Inflation, bond and stock prices

News Releases

CPI for all items rose 0.3% in January; shelter up


In January, the Consumer Price Index for All Urban Consumers increased 0.3 percent, seasonally adjusted, and rose 3.1 percent over the last 12 months, not seasonally adjusted. The index for all items less food and energy increased 0.4 percent in January (SA); up 3.9 percent over the year (NSA). [end quote]

Inflation at 3.1% Reflects Stubborn Pricing Pressure

Economists had predicted that price increases would fall to 2.9%

By Justin Lahart, The Wall Street Journal, Updated Feb. 13, 2024

… Stock futures fell and bond yields rose after the release, which fueled worries that firmer-than-expected inflation would reduce the probability of the Federal Reserve lowering interest rates in the coming months. Interest-rate futures, which before Tuesday’s report implied the central bank would probably begin cutting rates by its May meeting, now suggest a June start date is more likely…

Although prices are no longer rising as quickly as they were a year ago — and in some cases are even falling — they are still well above where they were before the pandemic. Economists’ forecasts imply the Labor Department’s measure of overall consumer prices was up 19.3% this January from four years earlier, just before the pandemic hit. In contrast, prices were up 8.9% in the four years ended January 2020…

[end quote]

Investors (and speculators) have been overly optimistic that the Federal Reserve will cut the fed funds rate ever since the Fed started its current anti-inflation tightening campaign in March 2022. The Fed has been transparent about its intentions but the markets didn’t listen and snapped back in disappointment when it became clear that the cuts would be later and smaller than they hoped. The markets have cycled through this hope-disappointment 3 times so far.

The Control Panel on Sunday was sunny but we can expect both the stock and bond markets to take a hit from this inflation report.

Real GDP is growing strongly so there is no pressure for the Fed to cut the fed funds rate in the near future.

Inflation eats away at purchasing power. Consumer prices have cumulatively risen 30% since 2016. Inflation can be sticky.



A 3.3% inflation rate on average, which is high but not horrible.

That depends on the narrative you want to promote.



Did these economists also predict that the Red Sea would be closed to a lot of shipping?

It seems to me that this “stubborness” in the inflation numbers can be attributed a temporary supply issue caused by rerouted shipping than an overheated economy. I suspect it is a temporary hiccup in the decline of inflation as the world readjusts its supply schedules.


It strikes me the FED board had some insight inflation would not settle down as fast as wished for when they put off a rate cut almost two weeks ago now.

That should have been a heads-up.

3% is high inflation. It is 50% above the target. The law of small numbers matters.

At the same time by April this is really in the rearview mirror. Just my guess for now. Based on interest rates.

Wars such as in Ukraine and Mid East are mostly inflationary, gobbling up goods and services into nothingness and causing problems such as


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Yes they are a misallocation of resources.

We need to look down the road.

Bibi is looking at once and for all resolving this with Hamas. Israel has to. We can not all keep having this standoff or this war repeatedly. It is cruel to the Palestinians and impossible for Israel to avoid.

The US can not avoid Russia in Eastern Europe. The costs skyrocket if we do.

There can be larger costs to both proxy wars with Russia if we avoid them.

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Unless there is some kind of major depression, prices will always be higher than they were four years ago. The question is how much higher?



This inflation print is a huge gift to bond traders. It gives them one more chance to load up at lower prices for the coming rate cuts. And there is zero doubt that there will be rate cuts coming, not in March, but later in the year (as most people have been saying). It’s almost as if the traders planned it this way … First they bid up the fed fund futures to show 5-6 rate cuts in 2024 starting in March … Then they slowly ratchet it back ever so slightly, while waiting for a bad print (and there’s always at least one bad print in a monthly sequence of data) … then a few days/weeks of selloff happens … then they load up … and hold through the rate cut cycle at very nice profit.

I wonder if it’s worth buying 15-year Federal Home Loan bonds at 6.15%, collecting the fat 6.15% for a while, and then get called out of most of them as those mortgages get refinanced when the lower rates arrive? (Obviously only for money that “has to” be in fixed income anyway)


Not sure how much of a gift it is. You do not want a very long duration.

