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High Inflation May Already Be Behind Us

By Lance RobertsStock MarketsMay 27, 2022 03:07PM ET
www.investing.com/analysis/high-inflation-may-already-be-behind-us-200624966
High Inflation May Already Be Behind Us
By Lance Roberts   |  May 27, 2022 03:07PM ET
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High inflation has captured the headlines as of late, particularly as CPI recently hit the highest levels since 1981. Some are even suggesting we will face hyperinflation. However, while inflation is certainly present, the question to be answered is whether it will remain that way or if the worst may already be behind us?

To answer that question, let’s define the difference between an inflationary increase and hyperinflation.

Not surprisingly, as Milton Friedman stated:

Inflation is always and everywhere a monetary phenomenon. It is always and everywhere a result of too much money, of a more rapid increase of money, than of output. Moreover, in the modern era, the important next step is to recognize that today the governments control the quantity of money so that, as a result, inflation in the United States is made in Washington and nowhere else.

Milton Friedman’s statement is backed up by the chart below of the M2 money supply compared to inflation (with a 9-month lag).

Inflation vs M2 Money Supply
Inflation vs M2 Money Supply

So, where did that surge in the money supply come from? Massive government bailout programs sent money directly to households that far exceeded economic activity. With production shutdown, demand dwarfed supply.

Biden-Stimulus
Biden-Stimulus

However, what we are experiencing is high inflation. “Hyperinflation” is not a threat. At least not yet.

“Hyper-inflation comes from a complete loss of faith in a currency from the threat of losing a war (Weimer Republic), an economic collapse, or some other catastrophic event. The U.S., even with all of our economic ills and woes, is still the safest place, in terms of liquidity, depth, and strength, to store excess reserves. The near historic low yield on government treasuries tells the story here.” – Real Investment Show

With that understanding, we can now examine what comes next in terms of high inflation.

The Peak Of Inflation May Be In

When discussing the inflation rate, it is critical to remember that we measure the “rate of inflation” on an annualized basis. In other words, compare the current level of inflation index to the index level 12-months prior. That calculation provides the annual “rate,” or rate of change, in the consumer price index.

With the latest read of the inflation index, the annual rate of change was 8.6%. Here is where it gets interesting. If we assume that homeowners’ equivalent rent, food, gasoline, energy, and healthcare costs all remain at the current elevated rate into 2023, inflation will fall back to 2%. Such is because as we move forward, the inflation index will be calculated against rising index levels. The result will be lower levels of the “inflation rate” even though the cost of goods and services had no change in price.

Inflation vs Fed Target Rate
Inflation vs Fed Target Rate

While that seems confusing, it is just a function of the underlying math.

Evidence Of Disinflation

However, the decline in the inflation rate may be substantially more prominent as the Federal Reserve begins its rate hike campaign and reduction of its balance sheet. Already, higher interest rates are slowing the housing market, and high prices are creating demand destruction. Already, consumer confidence is dropping sharply as expectations for consumers are collapsing.

Consumer Confidence Expectations Vs Current Conditions
Consumer Confidence Expectations Vs Current Conditions

Of course, that lack of confidence leads to decisions to consume less as the cost of living increases outstrip wage growth. The decline in demand is showing up in the Cass Freight Index.

Cass Freight Index Expenditures and Shipments
Cass Freight Index Expenditures and Shipments

As Bloomberg’s Simon White writes, real economic activity in the U.S. is slowing sharply, and:

“This is showing up in lower demand for new trucks and autos, and a tailing off in freight volumes, leaving transport stocks facing more downside.”

Not surprisingly, heavy truck sales in the U.S. are, as Simon notes, a

“Very good leading indicator of economic activity, with 65% of the dollar value of North American freight moved by trucks. But new truck sales have been falling sharply, now at -23% on an annual basis. New auto sales are falling at a similar rate. Truck and auto sales combined are falling at a rate previously only associated with recessions.

As shown in the latest CPI report, auto sales are indeed dropping sharply.

