As I mentioned a few weeks ago, Truflation is a blockchain-based (non-government) platform that provides real-time price analyses based on thousands of products, and many consider it much more accurate than the government’s PCE and CPI reports.
Truflation was 1.2% in January, but it has recently fallen to an impressively low 0.68% (on falling natural gas prices). In contrast, the government’s less-accurate CPI figure is at 2.7% (with an update coming Friday).
So, inflation is definitely cooling, and that is very good news for rates, as bond investors focus heavily on inflation.
AND – this gives the Fed room to cut rates without worrying about sparking inflation in the near term, at least.
Voters, however, don’t just want cooling inflation – they want actual DEFLATION or falling prices. But that is something the Fed never wants to see.
Further, the Fed and the powers that be often want and NEED inflation. So, as I mentioned a few weeks ago, don’t expect this to last.
Here are some of the reasons the Fed wants inflation.
- If inflation is too low, lowering rates won’t “stimulate” the economy – for reasons explained here (in case anyone is interested).
- Maintaining some inflation helps avoid a deflationary spiral – like we saw during the Great Depression. Central banks are more afraid of deflation than inflation because if a “spiral” sets in, consumers and businesses wait for prices to fall before making purchases. This results in less spending, which slows the economy, and results in more deflation. And consumers and businesses again wait to make purchases…
Note: Many economists say this is a myth. We’ve seen prices in plummet in consumer electronics for example for years, but few people “wait” to buy what they need. In addition, in a healthy economy with increasing productivity, a bit of deflation is the norm.
- Deflation makes debt service more expensive. This is another reason central banks are terrified of deflation, as deflation makes dollars worth more. In contrast, inflation makes dollars worth less, and that is why the 1970s were such a boon for real estate owners who took out low-rate mortgages in the 1960s – they were able to pay off their mortgages with much less valuable dollars while the value of their homes went up with inflation. Deflation fosters the opposite effect – which is why so many went bankrupt and lost homes in the 1930s.
- We need inflation to “monetize” or inflate away debt. While the low rates that come with low inflation make it much easier for America to service its massive Federal debt, low inflation makes it much harder to pay off the debt. Inflation allows governments to pay off debts with much less valuable (printed) dollars. This is partially how we paid off our massive WWII debt.
- Inflation keeps Wall Street happy. Wall Street’s no fan of high inflation but it likes moderate inflation, as it gives companies “pricing power” (the ability to raise prices), it encourages investment in inflation hedges, e.g. stocks, and it signals a healthy economy in the eyes of some who mistakenly believe that hot economies foster inflation. Cynics also say that Wall Street likes Fed meddling in general because it fosters boom and bust cycles that Wall Street benefits from.
We may see inflation continue to cool through the election, but likely not after that.
Further, as I mentioned a few weeks ago, economist Steve Hanke says that the money supply is already increasing at a faster rate – and that will foster more inflation 12 to 18 months from now.
My point: enjoy our lower inflation now, as it won’t last…
CAVEAT: If AI improves productivity as much as some enthusiasts are predicting, inflation might still be kept at bay – despite the Fed’s best efforts.
