I’ve been thinking about inflation a lot. Like, an unhealthy amount. Which is probably a good sign that I need to sit down and congeal my thoughts on the matter.
I’ll do my best to represent the various perspectives on this one but I won’t attempt to Steelman those perspectives because I’m not that magnanimous and my level of conviction and understanding isn’t that high. Anyway, the main stakeholders in this story are:
Our government who like any government knows inflation is super unpopular amongst the electorate. “Inflation is a tax on the poor” etc etc
Our allegedly independent central bank, aka, The Federal Reserve who isn’t all the least bit insecure about looking stupid
Insiders who preen for the approval of the Fed by proselytizing hipster economic theory
Markets which should be efficient but aren’t
Consumers who I’m skeptical can tell the difference between single digit percent differences in a complex inflation basket like CPI or PCE
Alright. What’s the message from the federal government?
Very Politburo, bro. I think any reasonable person can see this for what it is: cringe worthy damage control.
But also why not blame industry for inflation that doesn’t apparently exist:1
While factors like increased consumer demand have played a role, the price increases are also driven by a lack of competition at a key bottleneck point in the meat supply chain: meat-processing. Just four large conglomerates control the majority of the market for each of these three products, and the data show that these companies have been raising prices while generating record profits during the pandemic. That’s why the Biden-Harris Administration is taking bold action to enforce the antitrust laws, boost competition in meat-processing, and push back on pandemic profiteering that is hurting consumers, farmers, and ranchers across the country.
The federal government’s strategy appears to be 1) deny the inflation exists for as long as possible then 2) blame political opponents (and consumers).
The Fed’s response has been less partisan albeit entrenched in their “inflation is transitory” rhetoric.
From the minutes of their latest get together:
Inflation was elevated, largely reflecting transitory factors.
The staff's near-term outlook for inflation was revised up further in response to incoming data, but the staff continued to expect that this year's rise in inflation would prove to be transitory.
Inflation is elevated, largely reflecting transitory factors.
Inflation was elevated, largely reflecting transitory factors.
Calling it “rhetoric” might be unfair because the FOMC’s inflation forecast remains in line with their chatter. They’re walking their talk with the quantitative predictions:
The Fed publishes a lot more data than just meeting minutes. Their own data is showing 3 year inflation expectations by businesses much higher than their own economists forecasts:
Other consumer sentiment data seems to concur with a 4-5% long term inflation rate:
However, market participants who express their opinions by placing financial bets and not providing opinions on a survey don’t see as much inflation on the horizon:
The qualitative support for transient inflation doesn’t just come from the Fed. We also see it in commentary from the “smart money”.
The main thrust of Claudia’s piece is “Inflation is not our enemy. It’s Covid.”
Lloyd Blankfein (Goldman Sachs legend) took the time to remind us that deflation is worse than inflation. Uh, deflation? How deep into the Closet Of Distractions did he have to go to find the Deflation Strawman?
I can’t help but notice a trend of people whose personal balance sheets aren’t all that negatively affected by inflation claiming inflation isn’t happening, isn’t all that bad, or is way better than an alternative which we’re at no risk of happening right now (deflation).
There also seems to be a lot of narrative generation around single factor causes of inflation. Those range from oil prices to meat processors to supply chain bottlenecks to COVID.
There are two conspicuously absent factors in these orthodox narratives. The first is anything about consumer or business expectations of inflation. From an econ theory perspective, that’s a bit odd. It’s odd because the conventional view of inflation relies on the idea of consumer’s expectation’s of their long term wages driving inflation. There’s a new hipster theory of inflation which departs from these views. These theorists don’t actually make any predictions so it’s tough for me to really see this as much more than an attempt to intellectualize strongly held beliefs around lower inflation.
The second theme absent in all inflation conversation is anything to do with deficit spending, quantitative easing, or monetizing the national debt. There was a time when the Fed had to aggressively deny there was any attempt to monetize the national debt. And then there’s now. And at no point has there ever really been a discussion about why that changed and how this won’t end in some epic moral hazard.
Some Caveats
1) The Fed has some self awareness that their predictions are being perceived as one sided and rose tinted:
Atlanta Fed President Raphael Bostic said he’s banned the use of the word “transitory,” depositing a dollar bill in a glass jar each time it’s used, because inflation hasn’t proved to be as temporary as expected.
2) The Fed is actually pretty good at predicting inflation and has historically beaten the private forecasters and market priced forecasts:
We find that the expectations of professional economists and of businesses have tended to provide more accurate predictions of future inflation than the expectations of households and of financial market participants.
But also, there’s an attitude of what I might call hubris around their forecasting acumen:
“We are dealing with the subatomic particles of data that are out there,” she said. “We sift through the incoming data in a way that no Wall Street shop can do because they don’t have enough people.”
3) The acceptable range of opinions of inflation expectations has gotten more diverse as indicators fail to mediate.
So What?
I think the Fed’s views are optimistic but not in fantasy land yet. There’s a lot of reasons for them to stick to low inflation predictions which I didn’t get to. The short version is the incentive structure of all the relevant stakeholders largely biases towards downplaying inflation because the policy consequences of higher inflation are too tough to bear politically and fiscally.
Now that I’ve gotten all of that off my chest, I’m spending more time noodling on what assets capture inflation that aren’t already priced into the market. Would welcome any thoughts on that!
So I actually have no love for meat processors. It really is one of the modern monopolies we’re dealing with but what a lame excuse.