‘We are, unfortunately, about to go through a period of prolonged, persistent high inflation.’
By David Enna, Tipswatch.com
There’s a lot of speculation in financial markets right now about an upcoming dip in U.S. inflation, triggered by a strong decline in gasoline prices. We saw some of that effect in July with all-items inflation flat for the month, even though core inflation rose 0.3%. We could see a similar result in August inflation, to be released Sept. 13.
So yes, U.S. inflation is falling from its 9.1% annual peak in July, and will probably continue to gradually decline. But by how much, and how fast? How long will it take to get to the Federal Reserve’s target of 2% annual inflation?
Here’s a clearly explained outlook from Campbell Harvey, a Canadian economist who is professor of finance at Duke University and a Research Associate of the National Bureau of Economic Research in Cambridge, Massachusetts. In the video, Harvey explains why statistical and structural evidence points to U.S. inflation remaining at an annual rate of of at least 6.2% by the end of the year, even if deflationary pressures continue for several months. A more realistic number might be above 7.0%, he suggests.
“It’s kind of obvious looking at the data, but a lot of people don’t pick it up, is that we’ve already had year to date … 6.3% inflation. So if you think that inflation is going to end the year at 2 or 3 percent, it means that we are going to have strong negative inflation. … And I think that is very unlikely.”
Harvey also points out important changes in the way inflation was calculated 40 years ago versus today. The key point is that changes in the shelter index (which is weighted to be about 32% of all-items inflation) were designed to smooth out volatility, and that means inflation is printing lower than reality. The result: “There is more to come. And it is because of this smoothing.”
“The point is, this inflation has already happened, but it is not reflected in the CPI. And it will be reflected in the next year, or maybe longer. So anybody who is telling the story ‘oh well, this is just supply chain or geopolitical risk and we’ll quickly be back down to 2, 3 percent’ … No. You have to look at the actual structure of how inflation is calculated.”
It’s an excellent video. Give it a watch.
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David Enna is a financial journalist, not a financial adviser. He is not selling or profiting from any investment discussed. The investments he discusses can be purchased through the Treasury or other providers without fees, commissions or carrying charges. Please do your own research before investing.
Treasury Inflation-Protected Securities 
The monthly CPI change is the most interesting for projecting future rates. And the monthly Core CPI change is even better. The annual data incorporates info we already know about.
After listening to the video, I think I will buy/gift some more I-bonds.
wow, excellent analysis that is actionable
Hi David – This is brilliant, thanks for sharing it. It is quite a contrast from what the Fed’s Neel Kashkari was saying on a recent episode of the Odd Lots podcast.
Here he is in a more recent, longer, and scarier discussion:
“We are paying the price for the Fed’s distortive interest rate policies.” Exactly.
I liked how Harvey showed that even if monthly inflation stayed at zero for the rest of the year, it wasn’t going to get anywhere near the FED’s stated goal of being between 2% and 3%. In fact, it would take sustained deflation for that to happen. That’s just simple grade school mathematics.
His comments about shelter costs being a lagging component of inflation were interesting. Surveying rental units on a rolling 6 months schedule seems reasonable. He brought-up an excellent point in that it’s going to take a while for the measurement of inflation to reflect past reality.
After sitting on the sidelines for the last few years because TIPS yields have been negative, I loaded-up on TIPS at the last two auctions. Since the June auction, the yield on the 5 year TIPS has doubled. If those yields hold for the October auction. I’ll be purchasing a lot more.
If you look at the FRED yield chart, 5 year TIPS yields have only been marginally positive for short periods of time since the Great Recession. The 2% yields prior to the Great Recession seem to be a thing of the past. With ZIRP and QE gone, this year and next year may be a good buying opportunity.
Right on…see also
https://johnhcochrane.blogspot.com/
“Apartment inflation” which highlight the effect of “sticky prices”.
Doesn’t that imply that 5 year TIPs with a real yield of about 0.75% are a solid buy compared to nominal Treasurys?
Yes, but of course, I am a big fan of 5-year TIPS. At the least, these are solid investments and the term is reasonable to hold to maturity.