Is There a Different Inflation Coming to Town?

“Transitory.”

It’s one of those words that has no meaning — at least when it comes to financial forecasts.

The Fed has been trying to stick to its “transitory” narrative when it comes to inflation.

But what is transitory? Six months… Or six years?

To address the possibility that inflation isn’t quite so transitory, the Fed has committed to tapering their massive debt monetization-fest over the next eight or so months. The same monetization-fest that has sent real estate prices soaring. 

(We’ve been talking about that in the past couple of letters. If you missed them you can read them here, here, and here.)

The TL;DR version is… Real estate prices have been pretty much skyrocketing. But I believe that prices will normalize once the Fed tapers its QE program and starts bumping up interest rates.

The problem is, they may be too late…

Because something else could be waiting to squeeze the economy.

What’s Been Missing for the Past 40 Years?

Take a look at this chart…

Source: Macrotrends

That’s the Fed Funds rate (the interest rate, set by the Fed, that banks charge each other to borrow excess reserves) since 1980.

Now take a look at this chart:

Source: Macrotrends

That’s the 30-year fixed mortgage rate since 1980.

It’s hard not to see the trends.

For the past 40-plus years, interest rates across the spectrum have been declining. 

Why? 

Because in large part we haven’t had to deal with a SERIOUS bout of inflation in all that time…

Now Comes the Bad News

If you’re old enough to remember the 1970s you remember what became known as the “Great Inflation.” It was an economy that was hammered by soaring prices across multiple decades.

It actually began in the 1960s with President Johnson’s huge deficit spending on both his Great Society program as well as the Vietnam war.

But ultimately it became associate with the 1970s.  Average inflation for the decade was 7.25% — but it actually broke double-digits in 1974 and 1979!

Ultimately Fed Chairman Paul Volcker stepped in to do what no one else had the guts to do… He raised interest rates to nearly 20% until market forces reined inflation in.

Since that time we’ve had it pretty good.

Are the Times Changing?

If you look back at the Fed Funds chart above, you can see blips in the trend lower where rates moved higher. 

These are the Fed’s response to bouts of “cyclical inflation” — inflationary pressures that last for one, two or even three years.

What happened back in the 1970s was what’s known as “secular inflation” — an inflationary environment that can last 20 to 30 years.

We’re certainly facing an inflationary environment today. The Fed and their minions keep trying to call it “transitory.” But what if it’s not?
Supply chain issues are definitely one of the main causes of rising prices today — but signs are they won’t be transitory…

The labor market is demanding higher wages to attract workers, especially in the food and beverage industries. These cost increases will be reflected in prices everywhere.

Food and energy prices are both on a precipitous rise.

Pretty much the price of everything’s headed higher.

The truth is, we’ve been so steeped in cheap money and low inflation over the years, we’ve become numb to the possibility of secular inflation. 

Today the rate on a 30-year fixed mortgage is around 3.1%. Do you recall what it was back during the crisis (only 14 years ago)? The same rates were averaging 6.4%!

The big threat could be a wake up call to some long term inflation…

Make the trend your friend,

Bob Byrne
Editor, Streetlight Daily