THE WOLF STREET REPORT: This Inflation Will Be Tough to Get under Control

It’s like a dam broke. And now higher interest rates and mortgage rates for much longer, with lower asset prices, as the Everything Bubble gets repriced (you can also download the WOLF STREET REPORT wherever you get your podcasts).

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  182 comments for “THE WOLF STREET REPORT: This Inflation Will Be Tough to Get under Control

  1. MarkinSF says:

    Numerous typos in the closed caption options. The worst of which is the final statement that lists Wolf’s site as WallStreet.com.

    • Wolf Richter says:

      Complain to YouTube about it :-]

      I find captions very distracting.

      • Gattopardo says:

        “I find captions very distracting.”

        Timely. There’s a NY Times article this weekend on the growing popularity of using captions all the time. Highly correlated to age (younger, predictably, prefer using them).

        • WA says:

          Wolf covers the liquidity part of problem well.

          There is another problem that needs addressing:
          1. Fed and govt can only print currency but cannot create goods and services that readonly represents.
          2. Slow QT will soon trigger layoffs as many companies will need to reduce non-profitable operations.
          3. Under slow QT asset prices remain high that causes costs to remain high that in tun makes many productive operations non-proditable.
          3. So these layoffs will reduce consumption and production both at the same time thereby not helping inflation.

          The right way to fix this would be a single 600 basis point Shock and Awe rate hike to match inflation rate.
          1. This would correct Asset prices really fast making many productive operations profitable.
          2. So while there will sti) be layoffs an non-productive operations will wind down, the productive operations will remain.
          3. This production of goods and services will provide sufficient supply to control inflation.

        • Augustus Frost says:

          “Under slow QT asset prices remain high that causes costs to remain high that in tun makes many productive operations non-proditable.”

          The effects of QT aren’t a mechanical process. Look at the central banks that used it. In the US, the impact was mostly seen in the stock market. In the Eurozone, stock markets are below the 2007 or even 1999 highs.

        • Flea says:

          Wa this would also probably start a war

      • John says:

        For the hearing impaired subtitles are essential if the message is to be conveyed, understood and even acted upon.

    • Winston says:

      “Numerous typos in the closed caption options.”

      I’m amazed it works as well as it does. If you knew what is involved, you would be, too. For instance, I have seen it come up with the proper spellings for difficult to spell (foreign) names for things like various scientific theories which means it must have some kind of look-up capabilities within the subject content probably known to it via channel tags. I hear in a video the name of a theory named after the guy who thought of it, look it up in the auto-transcript, and there it is, properly spelled as I confirm when I search for it in a search engine.

      • Winston says:

        I need to add that the name of the theory is often associated with some gobbledygook term that is also correctly interpreted and spelled.

        • Frengineer says:

          Gobbledygook terms are the hallmarks of science and technical progress made possible by the tireless work of pioneers :)

  2. Pete Koziar says:

    Governments are fighting the fed tooth and nail. Here in Pennsylvania, the governor wants to hand out $2,000 checks to every household that earns less than $80k.

    You can’t make this stuff up.

    • E Vanswr says:

      Gee that’s not inflationary IS IT!!?

    • Lucca says:

      Sounds like the governor is trying to buy votes.

    • Confused says:

      I received $600 from Governor Newsom. He did not receive my vote in the primary election because I think that money should have been spent addressing California’s serious problems, such as the water shortage, forest fires, homelessness. Now, the state is handing out money for people to use to buy a house they can’t afford. What are these people going to do when they have to pay for a new roof, etc.? I wish politicians would extend their cognitive time horizon beyond the next election cycle.

      • Jon says:

        These are legal ways to buy votes.

      • Wisdom Seeker says:

        If the government finds itself with extra money to hand out on a whim, it’s prima facie evidence that tax rates are too high.

        So many statewide problems, including excess outstanding bonds, and they come up with a vote-buying scheme…

      • Phil says:

        Right wingers in my state are always screaming that the state should give back excess tax dollars. Now it’s happening, they’re screaming about it. :D

        • Mr. House says:

          The 2000 they want to give out isn’t from tax money, it was printed covid money. So uh, they didn’t tax for the giveaway.

          What causes hyperinflation again?

        • Mr. House says:

          Correction: They did tax, but it was against people who don’t speculate in casinos and save.

          So essentially an unequal illegal tax.

      • Wolf Richter says:

        Revenues in CA are already coming down hard due to capital gains tax shortfalls, and sales tax shortfalls. Particularly capital gains taxes are huge for California, and when the markets head south for long enough, the state runs out of money again.

        Right now, the state is still sitting on a mountain of pandemic money, and it will continue to spend it, but with revenue shortfalls lining up, eventually, the state will be back to budget cutting and program cutting, and then paying with IOUs because it ran out of real money. None of this stuff lasts forever.

        • gametv says:

          And they will be begging the Federal government for bailouts. The cycle seems to never stop. I read an article somewhere that talked about how Italy is accused of being fiscally irresponsible, yet it has a surplus each year now and the US is never accused of being fiscally irresponsible, yet we have massive deficits.

          As long as the dollar is the global currency, it seems we can continue to increase the massive deficit spending to no end.

          There is a point at which I really dont want to be a citizen of this country any longer. Such blatant greed and childish irresponsibility by so much of the population. You can literally explain this stuff in detail to people and they will say they dont care. They just want freebies.

          Aaarrrgggghhhhh!!!

        • gametv says:

          Wolf,

          I guess you can still put me in the partial denier category when it comes to inflation. I just dont see this inflation cycle enduring for a long time period.

          As you said, goods inflation and commodity inflation is coming under control and so it all boils down to services inflation. I personally believe that the internet has changed the ability of companies to engage in inflationary services – depending upon how much of a monopoly they have on their market. Commodity goods and products that are non-essentials have such massive price transparency – i can visit multiple sites with the click of a button and compare prices on similar goods. Companies like Amazon and Costco constantly beat down suppliers for better pricing (either through marketplace dynamics or price negotaition).

          So the inflation bug lies primarily in goods and services that are monopolistic and non-fungible (cant be substituted). Healthcare has limited choices from insurance companies that have no interest in driving prices lower, so inflation can wrack that industry until the government steps in. Higher education can also keep passing price increases for a quality degree. But I personally believe that many other service companies will see their business volumes erode as they try to raise prices further. Netflix is seeing alot of switching when they increase prices, I can drop them for 2 months and catch up on Hulu if I want. I can also skip the expensive out of home food and bring my lunch to work, I can drive less, go to the barber less frequently, etc.

          I see inflation falling rapidly as soon as…

          1. Credit card balances get bloated again. I think we are getting close to normal balance levels.
          2. Bank balances drop back down to normal after all the free money has been spent
          3. Home prices fall and people dont fee equity rich anymore (this is the big one). High home prices cause people to spend on many household products and services. Once home prices have fallen back down to pre-pandemic levels (in 12 months), the wealth effect will vanish and actually be negative, because the previous belief that home prices always rise will be dashed. Hopium will be gone.
          4. Stocks and bonds continue to fall – at least another 20%.

