November 18, 2022

Let’s continue our discussion from yesterday on the difference between a deceleration in rate-of-change in prices, and outright price declines(i.e. deflation).

The Fed’s stated goal is to slow the rate-of-change in prices to their inflation target of 2%.   However, they are inducing a decline in prices/deflation, rather than just a slow down in inflation.

Is it by design?

That brings me to a very important statement made by the Fed Chair in the last post-FOMC press conference.  In response to a question about the lag effect between policy and prices, Jerome Powell said “we do need to see inflation coming down decisively, and good evidence of that would be a series of down monthly readings.”

“Down monthly readings” means, negative change in prices.  He wants to see deflation (at least for a period of time).  And that suggests the Fed wants to move the level of prices lower, not just the rate of change.

Well, he’s getting it.

They nearly returned stocks to pre-pandemic levels this summer …

Gold, the historic inflation hedge has fully retraced to pre-pandemic levels …

Energy?  Crude oil prices are not too far off from pre-pandemic levels …

Here’s a look at global food prices … falling, but still 35% above pre-pandemic levels …

What about housing?Housing prices have rolled over.

A return to pre-pandemic prices in housing would inflict major pain.