You are talking traders but yields might not fall that much.

Well, as I recall, you are one of the main people here who repeatedly assert that debt to GDP is going to go down starting this year due to the IRA and Infrastructure bills. As I illustrated a week or two ago, with simple arithmetic, that it only has a chance (a very small chance) of happening if interest rates drop by a lot. Have you recently changed your position about that?

You misread my repeated statements.

I have been saying longer term over the decades the debt to real GDP ratio will fall with the factory retooling waves we will go through.

I have often said the debt will rise. The ratio will fall.

When do you think the ratio will fall? In order for that to happen (arithmetically), GDP has to rise faster than debt. In order for GDP to rise faster than debt, the interest rate on the debt has to go way down AND deficit spending has to go way down. That’s because the two things increasing the debt are the refinancing of all the interest and the new financing of all the deficit spending.

I think the turning point is soon enough. The trend will last for at least three decades. It could begin early next year. US factories are producing more and our exports are increasing. At some point that matters a lot in creating the turning point.

You are missing the point. None of that is true. Taxes will not have to rise for tax receipts to rise. Profits can rise from here in the industrial sector. Exports will also expand our economy. The last dollar in is not only the most profitable but the most taxable. There are fewer expenses against it.

Like I have been saying it is not the nominal debt. It is the ratio. No matter what the debt will rise. US Treasuries underpin our monetary system and our financial system. We need more treasuries in the market over time.

No. It is indeed you that is not understanding the macroeconomic statement above. And what specifically do you think is not true?

Maybe we can start slow. Do you know what deficit spending is? Just roughly? Since you brought up tax receipts … deficit spending is total spending minus total tax receipts (yes, there are a few other small things, so we can call it total receipts instead if you please). So when you say “tax receipts to rise”, that is literally saying that deficit spending goes down (assuming spending doesn’t ratchet up faster than tax receipts go up, of course).

Next it a tiny bit more complicated because you need to use a bit of arithmetic (but don’t fret, it’s 5th grade arithmetic). The total debt right now is about $33T, at an average rate of 3%. Parts of it get refinanced every single week at higher rates than previously. Let’s say a blended rate of 5%, so the rate is going up by 2%. Now remember that ALL the interest is being refinanced, that means that the total debt rises by the maturing debt PLUS all the interest being paid on it. So all the new refinanced stuff, maybe a third or the total this year. 5% of 1/3 of $33T is $550B, and 3% of the remaining 2/3 of $33T is $660B. That means that the debt goes up about $1210B from the refinancing of the interest. Some of it is intergovernmental (like treasury to social security and others), but it still counts as debt. Now on the spending side, we seem to be spending about $1T+ extra each year, and that also adds to the debt because it also needs to be financed.

Meanwhile GDP is about $28T. So right now, very roughly, debt to GDP is 33T/28T or about 117%. Still with me? Good!

Now, next year, the debt will be $33T + the aforementioned refinanced interest of $1.2T plus the extra spending of $1T, which comes to $35.2T. So what will be the debt to GDP next year? Obviously it depends on how fast GDP grows. So let’s make a simple table.

GDP growth GDP Debt to GDP
4% 29.1T 121%
6% 29.7T 119%
8% 30.2T 117%
10% 30.8T 114%

So, how much does GDP have to grow so that the debt to GDP goes down? Probably about 9% or thereabouts. Is anyone out there predicting 9% GDP growth? @Leap1, are you predicting 9% GDP growth this year (or next year for that matter)?

PLEASE NOTE: These are all rough numbers and not exact, but they are here to show the gist of how debt to GDP works.


You are being dense.

We are reindustrializing. We are seeking economies of scale. Tax receipts will increase dramatically.

I am predicting over one-third of years going forward will have over 5% real GDP growth(a couple of those years will have just under 5% real growth). This is in stark contrast to the supply-side period. Remember if the inflation rate is 2% but real GDP growth is over 5% that two percent also is used to outpace the prior debt ratio. The outpacing even by minor inflation is compounded as is the real GDP growth.

Have you ever known the US government budgets to be cut for a decade? What are you even discussing? Yet from 1950 to 1980 the ratio went substantially down after WW II.