          Rent inflation is a lagging factor, we are already seeing asking rents fall, it will take time for this to be reflected in the inflation indexes, but rent inflation is reduced significantly and will definitely be gone in 6 months time.

          I am looking for the Fed to increase rates by 1% to send a message that they are real serious about inflation, or alternatively maybe to also announce they are increasing sales of assets even further. These Fed actions are being driven by the November elections, so for the next couple months, watch the Fed act real tough. After that, I bet the Fed will pause the tightening.

          I just dont agree that inflation is a persistent problem, I actually think recession and collapse of the economy in the next whiplash effect of a fragile economic system is going to start within 6 months. The US doesnt make anything any longer and has been engaged in an orgy of “salesmanship and profiteering” where we reward people who dont create any real value (lawyers, real estate agents, wall street, private equity). This internal re-shuffling of ecomonic prosperity has hit an end.

        • QQQBall says:

          @Wolf Richter…. Cali will try to maintain revenues by higher fees, tax rates and new taxes. Be very hard to take the heat cutting give-aways during a deep recession. The calls will be for more government support…and Gov. Newsome has the time and money to bait other states other than focusing on the lights coming on when you flip the switch and water coming from the faucet. I had to laugh when Newsome said “we didnt have blackout” implying that power was plentiful. He was begging people not to use utilities and utility providers jack the cost of power b/w 4pm and 9pm.

          I wud guess the outflow of businesses increase. Companies are going to be faced with moving or going dark just like Buck Knives was 20 years ago when they moved to Idaho from San Diego County. As the exodus increases, tax receipts will decline even faster.

        • Wolf Richter says:

          QQQBall,

          That was a brutal all-time record heatwave, both in terms of how hot and how long. In Sacramento (capital of CA), it reached 116 degrees, which is nuts for CA. The daily encouragements to reduce power consumption between 4 pm and 9 pm worked very well. I got those too. We already have time-of-use pricing, and PG&E gave some extra credits on the bill for reducing power during that time slot.

          And so yes, no major blackouts.

          Unlike in Texas in February 2021 — when there were catastrophic blackouts when it got cold.

    • Augustus Frost says:

      Don’t worry, the problem will soon solve itself when the US economy first enters a severe recession and later in the future an economic depression.

      There won’t be any state money for MMT then.

      • Evelyn Wood Head says:

        But at least we did not go into a depression when the CoVid pandemic first started raging. It would have really been bad for us Americans being in a depression AND everyone Sick with CoVid and Hungry and Broke!!! and no way to fund tax revenues to finance the method to figure such a large mess out. Remember the GDP was down like -16% the first quarter and then -36% the next quarter but after the stimulus it was positive in the third. If it was negative in the 3rd quarter this would have been the definition or at least the start of the definition of a depression.. You have to admit that even though the “can may have been just kicked down the road” the overall soloution will be a lot milder because it was properly thought out and executed.

        • Nissanfan says:

          You lost me at covid. It was handled just as badly as is inflation “crisis”.

          Both should have just run its course on its own. Lockdowns, QE did more damage than it did good. “Experts” are finally slowly admitting how biased their decisions were.

          Politicians are neither health experts nor economists.

        • QQQBall says:

          @ Evelyn – The Bureau of Economic Analysis (BEA) released its initial estimate of first-quarter U.S. gross domestic product (GDP) Thursday at 8:30 a.m. ET. Here were the main metrics from the report, compared to consensus data compiled by Bloomberg: GDP annualized, quarter-over-quarter: -1.4% vs. 1.0% expected, 6.9% in Q4.Apr 28, 2022.

          -1.4% is not -16%. Also, if you shut all the businesses and lock everybody down, what would happen to GDP?

        • HowNow says:

          I agree. Good points, EWJ. There are a lot of cranks on this blog who bitch about everything the government does – non-stop bitching. Don’t take this to heart. It’s not about ideology, it’s about personal anger.
          If the government did nothing at the outset of the COVID pandemic, the cranks would have screamed bloody murder, at best, and possibly lost their possessions (which they cannot imagine losing) and perhaps their lives should gangs take over where government used to be.
          So, take it with a grain…

      • dougzero says:

        Maybe not soon, but eventually. I am seeing the Covid relief funds just being doled out by the state to counties. The counties will be spending it on who knows what, but engineering and permitting, etc for utility projects(one of those in my county) take time. Plus they have to have their fights over how the ‘free money’ will be spent. All that takes time.

        • VintageVNvet says:

          10-4 dz:
          And to be sure, most of that time is needed so the corrupt political puppets can make sure,,, DAMN sure, FAR SHORE,,,
          that their pay offs from their votes WILL in fact reach their pockets, even if it needs to go through their spouse’s aunt’s bank account so that WE the PEONs can never have any chance of finding out and figuring out how the BRIBES worked.
          System has been working for many decades,,, but, WE, in this case, clearly, WE the PEONs keep hoping to get some honest folks into every GUV MINT office sooner and later,,,
          HOPE??? More like a dream to replace the current nightmare,,, eh

    • James Nielson says:

      Every HOUSEHOLD? So every dude or dudette living alone in an Artist Loft, same as a family of seven?

    • TK says:

      Wants to does not equal will do. Speculating is a lot like gossip. Pointless. Politicians love it.

  3. Lucca says:

    Thank you Wolf for another great podcast. How high do you think mortgage interest rates will have to go to get inflation under control?

    • Wolf Richter says:

      I wish I knew. It’s not only “how high,” but also “how long.”

      • sageWexford says:

        Wolf, I think we will see Fed Funds at the high end of the range at 7% to 8% by the middle of 2023 (all Fed rate tightening for naught if inflation stays in the 6% to 8% range, so they must approach/exceed inflation via Fed interest rates) and mortgage rates, based off what the spread from the 10-year Treasury Note usually/historically is at 200 basis points for 30-year mortgages, approaching 9% to 10% by year’s end.

        That would be looking at a flat yield curve from the 2 year to the 10 year note which could be possible as a recession takes further hold. But there would be time premium pressure due to persistent inflation to push the 10 year to a 100 basis point to 150 basis point premium over the 2-year.

        Seems to be some form of consensus developing on Wall Street that the Fed will be done tightening short-term interest rates by the end of 2022. I think they will only be 2/3rds thru. QT will raises the rates at the intermediate to long-term levels, but at a very, very progressive (aka, slow) rate. Usually, pegged at the 10-year to 30-year maturities. Now, demand for mortgages due to skyrocketing Costs to Carry a residence, not to mention sellers who have not see the reduce-the-price memo, will subside as they have already in 2022. So my frosted crystall ball says 8.5% to 9.0% mortgages by Xmas 2023.

