It is hard to find a single inflation indicator not rolling over, but there is ONE and that will be tricky to handle for the Fed. Meanwhile, European energy supplies are MUCH better than feared!
The Fed is well aware CPI is lagging. They are tightening aggressively such that inflation can be firmly defeated. They are also well aware that any prices which are rolling over can easily resume an upward trend if victory is declared too soon. The fate of financial assets is a distant concern relative to restoring the low & stable inflation environment that enabled the boom of the last few decades.
I agree with Mark Louis' assessment. Furthermore, It's very clear that this is a political war on energy prices and svg control of the cxy and existing financial system. If the US and Fed cave on keeping a bid on rates and the US$, it empowers Putin with expensive energy and embedded long term inflation for the Western Alliance. IMO, this is not only a decision by Powell and the Fed. This is a US/Western Alliance Security and svgn dominance defense play. Stop raising rates now and pivoting will embolden Putin and ensure worsening the long-term inflation outlook. This pathway is the last alternative kinetic warfare.
Spot on. I would add a couple of things. First, we are in a different world than the early 70’s. Then, we had a bad El Niño in 1972 which killed a major source of protein feedstock, the Peruvian anchovies crop. This led to a major bout of food inflation. Then we had the Arab oil embargo in 73-74, which was a major international crisis. Also, the demographic curve was pyramid-shaped, with baby boomers leading demand. Lastly, we had Arthur Burns as Fed Chairman, and Keynes disciple.
Today, I completely agree on your take on Food and supply chain issues. I’ll note, though, that China is responsible for this, and China is volatile, to say the least. They created the logjam by closing their ports in 2021, and when they reopened them, the logjam transferred to the West Coast, which couldn’t handle the traffic - thanks to Butigiegg and Newsom who had no idea. For all I know, as long as China is a dominant trade player, it could happen again. Not sure we learnt the lesson, but the CBS certainly have no control over this.
The Nat Gas issue is easy to solve for Europe, even though it looks better than expected. The EPA is sitting on the major LNG producers in the US. All we have to do is to get them out of the way. Same thing for the oil producers/refiners. Hopefully a new Congress will tackle this, regardless of Biden’s maniac EOs.
Wages, tougher to say. In my humble opinion, the spike due to various countries lockdowns and pay-to-stay at home has peaked with their ending - the student loan thingy been the last ditch effort to buy some D votes. Even that should fire back, because 63% of the non-degree folks are now very pissed off. But certainly, if the Fed doesn’t change course, employment will collapse, led by Housing.
Seems like this whole thing is geared to fit the political cycle - recession 2023, rebound in 2024, good for Ds. But as we saw with most Feds, fine tuning doesn’t work.
So, why is this Fed so dumb as to not have recognized the inflation threats, and as you say, the clear signs of it ebbing? Politics, yes. But here’s a thought. Including Burns - i did not look further back - Volcker, Greenspan and Bernanke were Academia economist by trade. Powell’s trade is vulture financing. Does he have a bias for market chaos?
A couple of things to keep in mind. Even though fill levels are good in Europe, most countries can only hold about 25 percent of their needs for winter in storage. Austria can hold 70 percent, so they are probably fine. Germany is around the average. The UK can only store 1 percent.
On top of that, there is a physical limit to how much gas can be taken out of storage in a day, and it is not enough to meet daily demand. It also falls as the amount of gas in storage falls. If Europe can keep sourcing LNG shipments, they will probably be fine, but storage will not get them through the winter.
I am still amazed how little I see it mentioned that Europe's shortsightedness is going to crush countries like Pakistan and Bangladesh. While Europe can buy LNG at whatever the clearing price rises to, these countries cannot. They are both already experiencing rolling blackouts.
Take 1. Good analysis for Europe G&P situation. However most of the numbers seems to from German indexes which MAY represent Europe but can not be extrapolated to the whole continent and UK.
Take 2. Gas markets are very volatile. Nigeria LNG shutdown may affect Iberic markets but also south med. China position in not taking many cargoes can also be deceiving.
Your thesis on wage inflation seems to be based on conjecture and rather weak. The labour market is very strong judging by all conventional measures, signaling we may have a structurally smaller labour supply due to the after effects of covid (long covid?) energy price could also rise again easily due to chronic lack of supply. The reality is that we have structurally smaller supply of both labour and energy post covid. This means we need to a smaller economy which needs to be achieved by structurally higher interest rate to curb demand, a situation that will continue so long as new supply of energy and labour is yet to be found.
