Inflation: A Critical Juncture

Those who know me, know that I have been firmly in the “High Inflation” camp, since about February of 2021. I knew then that Inflation was not transitory, but was going to be a genuine, and a real problem. Why? It was not one single input, but rather; multiple causes occurring simultaneously. In response to CoVid-19 in 2020, there were extraordinary monetary policies implemented. At the same time, incredible fiscal policy placed funds directly in the hands of consumers. And … simultaneously … we had severe supply chain disruptions and global trade repositioning itself due to CoVid-19 and geo-political trade factors. All three of those factors, working in tandum and simultaneously, resulted in the inflation that we have seen in recent years.

That’s great. What about now?

As I was telling a few traders a month or so back, I think the next three inflation prints? Are absolutely critical. While the last print which was cooler than expectations, it still came in at 0.4 MoM. But overall, inflation, on the YoY, Inflation has been cooling. That needs to continue (1).

In my opinion, the Fed has to keep their foot on the gas pedal. The danger of Inflation at the moment, is shifting from Inflation that was led by input costs for the aforementioned reasons? To Inflation that becomes structural into the behavior of the consumer and producers. Structurally High Inflation is notoriously difficult to battle; and therefore that is the primary danger at the moment. I believe it would be a monsterous mistake to follow the Lagarde’s concept of “moving the goalpost” of 2% growth inflation, to a higher inflation target of 3% or 4% for the Central Bank; simply for the convenience and ease of a Central Bank to state they are ‘closer to target’. That is almost ‘paving a golden path’ for Inflation to become structural.

In addition? “The Baron” recently reminded me that PCE (Personal Consumption Expenditure) data not only increased, but ticked up hard . This being one of the Fed’s favorite data metrics. A worrisome sign, and not one that bodes well for cooler CPI and PPI prints in the future. Speaking of PPI, The Baron also threw me over a snapshot of the S&P Global Manufacturing PMI expansion …

US Core PCE

US S&P Global PMI Flash

So I would like to see the Fed keep up both their language and firm policy, on fighting Inflation. And to continue to see lower inflation prints overall; though that may be difficult given the above data. I think by the end of this summer, we can evaluate the data and at that time, see where we land. Until then, it’s simply evaluating the data as we receive it …

1) Trading Economics: https://tradingeconomics.com/united-states/core-inflation-rate-mom