Will inflation abate quickly?

This chart shows the average inflation of 50 countries since 1970. The dotted lines (rapidly falling inflation predicted in today’s U.S.) are rather laughable when compared with the historical experience.

I understand that the X-axis in this chart displays months. The median shows that inflation over 8% takes years to subside.

The historic median shows that, once inflation reaches 8%, it takes years to abate. This makes the dotted line showing the predicted drop of inflation in the U.S. way outside the norm of historical inflation experience. The prediction that inflation in the U.S. will drop rapidly could be wildly over-optimistic if we follow the other countries’ experience.

The bond market is predicting that inflation over the next 5 years will be about 2.6% and between year 6 and 10 will be 2.35%. If inflation actually remains higher for longer the return from TIPS will be higher than the return from Treasuries and cash (savings accounts).

The stock market would also be negatively affected if the economy stagnated at the same time.

Wendy

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To play devil’s advocate here for a minute, I’d wonder what countries and what inflation events are included in this data set. Apparently, it is looking at inflation events since 1970. That would include only one such event in the US - assuming you consider the early 1970s through the early 1980s to be a single event. And if you don’t, it’s two events.

So who IS included in this data? I suppose I could google that, but I’m feeling exceptionally lazy at the moment. And even answering that question isn’t the end of the questions, just the beginning. Once we know what countries are included, we also need to ask how comparable they are to the US economy. For example, I wouldn’t consider Venezuela to be at all comparable. There is little evidence that their economy is run for the benefit of anyone other than the dictator of the day. I’m sure there are other examples, and I am just as sure that comparability is on a range of more to less comparable rather than some black-and-white kind of thing.

Moving past that, it’s also interesting to note that the current US and Eurozone cycle has been in the bottom quartile of the data set up until about a year ago. The median event simmers along at a 5%-ish inflation for several years before popping up to the 8% threshold for this study. But this event has been a sharper spike up in inflation after having been at acceptably low levels for most of the 5 years preceding the 8% threshold. So we’re already outside of the curve for these inflation events. So should we expect to return to something closer to the median event after we’ve crossed 8% inflation? Or is it likely that our experience after crossing the 8% threshold will also be in the tails of the curve? Again, a question I know how to ask, but don’t know how to answer.

Still, it’s all interesting food for thought.

–Peter

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Wendy:

One has to be very careful when comparing inflation across countries that don’t use the same currency. Case in point Venezuela.

The Venezuelan bolivar was remarkably stable until 1983

Viernes Negro in Venezuela refers to Friday, 18 February 1983, when the Venezuelan bolívar was devalued substantially against the US dollar. This event caused a significant destabilization of the currency and the Venezuelan economy.
Viernes Negro - Wikipedia

Starting that day Venezuela experienced 30-35% inflation during 25 to 30 years when it accelerated into hyperinflation. That was the view from within. Viernes Negro bankrupted my business and the following year I would up in the hospital with coronary problems. I was lucky in that I did not suffer an infarction. When my partners came to visit I told them, “These SOBs are not gong to kill me!” That’s when I decided never again to invest in Venezuela and sent my money offshore. From then on my finances were in US dollars.

Why did I tell you this story? Because as Venezuela experienced inflation and hyperinflation my cost of living dropped. Around 2015 I only had to exchange $50 to $100 a month to cover my expenses. For reference, back in the late 1950s Caracas was one of the most expensive cities in the world. When I visited London in 1967 diner at the Savoy was cheaper than in a five star hotel in Caracas.

The view from outside the economy is not inflation but devaluation, just like in Weimar Deutschland.

The Captain

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The biggest question regarding this comparison is - did those other countries have an organization similar to our fed that was willing, and independent enough, to crush the economy short term to speed up the decline in the inflation? So far we’ve (USA) had Volcker and maybe Powell willing to do so. It took Volcker about 4 years to go from over 8 to under 4, so if we can repeat that feat, perhaps buying the 5-year TIPS is the right move for fixed income investing right now? 5-year TIPS will give you approximately CPI+1.7%, while a “5-year” I-bond will give you approximately CPI+0.4%.

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Wendy et al,

Name one policy that will bring down global inflation in your opinions?

Negotiated drug prices.

Puncturing the globe to let the air out?

The Captain

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Captain short of attacking anyone here…

Must do either way.

But the exporting of deflation by China must be our work now.

4+ billion people already have negotiated drug prices. Are you claiming that another couple of hundred million people with negotiated drug prices will lower global inflation?

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If the couple hundred million people are much heavier users, and if their ability I to price restrain has been so compromised as to be meaningless, then yes, it could have a material effect. Would it single-handedly solve the problem? No. Would it make a difference? Undoubtedly, yes.

