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Not Yet . . .


I don’t ever recall hearing so much worry about inflation . . . while still in a recession.  Inflation does not jump after a recession.  It usually takes quite a while for the economy to get out of recession and to build up excess demand or develop supply problems before inflation is discussed.  Everybody is pointing to home prices going up, but that is only one piece of a $21.3 trillion economy.

The CPI increase was 0.4% in December.  If you annualize that to 4.8%, it might be more worrisome, but 60% of that increase was due to the 8.4% in gasoline.  On a full-year basis, the CPI was up a mere 1.4%, which was the lowest in 5 years.  Core prices were up only 1.6% for 2020.

Another way of predicting inflation is the “tips-spread”, which is the difference between inflation-adjusted Treasuries and regular Treasuries.  It was up to 1.91% yesterday.  Long term rates have risen but not that much.  It used to be said that the Fed controls short term rates but not long term rates.  Since quantitative easing, that is no longer true.  The Fed now has the ability to control both.

Traditional expectations are that the Fed will start raising interest rates when inflation goes up, but the Fed WANTS to see 2% inflation – at least 2%.  The Fed is far more concerned about deflation than inflation.  You can crush inflation, but deflation is much more difficult to manage.  Further, the Feds have already promised NOT to automatically start raising rates when inflation does get to 2%.

Another inflation indicator is when both exports and imports are higher than expected, which was released this morning.  Exports are up because the dollar is down, and imports are up because the half of America who coasted through the pandemic can afford it.  Neither are worrisome indicators of inflation.

There are many things to worry about, but inflation is not one of them.


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