        It has to happen fast to get the drunk American economy, having swilled on liquidity for almost 1.5 decades now, into the recovery ward before the DT’s set in. Only The Shadow knows how long these money prices (interest rates) will last. Think longer than any of us expect at this point in the new cycle.

        • DR DOOM says:

          The Empire must sell its debt. The Empire will throw any and all assets under the bus to this end. My wealth and your wealth if tied up in assets in the way of selling the Empires’s debt will be liquidated. I am buying the Empires debt by buying short term treasury notes and rolling them over every 4 and 8 weeks. I am a good little empire citizen and do not want to get caught under the driving wheels of the empire.

      • Softtail Rider says:

        Wolf, your comments brings to memory my younger days of using dogs to hunt wild hogs in the swamp. We used Pit Bulls to catch the hogs and load into trucks in cages. Those dogs never let go!

        At my age then this was a fun activity. Not so much any more.

        I don’t have a dog to catch this inflation. I can however do the same I did during the 80s. I invested two thousand each, three years after IRAs were made and ended with $27,000. Worked fine but later investments not so well. Prime rate back then as memory says was 21%. Getting old so don’t hold me to facts.

        I’m looking at the same situation today without needing to buy a house and no money available. As said before I went contract for deed. The owner also had a loan payment for the same as my agreement. He and the loan company stayed in contact and when money became available I closed the contract.

        Sometimes funny how life was back then. Honesty was very important,

        Today I am looking for CD’s with a reasonable return on investment. Guess the world truly does revolve in a circle.

        Much like hunting rabbits with a good dog!

        Enjoy all the excellent data and the comments.

        Need another mug if only I can remember to send the check/donation.

    • Apple says:

      Rates peaked at 16.63% in 1981.

      • Lucca says:

        Which shows how far off the Fed is in fighting inflation.

      • Dan says:

        Which rates — 1 year treasury bills, 10 year treasuries, 30 year treasuries, 30 year mortgages? It makes a difference.

      • Depth Charge says:

        Yet the pivot crowd thinks the FED can just stop at 4% fed funds rate and then immediately go back to dropping them, like that’s going to do anything. These same people will be waiting for “The Great Pumpkin” late next month.

      • Phil Blythe says:

        I was a junior banker then. We loaned money to our best customers at 21%, and paid over 17% on a 6 month CD.

    • Harvey Mushman says:

      Captain Obvious would say that interest rates will need to keep going up until inflation comes down.

  4. Ben says:

    Insurance may not be in short supply, but the services they pay for have increased in costs, hence the premium increases.

    • Wolf Richter says:

      Yes, that’s how inflation works, how it keeps cycling through the economy. Businesses whose insurance costs jumped pass on those premium increases in their prices, and it just keeps going. This is one of the reasons it’s so difficult to get inflation under control when prices of services rise.

    • Brant Lee says:

      Hence a good opportunity to gouge, need it or not.

      My car is worth a little less this year and I’m driving much less. My home value peaked probably last year during the latest housing fiasco and is losing some ground now.

      What corporation or bank is not going to take advantage of the situation?

      • robert says:

        Easy question: why didn’t they ‘gouge’ before?

        • HowNow says:

          Because of the “psychology” (behaviorial economics). If everyone is talking about inflation, companies, landlords, dentists, et al, will gouge, whether or not they have windfall profits or their actual costs increased.
          Same for stories about house prices – bidding wars beget more bidding wars.
          Without the psychology & “everybody” echoing the inflation story over and over, prices would remain in check. Not true, though, if a company is a monopoly or duopoly or similar. They have pricing power and raise prices, at all times, to the point where it doesn’t draw in competition or kill demand.
          These are not moral matters. It’s maximum profit until something external stops it or something breaks. Then, the CEO will refresh the resume and jump ship. Pirates without the musket, parrot and eye patch.

    • Wisdom Seeker says:

      For a lot of services, the scarcity of labor IS sort of a supply chain issue. Skilled labor in particular is a critical input to most services.

  5. Swimmer says:

    Actions of the Fed and the federal government continue to be blamed on incompetence. But if one looks back through history, you’ll see there have been a great many periods of increases in a country’s money supply, and periods of inflation. Surely people at the Fed and in the government have studied economic history, and from that know what dramatic increases in a money supply will do. Which leads one to suspect that what has taken place is deliberate.

    • brewski says:

      They may have studied history, but sorry to report:

      “The only thing that we learn from history is that we learn nothing from history.”

    • robert says:

      “If this [Fed] is created, you will have created an engine of inflation”.

      Senator Elihu Root during the Congressional debates to create the Federal Reserve, 1913.
      Former Secretary of State, Secretary of War, Nobel Peace Prize 1912.

      Inflation, 1919 ~20%. Depression, 1920, 1921. etc.

  6. Rosarito Dave says:

    Hey Wolf, first I will preface this by saying I haven’t yet LTTGDFP. As a rule, I don’t listen to podcasts, but I have made a few exceptions with your’s and will listen to this one later at my convenience…

    That being said, the reason I am posting a comment today, is something I read earlier today. It brought up a point I hadn’t considered much and I think it pertains to the subject matter at hand….

    Do you think there’s any validity to the idea posted below?
    ————————————————
    Per Sarah Wolfe in US Economics, about half of all the income in the US is earned by households making more than $100,000 per year. Most of these households own their own homes, and either have no mortgage or have refinanced into a 30-year fixed-rate mortgage at an extremely low rate. This means that the largest expense for these households is not rising even as the Fed is hiking, but their wages are (median wage growth in the US is ~6.5%, per the Atlanta Fed). For many of these households, which represent a large share of national income, financial conditions aren’t tightening, they’re easing. This may help to explain why core inflation is so ‘sticky’ on the way down.
    ————————–

    • Wolf Richter says:

      Rosarito Dave,

      1. Agree – and it’s well established – that wealthy high-income households experience inflation a LOT LESS than households that have to spend their entire income on necessities. Even the Fed has mentioned this a lot in recent months (Powell, Brainard, Fed papers).

      2. Financial conditions are related to the costs and difficulties of borrowing. So if those high-income households don’t need to take on new debt, they don’t feel tightening financial conditions.

      3. But wealthy households are much more exposed to asset price declines (stocks, bonds, real estate, etc.) since the top 20% on the wealth scale own the vast majority of assets. So that’s where they’re feeling it. But they’ll be just fine if they’re – as you state – not leveraged. They will still have a lot, even if it’s a lot less. That’s why asset price declines (through QT) have relatively little impact on the overall economy.

      • Jon says:

        Anecdotal.. my friends who are multi millionaires are tightening their purses because they lost a lot in asset market

      • Brady Boyd says:

        Are there any available reports in FRED that shows monthly QT & QE? I track Fed Reserve Borrowings and Money Supply but not sure if that will show QT. Thanks!

