Weekly Inflation Outlook: Inflation Is Peaking, but Spending Will Keep It Around
Michael Ashton | Nov 14, 2022 05:49AM ET
Despite what you may have read last week, the downward surprise in inflation is not a sign that inflation is about to collapse, that the Fed has won, and that rates will soon be in full-throated retreat since recession is the likely next act.
To be sure, the cyclical highs for core inflation are in, even though median inflation is going to be accelerating for another couple of months at least and will end 2022 above 7%. After that, median inflation will probably decelerate, but probably not head back to 2.5%. The world has changed in many ways which will be persistent. One of these is that re-onshoring and near-shoring are reversing the two-decade-old trend towards off-shoring production to the lowest-cost country. Core goods inflation, which is decelerating, is not likely to return to its old -1%-0% sort of range but more like 1%-2%. The demographic challenge, which reduces the supply of labor for service industries, will place upward pressure there.
And to that list, we can now also add that the era of large government spending programs—which I thought might be coming to at least a temporary hold when pollsters told us the Republicans were going to win a mighty electoral victory—is going to continue for at least a couple of years. At this writing, we know that Democrats will continue to hold the majority in the Senate and may even expand their influence by 1 seat, and in the House of Representatives, the best the Republicans can hope for is a tiny majority. That would flip the gavel and change the chairmanship of all House committees, but it wouldn’t stop large spending bills from passing with just a mild application of pork barrel spending to the districts the Administration needs to sway. In fact, this argues for fewer but larger packages—so you only need to ‘buy’ votes once. As the economy looks to be headed into a estimate is that residential real estate is priced to return -2.14% per year for a decade after inflation. But in a world of 4% inflation, which is the world we are now living in, that means that nominal home prices should not fall very far, for very long.
Disclosure: My company and/or funds and accounts we manage have positions in inflation-indexed bonds and various commodity and financial futures products and ETFs, that may be mentioned from time to time in this column.
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