“Albert Edwards agrees with the Fed” isn’t something you hear very often, but it’s applicable when it comes to inflation. Or at least in the near-term.
In a Thursday note called “Don’t panic – just yet,” Edwards argued that the rather dramatic upturn in US inflation will likely prove transitory and that “investor worries will evaporate.”
True to form, Edwards added an ominous caveat: “This respite will prove to be brief.”
Core inflation in the US surged the most since 1992 in May, data out Thursday showed. The MoM print was also hotter than expected.
Edwards cited the Dallas Fed’s trimmed mean measure and another alternative gauge from the Cleveland Fed (figure below).
“By omitting outliers and focusing on the interior of the distribution of price changes, the median CPI and the 16 percent trimmed-mean CPI can provide a better signal of the underlying inflation trend than either the all-items CPI or the CPI excluding food and energy,” the Cleveland Fed explains, in their overview of the calculations.
For Edwards, “the key factor” when it comes to determining whether what market participants and consumers are seeing currently morphs into something more nefarious, is wage inflation. He noted widely-reported labor shortages in the US economy and juxtaposed that with the unemployment rate and the total employment rate which are still “showing a huge amount of slack.”
“The employment/working age population ratio shows there is more slack in the labor market than at the worst of the 2008 recession,” Edwards remarked. “Hence, it is really difficult to believe that wage inflation will take off.”
He also cited mix-adjusted measures of wages which he described as “quiescent” compared to AHE, which is wildly volatile right now for obvious reasons.
In addition to the notion that wage inflation is unlikely to accelerate sustainably in the US, Albert cited China’s efforts to rein in commodity prices and credit creation. Data out Thursday showed credit growth in China was steady in May. TSF was a slight downside miss (1.9 trillion yuan versus 2 trillion consensus) while new yuan loans were a marginal beat (1.5 trillion versus 1.4 trillion projected). Both prints were essentially unchanged from the previous month (figure below).
Recall that officials in Beijing are keen to keep credit growth in line with last year’s levels. China’s credit impulse turned negative last month.
“My own view is that current supply bottlenecks will ease, both in the goods and labor market as the global economy continues to re-open after the pandemic,” Edwards went on to say Thursday, adding that when considered in conjunction “with the impact of Chinese monetary tightening driving commodity prices lower, I expect inflation jitters to evaporate soon.”
Obviously, what happens over the longer haul is anyone’s guess. We are, after all, conducting a policy experiment.
Over the long haul? It’ll be down to politics.
My fear is that we seem to be oscillating between a Cyberpunk future and a neo-fascistic one. Neither is really healthy for me.
See also David Rosenberg – similar view as Edwards.
Also note how retail sales slows promotly whenever stimmies aren’t being paid. Imagine when pandemic UE benefits end in early September. Finally money velocity remains very low.
Yeah I’m not sure I agree with the rosy outlook on goods anyway. The chip shortage is creating a backlog across multiple industries that have become reliant on tech to improve their goods. Ford had (not sure it’s a has) parking lots full of F-150’s they couldn’t finish because they were out of chips. Acer came out last week and said they would only be able to meet 50% of demand for their laptops this year because of the shortage. I’m not sure how these mfrs are going to tool up factories quickly enough to fill that huge of a backlog.
The lumber association is saying 1.5 years to catch up to demand, that’s not soon and that is probably too late to stave off economic impacts from their lack of supply. As in by the time they finally get their mills tooled up to meet the current demand we’ll be in a recession.
“The connection between slack in the economy or the level of unemployment and inflation was very strong if you go back 50 years and it’s gotten weaker and weaker and weaker to the point where it’s a faint heartbeat”
-Jerome Powell to AOC explaining whether the Phillips curve is still relevant.
It still may be. The most dramatic price increases currently have nothing to do with US labor supply, but rather with materials, logistics, commodity financialization, asset price inflation, demand recovering faster than companies expected, etc. The inflationary impact of the $10/hr job dishwashing job now paying $13/hr is not zero, but it is a tiny factor.
So far the consequences of stimulus are less than the negatives of inaction. We would be looking at another Great Depression, part 2 if we hadn’t done anything.
Didn’t we want a little inflation just a couple of years ago?
In other words Edwards just reiterated what he has been saying for some time (like since march?) if I correctly remember from my readings here.