      • jm says:

        Several very well-to-do retired friends own two or more very nice homes, total real estate tax bill $50k or more per year. They’re members of an investment club I joined entirely to widen my social circle. A state goal of the club is that members will cooperate in trying to find stocks that will go up 25% in a year. Of course in the ZIRP-and-QE fueled bull market of the last 20 years they’ve been able to find some, and almost anything they bought went up some percent. Holdings dominated by Apple, Google and Amazon, all bought years ago, so still in the black. No thought of selling them despite declines — sure they’ll come back and go on to new highs.

        I asked a member who I know has $50k real estate taxes whether he can pay all his living costs from dividends and interest. Nope, he needs to sell stocks to pay the bills.

        Wealthiest member (one of the multi-home owners) is huge fan of Disney, though in 70s goes to parks frequently, has gotten club to keep buying into it, averaging down, touts its move into streaming, counters my arguments that their price hikes are going to cost customers by observing that parks are still packed. Can he pay his bills just from dividends and interest, or does he too need to sell some stock every year?

        None of these people can imagine that the market is going to fall 80% as it did in the dot-com crash (and in Japan in the 1990s crash). And anyway they’d be sure it would come back as it did post-dot-com crash (not stay down for years as Japan did, or as the U.S. market did in the 70s). It’s a fairly safe bet that they have envisioned continuing to support their life-styles by selling small fractions of portfolios of stocks at prices above current levels and steadily increasing, not at levels half of or even less than current prices.

        It’s clear they cannot imagine that the inflation-adjusted S&P 500 could again fall as it did from December ’72 through September ’74 and then not reliably rise again above the low until September ’82, and not recover the high until August ’87 — or that the U.S. market could behave as the Nikkei 225 has since the 1990 peak.

        Use the sliders on the data at
        https://www.macrotrends.net/2324/sp-500-historical-chart-data

        Of course if stocks fall 50%, and you’ve got to sell to support your life-style, you have to sell twice as much, and your nest egg disappears much more rapidly than you expected, especially if you were sure they could only go up.

      • jm says:

        Note that the inflation-adjusted S&P 500 did not recover reliably above its November ’68 peak until December ’94, and had more-or-less recovered only by 1989.

        • Harrold says:

          Reagan turned on the money spigots in 1982.

        • Wisdom Seeker says:

          Yes, for stocks the 1968-1982 bear was almost as bad as 1929-1933, after inflation. But be careful with the interpretation, because the MacroTrends data are overly pessimistic. They don’t include the dividend yield, which is a significant part of total returns. (And was larger back then.) Over 20 years, that makes a huge difference.

        • NBay says:

          Harrold,

          He did a LOT more than that, all of which combined into turning class warfare from the sick pastime of a relative few, into our National Sport.
          Of course he was just Heritage Foundation, et al, programmed, but still seemed to enjoy the role….what B actor wouldn’t.
          The TV reality show star sure did.

    • Gattopardo says:

      I’m not Wolf, but I’ll throw in a partial answer. Financial conditions may be easing for some, from a daily P&L or cashflow perspective. However, those are also the owners of a whole lot of the nations assets, and those assets are getting crushed much harder (and on a larger basis) than their incomes are gaining. So from a balance sheet perspective, their financial conditions are tightening.

      Before anyone says “ahhh, but they don’t need that money, so it doesn’t matter.” Well, since the purchasing power of those assets is falling from the crushing AND inflation, and money is only useful to buy stuff (don’t nitpick here), their futures are still tighter.

      • Old school says:

        Its going to be interesting how it all plays out. I keep much of my retirement funds at the front end of the curve since 2016.

        Monthly interest payout went from over $1000 per month to around $100 per month and now if Fed keeps raising will pretty soon be at $2000 per month. Not sure the higher income is going to cause me to spend less.

    • Rosarito Dave says:

      Thanks for the replies, however I’m thinking that these households still have the wherewithal to be willing to pay higher prices for rising service prices, especially as their wages are increasing. As this seems to be the stickiest part of inflation, I can’t see how that will go down quickly just by raising rates. Yes… eventually everything will level out and maybe start coming down, but not in the near future…

      • Miller says:

        Thinking that from this podcast and what Wolf has said elsewhere, if anything QT is even more important than the interest rate hikes to help bring inflation under control quickly. The rate hikes are important, and the Fed should be looking at minimum 125 basis points or even a 1.5 percent hike in the next meeting and inter-meeting hikes, as Volcker did. But like Wolf has said, the QT hits the asset prices of the big asset holders and wealthiest households, and major speculators, who have the least to worry about as far as their total portfolios (which will still be quite high). A smart move for the Fed would be to rev up QT even faster, which is after all one of the tools they have at their disposal that even Volcker didn’t in the early 1980’s when he went aggressive with the rate hikes.

      • Concerned_guy says:

        I have said this ~1.5 years ago…

        Massive-deep recession/lot of jobs losses will be needed to fix inflation.

    • BS (ini) says:

      Stat I won’t disagree with but the conclusion I would like to challenge. Retirees are on fixed incomes that went negative with inflation and ZIRP. For the high earners I agree that they have not reduced which shows up in the retail sales data.
      Hense the interest rates need to rise much more. Wolf mentions that inflation impacts low wage earners and retiree much more than the top wage earners. These same wage earners because of what u mentioned low Mtg good balance sheets takes longer for them to slow down. Hence inflation for longer.

    • Miller says:

      This is mostly true from what we’ve seen working in and with the tech sector, the one part we’d question is the wage growth side–we’re not really seeing that much. Companies have been doing everything in their power not to raise wages for established workers, even high skilled tech workers, to the point of trying to hire cheap labor (thru things like H1B) for other tasks instead of raising salaries for Americans. In other words companies are trying to force the workers (including high-paid high-skilled Americans with well into 6-figure salaries) to eat the costs of inflation instead of allowing for even modest cost-of-living raises, one of the reasons why raging inflation can so easily lead to social unrest and breakdown of society–the people actually doing the work have the least power to demand that their incomes catch up with inflation.

      The usual response we get to this is “just switch jobs” since yes, the higher salaries usually come with signing up for a new position instead of staying with the job you already have. This sounds nice in theory but it seems like those sorts of articles are disconnected from the real world, and how difficult it is in practice to just quit and pick up another job, even for someone with very in-demand skills, from what we’ve seen in nearly every state’s high-tech jobs sector. You’re making a guess about how the work environment of the other company is and how willing they are to keep you on board, the company you’re leaving may be less than interested in giving you a reference (not to mention non-compete restrictions), you may well have to move to a different area (very difficult to do if you’re indeed a homeowner, even if home values are rising–and now of course they’re falling), may have to send the kids to different schools.

