“A strategy of repeatedly lowering the fed funds target range toward a more neutral level relies on confidence that the neutral level is materially lower than where rates are now. When I look at the available evidence, though, I see substantial signs that the neutral rate has increased in recent years, and some hints that it could be very close to where the fed funds rate is now…ces. I anticipate the FOMC will most likely need more rate cuts to finish the journey. But it’s difficult to be sure how many cuts may be needed and how soon they may need to happen.” – Navigating in shallow waters: Monetary policy strategy in a better-balanced economy, Dallas Fed President Lorie K. Logan, November 13, 2024

“Shifting from my baseline to alternative scenarios, recent information suggests to me that the risk of inflation ceasing to converge toward 2%, or moving higher, has risen, while the risk of an unwelcome deterioration in the labor market has remained unchanged or possibly fallen.” – Musalem: Remarks on Monetary Policy and the U.S. Economic Outlook, St. Louis Fed President Alberto Musalem, November 13, 2024

“While now is the time to begin dialing back the restrictiveness of monetary policy, it remains to be seen how much further interest rates will decline or where they might eventually settle.” – Longer-term Considerations for Growth and Monetary Policy, Federal Reserve Bank of Kansas City President and Chief Executive Officer Jeff Schmid, November 13, 2024

All three speeches included Fedspeak for caution on the pace of rate cuts while maintaining the flexibility to follow the data. These speeches also came on the same day as the release of the October CPI data. This timely convergence of caution and circumspection is important because core CPI maintained the stabilization trend in place since a low in July (see the green line below). Meanwhile, core PCE, the Fed’s favorite indicator of inflation also looks like it is stabilizing. In other words, it seems the Fed is paying attention to stabilizing inflation patterns.

Sources: U.S. Bureau of Labor Statistics, Consumer Price Index for All Urban Consumers: All Items Less Food and Energy in U.S. City Average [CPILFESL], retrieved from FRED, Federal Reserve Bank of St. Louis, November 13, 2024. U.S. Bureau of Economic Analysis, Personal Consumption Expenditures Excluding Food and Energy (Chain-Type Price Index) [PCEPILFE], retrieved from FRED, Federal Reserve Bank of St. Louis, November 13, 2024.

Shelter costs continue to drive the bulk of inflation. For October, shelter costs constituted 65% of the year-over-year increase in the CPI. Housing costs are in a paradoxical juncture where monetary policy could help maintain elevated housing costs no matter where interest rates go. The National Assocation of Homebuilders (NAHB) laments that high interest rates contribute to contraints on supply thourgh an expensive and difficult financing environment for construction loans. On the other hand, looser monetary policy could reignite a housing demand that strains supply further and drives up prices. For now, a surprise rebound in mortgage rates is tamping down housing demand.

A Friendly Message from Gold?

While inflation is stabilizing, gold may have topped out.

Two months ago I interpreted the strength in gold as indicative of a skepticism about the Fed’s implied victory message on inflation. That trend persisted until last week. The resolution of the U.S. presidential election generated a fresh surge in Bitcoin (BTC/USD) and presumably drained interest in gold. The SPDR Gold Trust (GLD) gapped down and lost 3.0%. I was hopeful that the 50-day moving average (DMA) (the red line below) would hold as support. As a (perma) bull on gold, I added call options to supplement my core GLD position. Today’s 1.0% loss in GLD further confirmed a 50DMA breakdown. This bearish technical signal means that I am unlikely to try new short-term trades for a while.

Source for charts: TradingView.com

The new inverse correlation between gold and Bitcoin indicates a sharp shift in preferences with Bitcoin getting an added advantage from expectations of a pro-crypto regulatory regime starting next year.

The Bond Market Remains Wary

Two months ago I claimed that the bond market acted wary about the Fed’s presumed victory over inflation. Sure enough, long-term yields have steadily risen ever since. The iShares 20+ Year Treasury Bond ETF (TLT), which goes up when long-term interest rates go down, is now trading near the bottom of a presumed horizontal trading range. My strategy to fade TLT has worked all the way down.

After TLT gapped up for some reason on the CPI news, I thought I missed my latest profit opportunity. So when TLT faded back to the previous day’s close, I counted myself fortunate and took profits on my latest round of TLT put options. TLT then went on to lose 1.0% for the day.

