Monday, December 6, 2021

Inflation Going Higher

The Nov 2021 CPI report comes out Dec 10th.   The Oct CPI was 6.2%.   Here are three different estimates for Friday's number:

  1. Cleveland Fed estimates 6.6%
  2. Lyn Alden says  economists are estimating 6.7%
  3. Trading Economics forecasts 6.9%

As Edward Garbarino commented in response to Lyn's tweet, "If Powell did not have information indicating significant worsening inflationary pressure on the horizon, he would not have jettisoned the "transitory inflation" narrative, IMHO."

This year the real CPI numbers have surprised to the upside many times.  We may be at 7% or more on Friday. 

People are expecting that about a 0.5% increase in the Fed Funds rate in 2022 will tame inflation.   This is naive.   Given how fast inflation has been going up (frequently 0.5% per month) that is far too slow a pace of increasing interest rates to ever get ahead of the inflation rate.   If interest rates stay far below the inflation rate, inflation will continue to go up.  Interest rates need to be well above the inflation rate to be "fighting inflation".

Historically when inflation starts going up the Fed tightens and the market goes down.  It really seems that this is likely soon.

However, if we have 7% inflation then it would take something like 10% interest rates to get control of it.  If we had such rates the economy would be dead and the government bankrupt.   But if interest rates stay low, inflation can get out of control.  It really could go to hyperinflation.  Either choice the Fed makes has a really bad result.   There does not seem to be any nice way out at this point.

No comments:

Post a Comment

Looking for polite debate on ideas. Never attack a person. Be nice.