A Sticky Situation
"Peak inflation" may be upon us (in the US, anyway), but the relief for markets may prove transitory. And yes, that policy joke was obviously intentional.
Increasingly, concerns around unanchored longer-term expectations and the prospect of a nightmarish, emerging market-style price spiral, are giving way to a less apocalyptic, but still highly vexing, narrative centered on the notion that elevated inflation will be a fixture of developed economies for the foreseeable future.
That'd be uncomfo
It was not long ago that economists bemoaned being at or close to the zero bound. There is nothing magical about a 2% target. Research I have seen suggests inflation is anchored until 4% is approached. Some well respected analysts suggest 3% is a more appropriate target (Blanchard). Better would be to target 2-4% inflation along with a nominal gdp target. Add in a minimum floor for well being with a better safety net and some sort of minimum income to insure better income distribution.
H-Man, Barron’s reported that while energy has been falling, the cost of diesel and natural gas are not following that trend. Diesel drives tractors and trucks which are critical components of agriculture while gas is used to make fertilizers. Food is 14% of CPI while OER is 34% — so close to 50% of CPI will remain sticky for some time to come. This could translate to a mean hangover for 2023.
Pick your pain trade! Seems to me it boils down to high-priced, long duration equities versus the disorderly bear steepener, the latter of which we really haven’t seen in this drawdown and bounce. As to me, I’m trying to balance not fighting the Fed with also not having faith in them either.
For Main Street aka the real economy, I don’t know that it makes so much difference if inflation is 2% or 4%, so long as it is stable and wages participate.
For Wall Street aka the asset economy, I think it makes a big difference. Increase rates by 200 bp and valuations go significantly lower.
For decades, wages adjusted by asset inflation have declined substantially. Moderate inflation might temper that.
Imagine if inflation and hence rates had been 200 bp higher all that time, where might the SP500 be today?