US CPI MoM Used Cars
US CPI MoM Used Cars

Deflation Likely A Bigger Issue For The Fed

The surge in “artificial inflation,” from the flood of liquidity against a supply shortage, will revert to a disinflationary trend. Debt and demographics will continue to drive deflationary pressures leading to a reversal of the inflation trade.

As the fear of inflation rose, investors piled into the commodity trade. While commodity prices rose due to the supply shortage, the reversal of that liquidity will undermine those assets. (Commodity prices track interest rates)

CRB vs TNX
CRB vs TNX

As we showed recently, the reversal in commodity prices will worsen if the Fed proceeds with its monetary tightening.

“Historically, when the Fed hikes rates or tapers its balance sheet, oil prices decline from slower growth and deflationary pressures.” – Real Investment Report 01-21-22

Energy Index vs Fed Funds
Energy Index vs Fed Funds

Many continue to compare the current economic environment to the 1970’s inflationary spike. However, the impact of demographics and debt are vastly different.

Throughout 2022, disinflation will likely be the most significant threat to the markets and economy. Such was the point in early 2021 in “Sugar Rush.”

Unless the Government remains committed to a continuous stimulus, once the “sugar rush” fades, the economy will “crash” back to its organic state.

The bottom line is that America can’t grow its way back to prosperity on the back of social assistance. The average American is fighting to make ends meet as their living cost rises while wage growth remains stagnant.

The 3-Ds suggest inflation will give way to deflation, economic strength will weaken, and over-zealous investors will once again get left holding the bag.

High Inflation May Already Be Behind Us
 

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High Inflation May Already Be Behind Us

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Comments (15)
Alpha Omega
Alpha Omega May 28, 2022 9:29PM ET
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There's Something Which Rivals Inflation And that Is Called Job Layoffs. Combined The Two.And Depression Is Knocking On The Door.
Steve Bojo
Steve Bojo May 28, 2022 5:48PM ET
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“Inflation is transitory” it wasn’t. “Inflation wont be that bad” it is. “Inflation wont last long” it has. Mow they say: “Inflation is behind us”. Anyone buying this?
CS Greer
CSGreer May 28, 2022 2:54PM ET
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What a headline. As if we can all go to the store or gas pump and say, "Thank goodness inflation is behind us!!" lol... just a bit much really
Wen Moon Tho
Wen Moon Tho May 28, 2022 12:55PM ET
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Lmao I see they let just anyone write about ******they don't seem to understand. Inflation has far from peaked, ser. You must be living in your MMT bubble kek
Tom Sc
Tom Sc May 28, 2022 7:04AM ET
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if u look at a chart of the CPI in the late 60s and 70s I'm sure there were multiple times where they thought inflation was behind them
Jurjen Visser
Jurjen Visser May 28, 2022 6:31AM ET
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Funny math...
hd tv
hd tv May 28, 2022 5:33AM ET
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it's not a "function of underlying math" it's just a failure by the government and wall street to count the true economic effects of inflation on the average person. unfortunately for them the affects will still be felt wether or not the so called professionals measure it correctly, much like the housing crash the system just ignored the signs, still happened just no-one was prepared.
Steve Bojo
Steve Bojo May 28, 2022 2:11AM ET
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Nope
Jeremy Johnson
Jeremy Johnson May 27, 2022 11:03PM ET
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Whenever I shop at the grocery, oddly enough, inflation is right in front of me, same thing when I fill up my car.  Oh wait, maybe this means when I turn my back to the meat aisle or gas pump, then inflation is behind me?  Anyone else experience this?
ZS Beck
ZS Beck May 27, 2022 11:03PM ET
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They mean inflation is peaked, doesn't mean you can afford to buy food or had or anything.
peter neal
peter neal May 27, 2022 7:40PM ET
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Oil and gas futures all time high / food shortages and skyrocketing food prices on there way. Do you ever watch the future markets. See what retail gas prices are next week when you pump your gas.
 
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