The Fed is well aware CPI is lagging. They are tightening aggressively such that inflation can be firmly defeated. They are also well aware that any prices which are rolling over can easily resume an upward trend if victory is declared too soon. The fate of financial assets is a distant concern relative to restoring the low & stable inflation environment that enabled the boom of the last few decades.
Good call on the European energy situation. Thank you for your thoughts!
I agree with Mark Louis' assessment. Furthermore, It's very clear that this is a political war on energy prices and svg control of the cxy and existing financial system. If the US and Fed cave on keeping a bid on rates and the US$, it empowers Putin with expensive energy and embedded long term inflation for the Western Alliance. IMO, this is not only a decision by Powell and the Fed. This is a US/Western Alliance Security and svgn dominance defense play. Stop raising rates now and pivoting will embolden Putin and ensure worsening the long-term inflation outlook. This pathway is the last alternative kinetic warfare.
Spot on. I would add a couple of things. First, we are in a different world than the early 70’s. Then, we had a bad El Niño in 1972 which killed a major source of protein feedstock, the Peruvian anchovies crop. This led to a major bout of food inflation. Then we had the Arab oil embargo in 73-74, which was a major international crisis. Also, the demographic curve was pyramid-shaped, with baby boomers leading demand. Lastly, we had Arthur Burns as Fed Chairman, and Keynes disciple.
Today, I completely agree on your take on Food and supply chain issues. I’ll note, though, that China is responsible for this, and China is volatile, to say the least. They created the logjam by closing their ports in 2021, and when they reopened them, the logjam transferred to the West Coast, which couldn’t handle the traffic - thanks to Butigiegg and Newsom who had no idea. For all I know, as long as China is a dominant trade player, it could happen again. Not sure we learnt the lesson, but the CBS certainly have no control over this.
The Nat Gas issue is easy to solve for Europe, even though it looks better than expected. The EPA is sitting on the major LNG producers in the US. All we have to do is to get them out of the way. Same thing for the oil producers/refiners. Hopefully a new Congress will tackle this, regardless of Biden’s maniac EOs.
Wages, tougher to say. In my humble opinion, the spike due to various countries lockdowns and pay-to-stay at home has peaked with their ending - the student loan thingy been the last ditch effort to buy some D votes. Even that should fire back, because 63% of the non-degree folks are now very pissed off. But certainly, if the Fed doesn’t change course, employment will collapse, led by Housing.
Seems like this whole thing is geared to fit the political cycle - recession 2023, rebound in 2024, good for Ds. But as we saw with most Feds, fine tuning doesn’t work.
So, why is this Fed so dumb as to not have recognized the inflation threats, and as you say, the clear signs of it ebbing? Politics, yes. But here’s a thought. Including Burns - i did not look further back - Volcker, Greenspan and Bernanke were Academia economist by trade. Powell’s trade is vulture financing. Does he have a bias for market chaos?
A couple of things to keep in mind. Even though fill levels are good in Europe, most countries can only hold about 25 percent of their needs for winter in storage. Austria can hold 70 percent, so they are probably fine. Germany is around the average. The UK can only store 1 percent.
On top of that, there is a physical limit to how much gas can be taken out of storage in a day, and it is not enough to meet daily demand. It also falls as the amount of gas in storage falls. If Europe can keep sourcing LNG shipments, they will probably be fine, but storage will not get them through the winter.
I am still amazed how little I see it mentioned that Europe's shortsightedness is going to crush countries like Pakistan and Bangladesh. While Europe can buy LNG at whatever the clearing price rises to, these countries cannot. They are both already experiencing rolling blackouts.
Take 1. Good analysis for Europe G&P situation. However most of the numbers seems to from German indexes which MAY represent Europe but can not be extrapolated to the whole continent and UK.
Take 2. Gas markets are very volatile. Nigeria LNG shutdown may affect Iberic markets but also south med. China position in not taking many cargoes can also be deceiving.
Your thesis on wage inflation seems to be based on conjecture and rather weak. The labour market is very strong judging by all conventional measures, signaling we may have a structurally smaller labour supply due to the after effects of covid (long covid?) energy price could also rise again easily due to chronic lack of supply. The reality is that we have structurally smaller supply of both labour and energy post covid. This means we need to a smaller economy which needs to be achieved by structurally higher interest rate to curb demand, a situation that will continue so long as new supply of energy and labour is yet to be found.
Excellent update. Thanks!