"We are entering an entirely different era"

 ... one in which central banks are increasingly irrelevant to much larger forces.

Larger forces than central banks? Yes. One new era began in the early 1990s, giving us globalization, low interest rates, and persistently low inflation. All that is now ending.

My friends Robert Arnott (founder of Research Affiliates) and Campbell Harvey (of Duke University) have a new paper titled “ No Excuses: Plan Now for Recession.” 

Rob contends inflation will be high, if not higher, at the end of the year. I have learned over our 20 years of friendship to be very careful disagreeing with him. He is extraordinarily careful and precise. 

“… There’s another problem with the way CPI inflation is calculated. The largest component, shelter, is one-third of the total and is smoothed and lagged. According to the Bureau of Labor Statistics (BLS), their chosen measure for the cost of home ownership, owners’ equivalent rent (OER), is up 7.3% in the last two years, while the S&P/Case-Shiller Home Price Index shows that US home prices have risen by 37% in the two years ended March.

The one-third of CPI for shelter will be playing catch-up for some years to come. Empirically, most of that catch-up occurs over the subsequent two to three years. Note that this inflation has already happened; it simply hasn’t made its way into CPI quite yet.”

If Rob and Harvey are right, and rates are still well above 8% at yearend, the Fed will be raising rates more than the markets are currently predicting. What will it take to crush demand? A 4% fed funds rate? 5%? I don’t know but we are going to find out. Otherwise, the Fed will lose all its credibility against inflation.

John Mauldin 6 August 2022

https://www.mauldineconomics.com/frontlinethoughts/weirdness-factors


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