The U.S. dollar soars

The U.S. dollar index (DXY) has benefited from one tailwind after another. Now, the presumed tailwind comes from the boost it should get with increased tariffs that also promise to prop up inflationary pressures in the economy. Fewer dollars going overseas to buy goods tips the supply/demand balance in favor of a stronger dollar. Two months ago I decided to bet on continues strength in the British pound versus the U.S. dollar by buying shares of Invesco CurrencyShares® British Pound Sterling Trust (FXB). I took the opportunity to buy when FXB tested its uptrending 50DMA. The currency ETF has continued downward from there with little sign of an imminent rebound.

Conclusion

With the Presidential election behind us, the bets on stabilizing (or even stronger) inflation are clarified for now: long Bitcoin, long gold only after Bitcoin enthusiasm wanes somehow, long U.S. dollar, and short TLT. While I sold all my Bitcoin earlier in the day, I will continue to trade by buying dips. I am conflicted on the U.S. dollar as I stubbornly hold some dollar shorts while trading in and out of dollar longs. At some point, I will commit to a dollar long by shorting EUR/USD. Europe stands to lose in the next administration with a weaker NATO, more contentious relationships, and higher tariffs in a weakening economic backdrop.

The Federal Reserve has ahead as precarious a path as ever while it gets increasingly wary about stabilizing inflation!

Full disclosure: long GLD shares and calls, long PHYS, long FXB

The post The Federal Reserve Is Paying Attention to Stabilizing Core Inflation appeared first on Inflation Watch.

Inflation landed around 20% in 1947 according to the NY Times who also claimed it was the worst inflation America experienced over the past 100 years. The article did not specify the inflation measure, so for the purposes of discussion I assume the article referred to the entire Consumer Price Index (CPI). If so, then the 20% figure must have been for a particular month in 1947. The annual inflation for 1947 was 8.8% according to Investopedia, far short of the highest level over the past 100 years. Inflation the year before soared to 18.1% from 1945’s 2.2%. While it looks like the NYT selectively picked an inflation number for effect, it is clear that sentiment on inflation during this time was as dour as one should expect during a period of exceptionally high inflation. The following bullets are mostly direct quotes from the article reordered chronologically:

• In December 1947, more than 70% of adults said they would want their own wages to decline in order to bring prices down.
• In polling throughout 1947 and 1948, a majority supported reinstating wartime rationing and price controls.
• Before the conventions, voters said a plan to address high prices was the No. 1 priority they wanted in a party platform. More voters said they wanted prices to be addressed over the next four years than any other issue.
• In June, 1948, a majority of voters expected prices would be higher in six months (at election time in November, only 18% of voters expected the same).
• As late as summer 1948…adults expected prices to keep rising.

A combination of economic pressures sent inflation soaring.

Post-war supply shortages combined with the end of price controls to light a fire under inflation. The NY Times article pointed out that labor unrest following World War 2 exacerbated supply shortages. For example, the National WWII Museum in New Orleans observes: “With the end of the wartime no-strike pledge, workers across America expressed their frustration with wages and working conditions through a series of strikes that involved over 5 million people from the end of 1945 and into 1946.” Strikes hit broad swaths of the economy: mills, telephone service, meat packing, and General Electric (a major industrial employer at the time). The railroad strike of 1946 crippled large parts of the economy (the interstate highway system did not start until Eisenhower’s presidency in the 1950s). No doubt all this economic disruption helped dampen the national mood alongside the resulting price pressures.

Layer on pent-up consumer demand and the economy got hit with a perfect inflationary storm. Benefits from the GI Bill, not mentioned in the NY Times article, helped to stoke consumer demand. For example, while the country built very little housing during World War II, the GI Bill offered returning soldiers low interest, zero down payment home loans with better terms for newly built housing. Although Black servicemen were often denied benefits of the GI Bill (and thus they were often left in poverty), such incentives must have contributed to increased pricing pressures in the economy.

The NY Times article also did not consider the potential price distortion from large amounts of U.S. resources funneled into the Marshall Plan. The Marshall Plan kicked off in 1948, and it is plausible suppliers felt emboldened to increase prices in anticipation of the largess. Supply responses in Europe would eventually erode this pricing power.