      Plus a lot of these tech jobs are very specialized and specific and it can be hard to transfer skills over so easily, and even under the best circumstances, with all the HR screening and the multiple documents to get on-boarded, you’re looking at a delay of at least 2-3 months and usually more to actually start working at the new company, with all the headaches of making sure you have health insurance to cover costs if you, the spouse or kids get sick. (And Lord help you if you get divorced–the divorce courts in the US and Canada at least are profit centers for the lawyers and the state, and even high-earning divorcing couples get drained of earnings and savings, if I were a good-earning young American interested in starting a family it’s almost enough to suggest moving overseas instead.) So we’re seeing most of the things you’re talking about, but not really seeing this wage growth, certainly not for tech workers who stay with their companies (and again it’s much harder than the headline talk indicates to “just switch jobs”)–companies esp in specialized sectors with specific, high-competency positions and skills really do seem to be doing everything they can to not grant raises to help workers, even very proficient and experienced ones, deal with this inflation. Another reason the Fed needs to go full Paul Volcker to get it under control.

      • bulfinch says:

        My employer sprung for a 1% across the board COLA last quarter.

        And while it didn’t nudge me any nearer to the cornucopia most of my fellow Americans enjoy — these savvy hyper-numerate investor geniuses who’re are apparently just lousy with cash, and carrying no credit card debt, and shopping shopping shopping — I did appreciate the thought…

        sort of…

      • NoPrep says:

        Insightful comment. We do have the higher paid techies – work at Alphabet, Amazon and so forth. Not really pleasant, joyful work, but also not the hardest work for young and sharp minds who learn to work STEM. The Frugalwoods were a -dink- tech “elite” couple for a decade or so. Saved a relative ton of money but wanted to get out. And became the Frugalwoods.

        I don’t want to be a Frugalwood tbh
        Nothing against them but there’s something about them I don’t want to be like.
        (elite in quotes because these folks surely aren’t part of the worldwide business/global elite, as they are called)

      • TK says:

        Agree. Even in Nursing, the most in demand job, wage increase was just 3%. And they are recruiting Visa workers. The hiring bonuses are huge but few actually stay to collect. The work is hard and even super hard due to staff shortage. So please, everyone, be nice to the Nurses. Many are having burnout, meltdown etc.

        • Old school says:

          Might be a big swing coming. Profit margins went to record high of nearly 14%. It’s supposed to be mean reverting to about half that number as politics shift and labor gets more power.

        • Lili Von Schtupp says:

          Nursing is a quiet mess. Shortages of HCPs especially in expensive areas. But, in 15+ years, I saw annual staff raises only happen exactly twice; most non-union RNs are used to the financial abuse.

          And now the COVID lawsuits are starting–SNFs mainly, who got the shite end of the stick during the pandemic and weren’t excluded from liability like ACFs were. Lots of consultant audit requests from SNFs looking to tighten up before court/settlement/whatever.

          The layoffs were quick after the pandemic peak as hospitals were looking to recoup costs. But now they’re desperate to hire, not enough to pay a sensible wage of course. Friend’s remote medical employer uses a bonus system based on productivity quota yet curiously, all sorts of tacks have started being thrown in the road such as random frequent IT issues, selective case assignments, long and pointless meetings, etc. Burnout is very high even among remote/WFH RNs.

    • Augustus Frost says:

      The 81st to 90th percentiles of the top 20% aren’t wealthy, only somewhat well off and this also depends upon where they live and household size among other factors. In any large metropolitan area, definitely middle class.

      Most of their wealth is also in home equity and/or tax deferred retirement accounts meaning they don’t usually have access to meaningfully large spending cash.

      Like everyone else, they are also mostly almost entirely dependent upon wage income for their current affluence.

      So basically, they can spend while the labor market is tight but that can change quickly for most of them.

      The data is mostly public for those who don’t believe this description.

      • phleep says:

        I was shocked to find my net worth is around 80th percentile for households. No way am I wealthy.

        More shocking is the financial condition of those in the 79 percentiles below me, which must be truly awful. Something like (paraphrasing Lenin) 3 meals away from chaos.

        • Wisdom Seeker says:

          Net worth is very age-dependent. Very few people under 40 or 50 have saved for long enough to have much net worth yet. That accounts for 1/3 to 1/2 of households.

          In the data I saw (from 2019 … bit stale), $1,000,000 in net worth put one at the 88th percentile. Simply having $0 in net worth (i.e. not being mired in debt) put one in the 11th percentile.

          It’s also state-of-residence dependent. States with bigger housing bubbles generate higher-net-worths from home equity.

          Bet the housing bust (just getting started) does more percent-damage to most people’s net worth than the stock&bond market bear-market.

        • Old school says:

          Wisdom seeker,
          Very true. I am 66 and in the top 20% wealth and bottom 20% on income. Its kind of a lifestyle choice.

    • Nick says:

      What nonsense. Look up the stats. Less than 7% of workers who take a wage or salary make over $100k a year. 40% of those if I recall make less than $140k. Id say those households making a combined income of $160-200k are leveraged with debt and the McMansion lifestyle more than anyone. The demographic she (you) are talking about probably are those making well north of half a million. ie a household with a white collar profession of lawyers, doctors, small business owners etc. A household with 2 public school teachers making $80-90K you think is going to skate through this coming economic downturn because they don’t carry much mortgage/debt? lol sure!!

  7. Lucca says:

    Last year the Fed’s strategy was to do nothing, hoping inflation would go away on its own. This year the strategy seems to be to do little and as slowly as possible.

  8. Roger Dodger says:

    Locally they are or are hoping to increase taxes and spending at every level of government, and I’m sure voters will be good little zombies come November and continue to vote in favor of tax and spending increases, as taxes only apply to others, or each little increase is so insignificant why not. Plus we have to vote with our heart rather than our brain.

    Most voters still haven’t figured out bonds are loans that have to be paid back with interest which results in increased government spending and the need for increased taxes.

    They also believe federal money is free money that others pay, not themselves, or that if we don’t spend it someone else will, so we must.

    All meaning, as Wolf states, inflation is here to stay until great damage has been done to the economy and individual finance.

    • Nick says:

      Its not damage, it’s called paying the dealer what he’s owed. America has been high on cheap money for 15 years. Now we are the victim? lol

    • Harrold says:

      They will in Texas, thats for sure! Elections haven’t been competitive here in 30 years. Those currently in power are a lock for re-election.

  9. Richard Jackson says:

    Wolf, my son age 40 has long been a fan of yours, and recently urged me to subscribe. I wish i had done so sooner.
    A small point: your saying the Fed is trying to “repress” inflation caused me to look up some definitions. You might enjoy, it’s kinda fun:
    “To oppress means to keep (someone) down by unjust force or authority. To repress is (1) to hold back, or (2) to put down by force.
    Suppress, which is broader and more common than the other two, means (1) to put an end to, (2) to inhibit, and (3) to keep from being revealed.”
    You might be right that it is “repress” but as you reflect, governments have not yet been forceful. Hmmm.

    • Wolf Richter says:

      What I said was “interest rate repression” — meaning until its pivot late last year, the Fed lowered its policy rates to near 0% and kept it there, and it engaged in QE to repress long-term interest rates. I’ve used this term a gazillion times over the years.

