“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.