Fast forward to today and we find parallel economic distortions putting pressure on prices. Massive fiscal and monetary stimulus stoked demand, especially for housing and related goods. Government supported pandemic savings have apparently supported on-going strength in retail spending. Wage growth has also supported robust consumer demand. While today’s labor unrest pales in comparison to post-war labor actions, the scales have tipped in favor of labor for now. Unemployment remains at historic lows, and employers have readily absorbed the rebound in the labor force participation rate. U.S. industrial policy could apply its own upward pressures on prices in the economy.

The Federal Reserve on the Sidelines of Late 1940s Inflation

The volatile cocktail of inflationary pressures must have complicated monetary policy. Compared to today’s tornadic monetary policy response, the Fed’s rate hikes in the immediate post-war years look exceptionally timid. The Federal Reserve essentially sat on the sidelines as the economy convulsed through its inflationary pressures. From “A New Daily Federal Funds Rate Series and History of the Federal Funds Market, 1928-1954“:

Today’s deflationists would have been particularly happy with the timid Fed of the late 1940s and early 1950s! Fresh memories of the economic devastation of the Depression no doubt also slowed the hand of the Fed. The NY Times article did not delve into the role of the Fed in allowing inflation to take its course in the post war years.

Inflation Today

Pandemic disruptions are mostly in repair, but Russia’s invasion of Ukraine has caused its own supply disruptions. The Israel-Hamas war threatens to cause disruptions in global oil markets and shipping lanes in the Gulf. Growing tensions between China and Taiwan and increasing authoritarian control over the Chinese economy have motivated companies to leave China in search of “safer” countries for production. This transition will likely pressures prices through increased production costs and the short-term transition costs.

In other words, while financial markets celebrate the end of the Federal Reserve’s fight against inflation, there are plenty of looming inflation risks, any of which could deliver setbacks to current trends. Seventy-six years ago inflation came to a boil and then yielded through the 1950s and early 1960s. A parallel peak for today’s inflationary era would be welcome news!

The post Inflation Now, Inflation 76 Years Ago appeared first on Inflation Watch.

This price drop has put additional pressures on some of Europe’s poorest regions.

For more details see “Europe’s (olive) oil crisis“

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Here are some key inflation-related quotes from today’s statement on monetary policy at the ECB:

“The economic analysis indicates that risks to the outlook for price developments are on the upside, while the underlying pace of monetary expansion remains moderate.”

Trichet and the ECB are clearly portraying themselves as hawkish and officially on “inflation watch”:

“It is essential that the recent rise in inflation does not give rise to broad-based inflationary pressures over the medium term. Strong vigilance is warranted with a view to containing upside risks to price stability. Overall, the Governing Council remains prepared to act in a firm and timely manner to ensure that upside risks to price stability over the medium term do not materialise. The continued firm anchoring of inflation expectations is of the essence.”

The ECB appears determined not to let increases in commodity and food prices permeate throughout the larger economy:

“With regard to price developments, euro area annual HICP inflation was 2.4% in February 2011, according to Eurostat’s flash estimate, after 2.3% in January. The increase in inflation rates in early 2011 largely reflects higher commodity prices. Pressure stemming from the sharp increases in energy and food prices is also discernible in the earlier stages of the production process. It is paramount that the rise in HICP inflation does not lead to second-round effects and thereby give rise to broad-based inflationary pressures over the medium term. Inflation expectations over the medium to longer term must remain firmly anchored in line with the Governing Council’s aim of maintaining inflation rates below, but close to, 2% over the medium term.”

The ECB is hoping that modest growth in the money supply will restrain inflationary pressures:

“Looking beyond the movements in individual months and the effects of special factors, trends in broad money and loan growth confirm the assessment that the underlying pace of monetary expansion is still moderate and that inflationary pressures over the medium to longer term should remain contained. At the same time, the low level of money and credit growth has thus far led to only a partial unwinding of the large amounts of monetary liquidity accumulated in the economy prior to the period of financial tensions. This liquidity may facilitate the accommodation of price pressures currently emerging in commodity markets as a result of strong economic growth and ample liquidity at the global level.”