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I used to invest in healthcare until I realized how politicized it is. You can make a lot of money as an insider but as a shareholder you get whiplashed by politics such as ‘negotiated drug prices.’ Drug companies know the territory, in some places they sell close to cost, in others they gouge. It’s a power play market, in no way a free market.

The Captain

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That’s also true of oil and many commodities. Decisions by a few people (or governments) can have a major impact on value. That contributes not only to volatility but also stairstep changes in value.

One of the risks of investing. Some more stable than others.

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THIS…and how.

Outside of the US, I suspect it pans out along the lines of those countries that have a viable pharmaceutical industry…the UK, Sweden, Germany etc…tend to be a little more permissive with their price negotiations, not wishing to scupper profitability too much. The others, however, can afford to be more intransigent and hold out for “close to cost”.

By coincidence, just got my o-FISH-awl notification of my premium and out of pocket costs for my medications that’re covered by my part D plan so I’ve got price gouging on my mind.

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Be sure to check prices at the non-insurance discounters, like GoodRx.com, Blinkhealth.com, Amazon’s new drug service and Mark Cuban’s costplusdrugs.com. Also globaldrugsdirect.com.

The savings can be substantial. We also have Medicare Part D but an inexpensive policy. I often find that the non-insurance discounters are cheaper.
Wendy

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Yes, I’ve been doing that and was contemplating rolling with a cheaper part D plan for next year. That was back when I was in total ignorance of my ASCVD. Likewise my supplemental.

Right now…and pending definitive evidence that my current treatment regimen (both medical and my chosen lifestyle interventions) is doing what it’s supposed to or not, as the case may be…I feel a bit more confident to carry on as is.

As much as it sticks in my craw that both dh and I have been struck by potentially serious and expensive to manage issues without our collusion (not unlike yourself, right?) at least we can afford to not fret too much about coming up with the $$$$bucks.

P.S. … currently nattering back and forth on FB messenger with my two former roomies from dental school and besties for the past half century (quite literally) who are both still back in England. They have their own medical issues (and again, not self inflicted) and getting a bit of commiseration for me not only having to fret about my health, but also wonder if I’m getting the best deal financially

I’m ignorant of ASCVD so I took a test that estimates 10 year ASCVD risk.
https://tools.acc.org/ascvd-risk-estimator-plus/#!/calculate/estimate/

My current ASCVD risk is 8.8% where optimal is 6.2%. So I will keep calm and carry on, including doing HIIT and Zumba 6 days a week. I’m at higher risk of dying from cancer. I would prefer to die of a heart attack but probably not gonna happen.

Wendy

Did the discussion include the 20% VAT they’ve paid on nearly everything they’ve purchased over the last half century? Maybe all that money is what covered their NHS services (including pharmaceuticals)?

In order to properly compare the various financial deals, all relevant cashflows have to be examined. Of course, I am not asserting that the “deal” in the USA is better, it clearly is NOT better, as we pay way more than anyone else for medical care. But I am asserting that the “deal” there (in the UK) isn’t necessarily as good as it might appear by just looking at one aspect of it.

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Gulp. Taking the same test at 70 (which has been applied by my PCPs in previous years) mine is 7%. If you take it again and experiment with age down to about 50, you’ll see how the 10 year risk drops a fair bit. This is the problem with this calculator. It’s an average across large demographics…and the larger the number within the demographic, the greater the chance of those who aren’t average (which, depending upon circumstances, is pretty much everyone) are going to be poorly served just by applying this somewhat clunky tool. Especially if, as in my case, triglycerides are low (not included in this calculator …but an important risk factor), HDL is high and hs-CRP is routinely less than 1. Not to mention Lp (a) particle and Apo-b lipoprotein (which doesn’t seem to be routinely measured). Add to that “doing all the right things” sufficient to bamboozle the unwary.

It’s quite conceivable that, say, at age 30 my 10 year risk could’ve been close to zero. On the face of it, apparently no problem …but, in my case and that of others with not-so-obvious variants of familial hypercholesterolemia the opportunity to practise meaningful primary prevention is lost.

Truth be told, if I were to drop dead of a heart attack on the eve of my 80th birthday, that wouldn’t be so bad (I don’t like to think about dying that young…but for sure, there are worse ways to go) However, ASCVD isn’t synonymous with “heart disease” and, in my mother’s case, was.more peripheral in nature. Starting at age 60 she had quite severe claudication limiting her ability to walk far, renal artery stenosis resulting in super high, difficult to manage blood pressure and a stroke. That sort of morbidity over an extended period is my primary concern and something I intend to avoid as far as humanly possible. I feel like a bit of a chump putting it all down to just her smoking but that’s pretty much the only thing I did ignore.

Pfft…of course not, since all 3 of us are well aware of the source of NHS funding even though for the 15+ years I was a contributor VAT wasn’t running at 20%. Not to forget the higher direct taxes along with National Insurance contributions too.

No one with any gumption thinks the NHS is free.

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