Ok, that is usually true with a rising GDP. How much do you think tax receipts will increase? $500B, $1T? $2T? And when?

Also think hard about where exactly those tax payments come from.

That’s very nice, and would be very welcome. But look at the table above, 5% real GDP growth would be roughly 7.6% nominal, and still doesn’t outpace debt growth. You’re going to need 6% real GDP growth just to barely keep up with the growth of the debt. And that comes with a big assumption that spending slows to a point of only being in deficit by $1T (that was the assumption for the table, in reality, the deficit has been substantially higher than that in recent years, 2023 was $1.7T, 2024 is estimated to be similar).

This depends on two things, the interest rate on the debt (which normally is about inflation + 2%) and the amount of new debt being added. If GDP can outpace those two, then the ratio will go down. As illustrated above in the previous long comment.

So two items:

  1. Interest on the debt. This whole part of the conversation started when you said “You are talking traders but yields might not fall that much” implying that interest rates will not fall much. What do you think that rate will be?
  2. New debt. This all depends on total spending minus total [tax] receipts. What do you think tax receipts will be?

Once you can answer those two questions, not with generalities (like “Tax receipts will increase dramatically”), but with numbers, you can then calculate exactly how much GDP will, or will not, outpace the growth of the debt.

I think this is a fundamental misunderstanding by you. Nobody said anything about cutting government budgets. That almost never happens, at least for the last 100 years or so, see chart below. It ebbs and flows, especially during big wars, but slowly goes up as time passes.



Forecasts are not met on time or met early.

The taxes come from profits. Exporting grows our economy, profits, and taxes.

I will give you this. More people earning more means less welfare spending on a per capita basis.

Eventually we go to socialized medicine. That means a tax but it means a huge savings for everyone. It also means our factories and labor base are more efficient and productive.

Productivity is rising.

The last dollar in is the most taxable. It has the least expenses deducted.

Have you heard of automatic stabilizers in econ? It means government programs that kick in when times are bad. Then slow the spending when times are better. We are going into better times. Government spending in relative terms will decline for welfare and other programs.

The economies of scale may mean other costs to the government may decline in relative terms.

The ability to pay taxes will increase.

Currently half of Americans do not pay taxes. That used to be true only a couple of years ago.

Younger people are earning more and paying taxes in larger numbers and in higher brackets. The fruits of this are just beginning.

All of this adds up to the tax base growing without raising the tax bracket rates. This is good for most of the rest of 10 years.

One minor clarification.

Roughly 20% of our debt is owned by the Fed - effectively the govt has borrowed from itself (QE during Covid) - and as that debt matures and roles off the books, the total outstanding debt will decrease (all else being equal).


I’d like to explore this a bit. Let’s look at the actual numbers. The Fed owns a lot of debt, about $7.6T of it. Most of it is treasuries and some of it is mortgages (mortgage-backed bonds). Let’s drill down and look at 2 cases:
Case 1: PYFSN Pension Fund owns a $100M 5-year treasury note that matures on 7/15/24. On 7/15/24, the treasury will make the last interest payment plus return the $100M to them (presumably they will use it to pay pension benefits they owe). Where does the treasury get that $100M from? They refinance it by issuing new bills/notes/bonds! So they create a new debt instrument of a little over $100M and sell it at auction. Over the 5 years, debt of $100M disappeared, and new debt of about $105M appeared.

Case 2: The Fed owns a $100M 5-year treasury note that matures on 7/15/24. On 7/15/24, the treasury will make the last interest payment plus return the $100M to them. At this point, the fed “vaporizes” that $100M (the same way they created it out of thin air a few years ago but in reverse*). Where does the treasury get that $100M from? They refinance it by issuing new bills/notes/bonds! So they create a new debt instrument of a little over $100M and sell it at auction. Over the 5 years, debt of $100M disappeared, and new debt of about $105M appeared.

Can you explain how “total outstanding debt” will decrease in this case? All else being equal as illustrated above.

* Years ago, sometimes the fed had excess interest remaining after vaporizing, so they would send a check to the treasury. But those days are long gone with higher interest rates.

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