My wife Heejin and I went to a trendy brew pub near our CA home to get burgers on Sunday.
It was the type of brew pub that you see in pretty much every town nowadays, with 734 different beers on tap, sports blaring from multiple TVs, a loud din that makes conversation difficult, and uncomfortably high tables and chairs.
Our server told us that if we drank every one of the 734 beers, we’d get a little plaque above the bar with our name on it, along with cirrhosis of the liver and type II diabetes (quite an enticement).
Even better… because it was a Sunday in Northern California, the place was replete with boomer-bicyclists with beer bellies and tight bicycle shorts – which should be illegal 😊
BUT – here is the point of the story: We only ordered two burgers, and the price was $45 before the tip.
At first, I thought they might have charged extra for the privilege of seeing boomer-buns in bicycle shorts. But then I remembered, even though inflation is now down to 2.4%, food prices have increased over 20% since 2021!
And that is one of the points I want to make in this blog, and I will discuss it below.
Latest Report Shows Waning Inflation
Today’s inflation report came in surprisingly tame, despite rising energy prices. It is another indication that inflation is clearly waning, as both Jeff Snider and Barry Habib have been predicting for some time.
But, I want to make a few interesting points about it.
Here are the inflation numbers for recent years based on CPI:
- 2020: 1.2% (the type of number we saw for years and that spoiled us all)
- 2021: 4.7%
- 2022: 8.0%
- 2023 YTD: 4.0%
Inflation Down To 2.4% But Prices Have NOT Come Down
Inflation is now very close to the Fed’s 2.0% target if we look at only the last 3 months – over which it has averaged 2.4%. So, per Barry Habib, we can expect more of the same and lower rates as a result.
2.4% just means price increases have slowed, but prices have NOT come down. This is the main point of this blog. Yes, the rate of inflation is plummeting, but that does not mean prices have come down. One of my kids has not received a raise since early 2021, so her pay is effectively 20% less. So, until we see prices actually fall, people should not get too excited about falling rates of inflation; prices remain 20% higher than where they were only a few years ago.
Inflation Scares Investors More Than Anything Else
Good news on the inflation front is the best news for those of us in the mortgage and real estate industries, as nothing spikes interest rates more than news about rising inflation. This is both because the Fed desperately wants to keep inflation at bay and will raise short-term rates to any level necessary to stop it (like we have seen), and because bond investors fear inflation more than anything too because it can destroy their investments.
What Causes Inflation?
Jeff Snider insists that almost all of the inflation we are seeing now is a result of supply shocks brought on by COVID. Famed monetarist, Steve Hanke, in contrast, insists that inflation is entirely caused by a massive increase in M2 money supply, mostly from excess government stimulus hitting bank accounts. George Gammon reminds us over and over that if you shower people with money for no reason without a corresponding increase in the production of goods and services, you will ALWAYS see inflation. And Lyn Alden says the cause of inflation was both supply shocks and the increase in M2/government stimulus. Alden makes the very good point that if the supply shocks were the sole cause of inflation, we’d see prices falling now that the supply shocks are over.
The Fed desperately wants you to lose your job! My daughter asked for a raise largely because we have seen close to 20% inflation over the last three years – and that scares the heck out of the Fed. This is because the Fed most fears what is called “the wage-price spiral.” This is where workers ask for more money to offset higher prices, and then employers charge more for goods and services to cover higher wages – and so on. The Fed wants a slower economy and more unemployment – so employees have much less bargaining power and are thus unable to demand higher wages – stemming the wage/price spiral.
Inflation Reprieve Will Be Short-Lived; It Will Come Back
The likes of Jeff Snider and Barry Habib are convinced inflation will continue to fall. Snider and others like Hugh Hendry actually expect DEFLATION, largely because of excess inventory builds and manufacturing capacity, along with a recession, less bank lending (the main source of new money), and much less demand overall. BUT – many other analysts like Brent Johnson and Erik Townsend would not be surprised to see inflation roar back due to energy and commodity shortages, and in response to massive government spending and borrowing to cover deficits. I am in this camp too, but of course nobody knows the timing. We could enjoy low inflation for months or even years before high inflation returns. But, it will, and when it does, the best thing to own is real estate – as it is one of the best inflation hedges there is (particularly investment real estate – where both the properties and the rents rise with inflation).
In the meantime, we should just all enjoy our $22 cheeseburgers.
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