Pro Perspectives 9/12/22

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September 12, 2022

We get the big August inflation report tomorrow morning. As we discussed last week, this report should show an improving inflation situation.

Much of this is due to the blow to consumer confidence that has been caused by: 1) high inflation, and 2) a Fed that has responded to high inflation by explicitly vowing to destroy jobs.

The former follows the old adage that high prices are the best cure for high prices. The latter, I would argue, is the real monetary policy tool being deployed by the Fed: Threats.

Both have been working. The monthly change in the headline CPI may decline in tomorrow’s report, following no monthly change in prices from July.

Let’s look at what we know from some key prices in the economy from August.

As we’ve discussed, gas prices declined 12% in August.

Used car prices declined again in August (peaking earlier this year). And new car prices may have finally peaked in August.

Food prices, globally peaked in February, and with a decline in August have declined six consecutive months (chart below).

What about house prices? Realtor.com says the median home price declined 3% in August.

Now, there's a difference between deceleration in prices, and a decline in prices.

There's a difference in controlling inflation, and inducing deflation.

The Fed's job is price stability. Does price stability mean getting inflation back to their target level (of 2%)? Or does it mean returning prices back to trend, which would mean a period of deflation?

Regardless of the Fed's intent, their are some that think a swing back to the deflationary era is coming. Among those that share the viewpoint: Elon Musk and Cathy Wood.

The Fed has told us explicitly that they are doing whatever it takes to get inflation back down to their target of 2% (inflation is their goal, just much lower inflation).

With this next chart in mind, it seems implausible that deflation could return anytime soon.

This increase in money supply, has raised the level of prices (no surprise to anyone, including those that executed the policies — both monetary and fiscal).

What has to rise to maintain quality of life within this economic framework? Wages. It is the only solution.

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