Inflation Left-Tail Is Dying. But Hold The Champagne

Inflation Left-Tail Is Dying. But Hold The Champagne

The inflation left-tail risk may be "dying out." That was one message from Nomura's Charlie McElligott who, on Tuesday, suggested some market participants are becoming at least incrementally more comfortable with a version of the "soft landing" narrative, even if "soft" ends up being a relative term. While it's eminently possible (indeed, it's likely) that the US will be compelled to grapple with irritatingly persistent 4%, or even 5%, inflation for much longer than investors expect, the risk
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9 thoughts on “Inflation Left-Tail Is Dying. But Hold The Champagne

  1. H-Man, so if inflation keeps hanging around, what does it do to the curve inversion? Does the long end push higher to return to a normal slope or does the front end capitulate while the long end holds? Something has to give assuming the curve has to revert to the norm.

      1. but why would inflation stick to 4-5%, though? Oil/energy is coming down, home/rent equivalent etc. may stay a bit elevated but come down fast in a few months, US is relatively well protected against food inflation provoked by Russia invasion of Ukraine…

        and I still struggle to see a wage price spiral, esp. if job openings get slashed and with hours worked mysteriously weak…

        1. Look at PPI. Costs are still rising and wages that rose in COVID will stay rose [sic]. Look at all the things that go into a lowly box of Raisin Bran: grain (up), sugar, raisins, plastic for bags, cardboard, and fuel (some say 50% of the total cost), among others. Fuel and truckers are needed to get the raw materials to the place where they are processed, then from processing to the cereal factory, from the factory to the distributor, from the distributor to the store or regional warehouse. This chain exists for most of the inputs. Even small rises in these inputs and their chains add up. When costs rise, producers have only two real choices, to raise prices or cut costs. When they lose bargaining power with suppliers (grain markets, fuel markets, etc.) they must try to raise prices to cover the rising costs. When consumers no longer accept higher prices then something has to give. Our last best solution was to go offshore for much of our production. Last year alone we imported $2.8 tril of stuff, in spite of any hype to the contrary. Our standard of living will decline sharply if we don’t maintain our imports. When the PPI starts to fall then I’ll believe in “peak inflation.”

          1. Absolutely sure. We’ve been moving our production to lower and lower cost places for a hundred years. From New England to the Carolinas, then to Puerto Rico, then to Mexico, China, Thailand, Vietnam, etc. Look at the labels in your clothes and shoes. Deere just move a bunch of stuff to Mexico. Whole industries are gone so we can afford the stuff we want.

        2. The wage-price spiral is already here. I’m not sure what evidence anyone needs for that other than record-high prints on the most important measures of wage and compensation growth. I mean, where do you reckon that comes from? Employers suddenly becoming more generous? There’s an acute shortage or labor, consumer prices are sky-high and the combination of the two is driving wage costs inexorably higher. Those costs are being passed along to consumers in the form of higher prices, and those consumers then need even higher wages to afford the same goods. That’s not a hypothetical. It’s happening right now, as we speak/type. The fact that real wage growth is negative makes the problem worse, in my opinion, as it only creates an even stronger incentive for scarce workers to demand higher pay.

          1. The notion of a wage-price spiral gained credence back in the 60s and 70s when so many compensation packages included automatic COLA kickers. Very few do now. That acts as a barrier against real wages keeping up with CPI. Just a nuance but it may prove critical in the months ahead.

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