      I’ve also used “financial repression” in the past (not in this podcast) — which is a technical term about pushing interest rates well below the rate of inflation.

      “Inflation repression” is not anything I ever said, but heck, I might if the Fed is actually able to do it :-]

  10. smashsc says:

    It’s one thing to read Wolf’s articles and try to digest just how serious and long-lasting the inflation is. It’s quite another to hear him elaborate in his own voice. I came away very concerned & looking to make further adjustments on spending and investing starting tomorrow. Thank you Wolf, for the warnings.

    • SpencerG says:

      Yeah, I came away with the same concern. For one thing, before this podcast by Wolf, I have totally ignored the impact of state and local government spending on inflation. He mentions it three times I believe. I will have to look into that further.

  11. Michael Engel says:

    1) SPX monthly for fun and entertainment only :
    SPX built a Lazer tilting up between 2004 and 2006. After twelve years,
    in Dec 2020, SPX came from below and moved in. Jan 2018, Feb 2020
    and Sept 2020 highs are x3 failed attempts to move in.
    2) SPX osc above the Lazer until Jan 2022, below in June 2022. Options :
    3) Option #1 : SPX will plunge after losing it’s grip last month.
    4) Option #2 : June low is good enough. SPX will osc inside and move above
    to a new all time high.
    5) Option #3 : the next high at 6K/7K will not be the last high. SPX might
    move higher for more than a decade, before moving sideways…

  12. Cobalt Programmer says:

    1. Difficult to control inflation without triggering a recession.
    2.The youtube subtitles are made by NLP – natural language processing AI. The captions can be turned off.
    3. If prices of everything is raising how come the how do I explain my salary or T-bills?
    4. Inflation in food is what is going to burst the dam.
    5. You dont have to wait because its already here
    6. Limit of the fed rates is ~5% (my guess). Recession is waiting beyond this limit.
    7. May be the rate 5% will stay longer time.
    8. Congress passed an important bill to control inflation.
    9. Inflation reduction act 2022.This will bring down all the inflation.
    10. After november, SPR will stop flowing. Gas prices will be higher again.

    • Random Youngster says:

      “8. Congress passed an important bill to control inflation.”

      It just dumped more money into money supply. How is that helping?

      • NJGeezer says:

        I read CobaltProgrammer’s #8 as pure sarcasm, but lacking the /sarc flag. If this is not the case, then clearly CP’s financial acuity may need a slight adjustment.
        –Geezer

        • NBay says:

          It may not control inflation, but it means fewer kids will go to bed hungry. (and as quoted here before, “the wealthier will have it all before nightfall, anyway.”)
          The “Free Market” and “trickle down” don’t seem to work very well for distributing food and shelter….or good education and good jobs if you want to use a tired argument.
          Some people just aren’t quite as perfect as most here are…..for some unknown reason…..when measured in net worth and lifestyle, of course.

  13. JeffD says:

    Expect oil prices to rise again in the near term, probably to $120.

  14. Mike says:

    compelling argument that fiscal/monetary is still stimulative and that old COVID $ is still in state coffers. The inflation in services is more concerning because, as you state, there are no supply chain issues there.

    I dropped a couple of coins in the jar as a thank you for your analysis. I might have dropped a few more but I have to double my Prozac prescription now

  15. breamrod says:

    with Europe in such bad shape that might trigger a flood of money moving into U.S. assets such as stocks and real estate. That would be interesting to watch even as the U.S. economy sloes into recession in 2023 and interest rates continue to rise.

    • phleep says:

      Also, the US is offering increased interest rates. I have wondered whether all this is buoying markets up at the moment.

      The “carry trade” is borrowing somewhere cheaper, and lending here. That usually pays nickels, but has been known to unwind steeply: one meets the steamroller in front of which one was grasping the nickels.

      In the USA, this unwind could take the form of the Fed panicking if a downturn happens too fast, and loosening.

    • Miller says:

      That’s questionable because even with the issues over there, it’s actually the USA that saw GDP shrink in Q1 and Q2 in 2022, while it went up in Europe (much more than expected) in first half of 2022. There’s been this weird dis-connect between media headlines and perceptions (at least in the US media) and the actual numbers and figures that come out. While it’s true the GDP shrinkage doesn’t mean a recession (US employment and spending are still holding up for now), it calls into question the narrative that the US is a better performer than the other major economies, the data just don’t support that. A lot of talk and expectations about the European Union going into recession in 2022 when in fact of the major economies, the EU has had the best performance so far this year by the numbers themselves, which I also found very surprising at first until one of our technical briefings a few weeks ago. It turned out that Europe’s energy policy even prior to Russia’s recent blundering had been much more ruthlessly practical than we’d thought, with esp France muscling in conditions to make sure that nuclear power was considered green tech, and a lot of alternate nat gas pipelines sent up both officially (and through LNG deliveries) and through the black market, and Iranian natural gas basically being pipelined in with lip service to US sanctions. Germany was forced to acknowledge that Merkel’s delusional Energie-wende was a total failure and re-started a lot of its nuclear plants while opening up to “clean coal” (which also became “green”) even as it also expanded alternative options. EV production was ramped up, and there’s been a surprising level of investment into software startups and chip production across the bloc (with the Netherlands already having a near-monopoly on one of the key fabrication steps). Even China despite its slowdown has held steadier than we thought with its exports, growth and trading expansion, and once the next Congress is done and Xi is a bit more secure for his next term, they’re already dropping COVID zero policy since they have a nasal vaccine and good enough rapid-tests to keep any COVID wave from getting too burdening, which should also help with supply chains. Very doubtful there’ll be any flood of money from other regions into US stocks and real estate when it’s the USA that’s been the laggard despite the reports and expectations.

      And then there’s still the main elephant in the room, which is US assets are already way overpriced and overvalued in equities and especially our housing bubble which, while not as bad as Canada’s or Australia’s is still one of the worst in the world. And all this while inflation rages and US social unrest become a mounting threat–esp as rents and food prices go up to the moon, a country with 400 million guns and a very angry and divided populous isn’t necessarily a safe place to park your money at least until the inflation is under control. “Buy high” has never been a good maxim for investors and until assets in the United States reset to a more realistic level, at least in line with actual US incomes, money is going to have to flow out of US stocks and real estate, not in. Too, and as the Fed well knows that outflow from overpriced US assets is the only way for inflation to get under control and that’s a much bigger threat to US power and even viability as a nation than falling asset prices.

  16. Inflation says:

    In Canada, a plot of land in the middle of nowhere was valued 5,000 in 2013. After 2020, that same plot of land sold for more than 500,000. Happened a lot in rural Ontario and the Maritime provinces.

    The Bank of Canada MUST hike interest rates some more. Hike it higher and higher and disregard the home owning politicians who don’t give a single care about the common Canadian paying double the prices for food compared to five years ago.

    I could have bought a tin of sardines for 1 dollar in 2015. Now it’s 2 dollars!