But just to make sure everyone understands loud and clear, the statement repeats the following commitment:

“Overall, the Governing Council remains prepared to act in a firm and timely manner to ensure that upside risks to price stability over the medium term do not materialise. The continued firm anchoring of inflation expectations is of the essence.”

Forecasters seem to be anticipating a rate hike in the next ECB meeting. The key from there is to see whether the accompanying statement hints at further rate hikes. Given the ECB’s very modest forecast for growth in the next two years, I suspect rate hikes will emphasize symbolism over quantity.

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“Mersch is the fourth policy maker this week to signal increased unease about inflation. Executive Board member Juergen Stark said last night that the ECB is “prepared to act decisively and immediately if needed” to maintain price stability. Fellow board member Lorenzo Bini Smaghi said the bank may need to reassess its policy stance.”

Most importantly, Mersch indicated:

“I would not be surprised at most colleagues concluding that we have upside risks to price stability”

The biggest concern seems to be that increased food and energy prices will motivate labor unions to press for wage increases, thus stoking general inflationary pressures. Strong economic growth in Germany is also increasing the need for higher rates but lingering issues with sovereign debt in the periphery countries may yet prevent rate hikes.

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On Wednesday, Bloomberg reported: “German Import-Price Inflation Accelerates to Fastest in More Than 29 Years.” The various statistics on inflation in Germany are eye-popping:

• Import-price inflation accelerated to 12 percent, the highest rate since October 1981, from 10 percent in November
• In the month, prices increased 2.3 percent, almost double the 1.2 percent forecast by economists
• Energy was 34.2 percent more expensive in December than a year earlier
• Iron ore prices soared 98.4 percent
• Non-iron ore metals cost 37.9 percent more
• German consumer-price inflation accelerated to 1.9 percent last month, pushing the euro-area rate to 2.2 percent, the first time it has breached the ECB’s 2 percent limit in more than two years

For those of us who never believed that deflation was a serious threat given the monetary actions of central banks across the globe, we must now wonder how much longer will it take for inflation to start hitting consumers across a broad array of purchased goods.

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Sainsbury’s Finance estimates that the annual cost of running a car has increased by around 11% when compared to 2007, with insurance the most significant element in the rise. According to the research, the typical cost of insuring a car rose 13% in the 12 months to October 2009, having increased 23% since 2007, taking the average premium to £551.74.

The post U.K. auto insurance premiums up 23 percent in last two years appeared first on Inflation Watch.

The U.K. inflation rate rose more than economists forecast in October, climbing for the first time in eight months as fuel costs and air fares climbed. Consumer prices gained 1.5 percent from a year earlier, compared with 1.1 percent the previous month, the Office for National Statistics said today in London. The median forecast in a Bloomberg News survey of 30 economists was 1.4 percent. On the month, prices rose 0.2 percent.

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Property asking prices in London have broken through the record high set in November 2007 as the drought of homes for sale around the country continues to distort the market. New research out today shows that the average asking price in London jumped 6.5% to £461,157 in the four weeks to 10 October, sailing through the high of £412,731 set in November two years ago…The survey by the property website Rightmove also shows that asking prices in England and Wales are now higher than a year ago, after climbing 2.8% in the past month.

Prices have soared thanks to a lack of supply and rising demand, especially amongst high-end homes. The article also notes the proposed regulations to tighten lending standards could dampen demand in the near-future. Until then, it seems that property markets in the United Kingdom are heating up all over again.

The post Home Prices In London Surpass Record Set Two Years Ago appeared first on Inflation Watch.

U.K. factory gate prices increased more than expected in September due to rising prices for petroleum products and recycled secondary raw materials such as scrap metal, official data showed Friday….

Output producer prices rose 0.5% in September from August and were 0.4% higher than in September last year, the first annual rise since April, the Office for National Statistics said. That compares with a revised rise of 0.3% from the previous month and 0.3% drop in annual terms in August.

“Changes to excise duty on petroleum products are estimated to have added 0.2 per cent to the overall index in September,” the ONS said in a statement.

Economists were expecting output producer prices to rise 0.1% in September, leaving them 0.1% lower than they were in the corresponding month last year, according to a Dow Jones Newswires survey last week.

In related news, core consumer prices in Norway rose faster than expected last month.

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