Yesterday’s Consumer Price Index (CPI) Report showed “the most intense decline in inflation in 70 years.”

And rates increased at the end of the day – SHOCKING THE FINANCIAL WORLD!

The quote in 1st sentence is from renowned macro analyst, David Rosenberg, and it was shared by the MBS Highway today.

Because inflation signals are probably the biggest single driver of interest rates, yesterday’s rising rates in the face of sharply falling inflation proves once again that we are truly sailing in uncharted financial waters – or that we are in “Bizzaroland,” as Barry Habib stated today.

So, why did rates rise yesterday when “normally” rates would plummet in response to such a positive inflation report?

Here are a few possible reasons: (1) Investors are expecting a flood of bonds (borrowing) to hit the market, as both commercial banks and the government (now that the debt ceiling crisis is over) sell bonds to raise cash in a hurry; (2) Investors expect the Fed to raise rates still because inflation remains higher than the Fed’s official 2% goal with some prices remaining stubbornly high; and (3) nobody has a clue…

NOTE:  The Fed announced today that it will NOT raise rates this month, but they are likely to raise again next month – and that is pushing rates up despite positive inflation news again today.

The Fed is not alone with its excess concern about inflation, as even the WSJ expressed continued concern in an editorial today:  No Inflation Reprieve for the Federal Reserve.

But – there is plenty of good news, and numerous reasons to think inflation will continue to fall.

CPI fell to 4.0% year-over-year from 4.9%, and without shelter costs, CPI would be at only 2.0%.

Even better is today’s Producer Price Index (PPI) which was down a full 3/10 of 1% month-over-month – much greater than the expected 1/10 of 1% decline.  PPI is only up 1.1% year over year too.

Here are some of the reasons why we can expect inflation to continue to fall (this really matters too because rates won’t fall if inflation remains stubborn – and boy do we need rates to fall).

  1. DEMAND IS COLLAPSING:   The economy is getting a beating from monetary tightening, credit tightening, higher rates (all are related), and an onslaught of regulations – and that will translate to lower prices.
  2. TOO MUCH MONETARY TIGHTENING:  The Fed has gone way overboard with its efforts to shrink the money supply, per analysts like Stephen Hanke (not to be confused with South Park’s “Mr. Hanke;” they are not related).  This will result in both falling prices and a bad recession, per Stephen Hanke.
  3. MORE UNEMPLOYMENT COMING SOON:  The above two items will result in a rise in unemployment, per Jeff Snider, which will further reduce demand and wages.
  4. PRODUCER PRICES ARE FALLING SHARPLY:  Today’s PPI report is one more indication of this, and Jeff Snider has been harping about this repeatedly. We will soon see falling producer prices spill over into consumer prices.
  5. RENTS HAVE BEEN FALLING SHARPLY:  Falling rents take a while to show up in CPI reports, so they are not fully reflected yet – but they will be for sure as new leases are signed and end up in CPI reports.
  6. “F-UGLY” SAME STORE RETAIL SALES:  Stephanie Pomboy was screaming on Twitter about how alarming this data has been in recent weeks, and “f-ugly” was her word of choice, so bad were recent numbers.
  7. WTI CRUDE OIL PRICES AT $69 PER BARREL!  This is huge and cannot be overstated.  WTI Crude Oil prices are the benchmark for the industry, and they hit $120 per barrel last year – and many analysts were predicting much higher prices this year (as high as $300 per barrel) in the face of falling production and increased, post-COVID demand.  BUT – prices have plummeted.  Even more shocking is that they plummeted after the Saudis and OPEC announced major production cutbacks.  This is probably the strongest indicator of all that the markets are expecting both a recession and falling prices.

Once again, this is all extremely important because all too many people expect inflation to continue or even get worse, when it seems abundantly obvious that the trend is downward and that trend will continue.

I do not, however, think the lull in inflation will be long-lived though, as I expect Congress to panic as soon as recession signs surface and to start spending money like drunken sailors (or even more drunken sailors), and that will no doubt revive our inflationary spiral.

So – the key will be to take advantage of the good times, while the good times last, by buying and financing real estate at low rates, as real estate financed with low rates is one of the best inflation hedges there is. 

Jay Voorhees
Founder | JVM Lending
(855) 855-4491 | DRE# 1197176, NMLS# 310167

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