    • Miller says:

      yeah inflation in Canada has been nuts, and it’s been one of the few places with an even worse and more stupidly excessive housing bubble than the US has. (Australia and New Zealand apparently the same problem, “negative gearing” plus their own QE has been a disaster for inflating asset bubbles)

  17. Pancho says:

    I think a major battle is brewing: the bankers that run the Fed and the federal politicians who want cheap debt to pay off their voters.

    When Treasury rates really start to rise due to the appearance of a significant inflation premium, the political pressure will become intense for the Fed to buy those bonds to bring down the rates (especially if they bring pull up the mortgage rates with them and wreak real havoc on the housing market).

    Will the 30-year yield be allowed to hit 15% again (or higher) like it did in 1981? If inflation is still raging, the Fed is going to be reluctant to resume QE to buy those bonds to fuel the raging inferno. It would probably only make the problem worse anyway, exaggerating the inflation premium on the 30-year bond and having the opposite effect of what’s intended (much like Operation Twist).

    Another problem: the last time QT was enacted, it eventually resulted in a blow-up of the repo market (September 2019). There was a cash shortage, which drove the SOFR rates to 10% against the “price ceiling” of 2.25% imposed by the Fed.

    Inflation was only in the 2% “target” range, so the Fed had no problem intervening with unplanned QE to “fix” it.

    But what happens next time once the reserve drawdown from QT crosses that critical inflection point and some multi-trilion-dollar market sector experiences sudden and unexpected strains due to a cash shortage?

    With inflation still raging, will the Fed intervene again?

    If it refuses, the economic gyrations will be profound.

    Interesting times ahead.

    • Wolf Richter says:

      1. Last time there was QT, inflation was BELOW the Fed’s target. Why do people keep ignoring that?

      2. Last time the repo market blew out (late 2019) because a bunch of mortgage REITS ran into trouble which caused banks to stop lending to the repo market. Now the Fed has a standing repo facility (SRF), and it can step in to prevent any such blowout. It got that the SRF set up a year ago in order to be able to manage QT better.

      3. Right now, the political pressure is intense for the Fed to BRING DOWN INFLATION — forget all the other stuff.

      4. No need for yields to go to 15%. The Fed has QT, which is a powerful tool. That’s why QT will continue, because then short-term rates might only have to go to 4.5% or 5%, and long-term rates a few percentage points above that. For long enough, it will likely do the job.

      • Remy says:

        5. And, although not their mandate… The USD needs a silent backup partner.

      • SpencerG says:

        I think you nailed it more with this post than with your podcast… and your podcast was GREAT!

        People keep forgetting the power of QT. The Fed doesn’t have to raise Fed Funds rates above the inflation rate because QT means that the markets will raise interest rates above the inflation rate on their own. As you say, if they do QT and Fed Funds rate hikes in tandem “for long enough, it will likely do the job.”

        The real question is… how long is long enough? Surely the Fed has wargamed that out… I would love to know the results of THAT analysis. My guess is that they would like to end their Balance Sheet reduction prior to lowering Fed Funds rates… which would give us a clue as to how long THEY expect it to take to wring inflation out of the economy.

        • AB says:

          I strongly agree with your comment about the importance of QT. Above all, QT is enabling a vast repricing exercise to take place.

          Interest rates grab all the headlines yet Powell’s assertive speech at Jackson Hole, as perceived, might have amounted to nothing more than an additional 25bps over previous medium term expectations.

        • crazytown says:

          The Fed is going to have to keep running QT even through stagflation and risk being blamed in the future for shrinking the money supply during economic contraction. But I see no other real option, they know inflation is the only priority right now.

        • Randy says:

          Numerous times at various financial sites folks post “FFR needs to rise to inflation rate to thrawt it” or something to that effect. I believe i read that notion goes back to the 1980s.

          Clearly its an idealism. Why do so many people treat it as gospel (I’m not religious sorry) ? Just how often has this notion been verified, actually verified, in practice ?

          Some people assume things are true w/o even realizing they are making assumptions.

        • Franz Beckenbauer says:

          ” QT means that the markets will raise interest rates above the inflation rate on their own”

          The implicit assumption behind this thinking -which is never actually explicitly stated, because then it would become obvious how flawed this thinking is – is as follows:

          The Fed is not buying treasuries any more, it is even selling some into the market. Fair enough. That increases the supply of treasuries and removes the demand from the Fed, which will bring prices down. Lower prices means higher interest rates.

          So far so good.

          The only problem is that this reasoning still implies that the treasuries will be bought by someone. And here the logical circle becomes obvious: if Market participants expect prices for treasuries to fall – because of QT – they won’t buy’em. Plain and simple. The primary dealers have to buy them, but their balance sheet capacity is more than stretched. They definitely cannot buy the whole Treasury Market.

          All you’ll get in the end is failed treasury auctions because noone will buy’em any more. And another lockdown in the repo markets because no bank or financial institution will accept collateral that is certain to go down in price.

          There’s your QT.

        • Wolf Richter says:

          Franz Beckenbauer,

          You need to understand what a rising yield does: It CREATES DEMAND. Yield solves all demand problems. That’s what it’s for.

          QT and rate hikes allow yields to rise, finally.

          A higher yield (lower price) makes those securities more attractive to buyers. People here (including me) have been buying short-term Treasuries in recent months because yields are much higher.

          The 1-year yield today is at 4.08%. There’s an auction coming up next week, and I’ll probably buy some.

          If the 10-year note goes over 6% or 7% or maybe even over 8%, I will be backing up the truck. If I get 30-year bonds at 9%, I’m in paradise. Not sure we’ll ever get there – but this is to illustrate the principle that rising yields make those securities a lot more attractive, and thereby rising yields create demand, and there will be lots of investors buying them to get the higher yields. And that includes a lot of us folks here.

      • AV8R says:

        Keeping in mind the lesson taught right here on 5 September, QT is finite.

        It should do the job but…..

        • Wolf Richter says:

          If it doesn’t do the job knocking down inflation before it hits its limit a few years from now, we’re in inflation hell. And that could be the case. But it’s not my most likely scenario.

      • Mark Stoneweapon says:

        I’m concerned the spreads on commercial lending rates Vs the CB rate is going to increase as lending volume decreases, and the premium in the cost of financing needed re-shoring is going to exacerbate supply shortages by lack of expansion/borrowing. If there is too much risk priced into the cost of borrowing is it wiser to go home and lie down and keep running a tight ship limiting the liabilities?

        The spreads on mortgage lending from the big five Canadian banks has more than doubled from 1.25% to 3%.

  18. The original Marco says:

    I think the game by current Politicians is to spend as much money as possible , as quickly as possible which they feel will then force the Federal Reserve to back them via QE rather than let the whole system crash

    • Auld Kodjer says:

      If I may. Just a small edit to the end of your sentence:

      “I think the game by current Politicians is to spend as much money as possible, as quickly as possible, which they feel …”

      … will get them re-elected to another 4 years of snouts in the trough.

