a major part of the economy. The best known is “chips” for cars, which leads to fewer new cars at the high end, and fast increasing prices for good used cars. It’s hardly the only one. Appliance assemblers, generic drugs, users of oxygen, raw materials, food, retail; there is hardly a sector not affected.
Why hasn’t it been fixed? The Texas deep freeze and Hurricane Ida screwed up domestic petrochemicals, the EverGiven Suez Canal fiasco shut that artery down for a week while ships stacked up; Covid hit India, Indonesia, China, Japan, and of course US ports at different times wreaking havoc on schedules, return trips, and more. It’s still far from operating smoothly.
Based on my unscientific survey of how few people are wearing masks these days, folks have decided Covid is over, even if it’s not. It’s Spring. Everybody’s had pent up plans - and anxieties - for two years, and the dam has burst. Flashing demand coupled with restricted supply has increased prices. More.
The pandemic taught a lot of families that the second income wasn’t all that important, especially without cheap child care. Others retired, and some just said “the hell with it.” Wages have bounded upwards often from $10 to $15 and even more, and still there aren’t enough workers. More money in the paycheck inevitably means higher prices at the cash register, absent productivity increases, which have n’t been happening because of lockdowns, supply chain, etc.
And last, helicopter money. While the amount was a pittance in the scheme of things, it did keep money flowing that would have been otherwise constricted, so “no recession” adds up to another demand input.
Speaking of a pittance, the “Build Back Better” bill is dwarfed by China’s just announced infrastructure bill, coming in at $2.3B, nearly twice the US idea. In China that will buy more high speed rail (*they already have more than the rest of the world combined), more ports, more science and technology in the EV and battery sector, and lots and lots of new factories.
Without a sudden, dramatic, I dare say reckless increase in rates from the Fed, I now expect the inflation to continue for several years, and chances of a soft-landing looks increasingly remote. This will have dramatic consequences politically in 2022 and possibly 2024, and it will change many things financial: from speculative investing as is going on now to home ownership to, well, everything.
I would go long ultra luxury (the rich won’t be affected) and short middle class (who always take it in the hindquarters), I would go long stable houses like Berkshire and short Saul’s and similar.
Goofy posts,
I would go long ultra luxury (the rich won’t be affected) and short middle class (who always take it in the hindquarters), I would go long stable houses like Berkshire and short Saul’s and similar.
I agree on the Berkshire. Worked well the last time everything “hit the fan”.
intercst