  19. Arya Stark says:

    Excellent report but not sure how you conclude supply chain issues are no longer a factor. Chips are still an issue and good luck buying a new car.

    • Shiloh1 says:

      I’m in the market to pro-actively replace a 25 year old natural gas fired tank hot water heater, manual light standing pilot. Looking for as close to same as possible.

      To my horror it seems that most if not all have some sort or electrical dependency and microprocessors. Plumbing supply guy explaining had me at “…the government…”.

      • crazytown says:

        You can still get a tank that doesn’t require electricity. It won’t have a standing pilot but uses some fancy igniter to light the burner without mains electricity. It increases efficiency, is reliable, and will keep working even if electricity is down! I would highly recommend one over one of the slightly more efficient ones with a blower fan that requires mains power.

    • Mark Stoneweapon says:

      In my view, supply-side inflation has a long way to go before the real cost of our domestic production is realized as many countries are limiting exports of essential materials. I don’t think the Fed can’t cure this problem, it can only soften the blow of our adjustment, while the geopolitical hegemonic troubles play out. For example, my local white cement plant had to invest $50 million in their operation, partly because they were being cut off from supply of a raw material they imported from Europe.
      Deglobalization is inflationary.

      • Mark Stoneweapon says:

        Also, higher rates and demand destruction increases the net cost of production.

  20. DUKE says:

    Wolf,
    Call your internet provider and ask if they can reduce your monthly rate.
    Tmobile is offering $50/month for very good 5g home internet (if you are close to a tower). I get 300-500mbps down and 80mps up.
    With my tmobile max mobile service, they reduce the home internet to $30/month.
    I told Spectrum I wanted to cancel and they offered to drop their monthly from $75 to $39.99. And told me anytime a promotion ends, I can call back and get the latest current deal.
    I went with tmobile for $30. So far so good.

    • Wolf Richter says:

      I already did, no go. It’s fiber to the house, and it’s still a lot lower than Comcast was. But now Comcast, which has lost lots of customers here when we got fiber and now Verizon’s 5G, is offering a two-year teaser rate on its old coax cable. But to heck with Comcast.

      I’ve been wanting to short that stock so bad ever since fiber moved in last September that it was hard to restrain myself. I shoulda…

  21. Lenore Loves You says:

    But. . . but . . . but. . . you said it was transitory?

    I wish Bob Fosse were here to dance to this.

  22. Auto-outsider says:

    Congress needs to encourage production by getting their prohibitive regulations out of the way. I don’t see this happening any time soon for any industry.

  23. Heron says:

    I’ve been thinking for a while it may take a lot higher and longer to tame inflation than the stock pumpers claim. Look at all the software companies that have never turned a profit. They enjoyed a decade or more of VC money at near 0 rates and never, ever, thought about making a profit. The insiders made tons via stock options and some of the worker bees probably did ok too but most of that industry is dead, dead, dead. I dont see the bear market being over until companies like that – in whatever sector they happen to be – are gone with the wind.

  24. Bobber says:

    I feels like we are in the eye of a storm right now. There hasn’t been any really bad news yet. Stocks and RE are still relatively high priced. Unemployment remains low. Consumers are mad about the inflation but they keep spending anyway.

    It won’t last.

    • SpencerG says:

      Having lived through many hurricanes, let me tell you… we aren’t in the eye of the storm yet. This thing isn’t half over and we aren’t on the less dangerous side of it yet. It is more like we are aware that a storm is approaching and we are just boarding up the windows because it is too late to escape.

      The weird part is that when a hurricane approaches people turn to the government for information in order to prepare (and survive)… but with this situation the people have been telling the government for over a year now that inflation was an approaching problem only to have the government tell them it was no big deal.

    • AD says:

      I look at housing needing to come down to late 2020 levels. Or as with my wife and my home that we bought in 2016 at 3% rate for a 30-year mortgage through the VA.

      I figure fair market value of our home now is based on an annual appreciation of 3.5%. That means the current estimate market price needs to decline about 20%.

      As far as stocks, the S&P 500 is down (again) 19.7% from its 52-week high. I think worst case the S&P 500 may bottom in 2022 around early 2020 levels, which corresponds to about a 33% drop.

      This type of shock will give enough jolt to get people to recalibrate how they participate in the economy and may encourage creativity as far as innovation and production gains throughout the economy.

      My main concern is the cost of the federal government borrowing money in the near to distant future such as with the 10 Year Treasury rate steadily increasing.

      And this increase in servicing /paying the federal debt coincides with a drop in tax revenue due to declining capital gains, etc.

      Its quite a conundrum as far it being an optimization effort with minimizing inflation while maximizing economic growth / GDP.

      • bulfinch says:

        I guess it depends on the specific market you’re in, but where I live, residential real estate was already several exits past crazy town by 2020. A reversion to those numbers would be no great shake-up.

        • Harrold says:

          Supply and demand. You cannot arbitrarily adjust housing prices.

        • bulfinch says:

          Of course you can; only a first year economics student hails the almighty supply & demand as pure, raw forces of nature as un-manipulable as a gale wind.

  25. SWE Josh says:

    Wolf, towards the end of the podcast you say “it is going to take years to get (inflation) under control” as the government spending is making inflation worse (e.g. EV incentives) while the Fed does what it can with QT and higher interest rates. As you have pointed out in previous posts, the layoffs to date have not been very high but it seems that many companies are cutting back hiring, travel spending and starting to lay people off. If this accelerates and we start seeing mass layoffs, would that also accelerate the timeline for how quickly inflation would get under control? I don’t know how the late 70s and 80s played out but I would expect that it would only take years with QT and slow interest rate increases if the economy was still chugging along but that a major downturn would accelerate the timeline significantly. Is that the right way to think about it?

    Either way I think asset prices would go down but the reason I ask is if people expect interest rates to continue to go up and are waiting until higher rates before buying long term bonds, they may miss out on a good opportunity now if the economy turns and rate increases are no longer needed to reign in inflation.

    • Flea says:

      Inflation can’t go down ,because the usa only produces planes agricultural,and construction equipment,read in 80 s when a country gives up manufacturing,flush the economy down the toilet

  26. ru82 says:

    Construction costs and labor cost for anything house related has gone up a lot in the past 5 years.

    5 years ago my handyman charged $30/hour and now he charges $45 and is thinking about going to $48.

    A local convenience store 5 years ago advertised $12/hour and now they advertise $20/hour.

    On the topic of house prices. In 2015, I did some remodeling on a rental home I own. It costs about $18k. I am doing something very similar to another house. It is going to run me at least $35k. Ouch. Basically a 100% increase.

  27. NoPrep says:

    When gas prices spiked there, Biden took action to lower the price at the pump. “I did that!” I don’t know what people are worried about.

  28. Kevin W says:

    WR is right that the Fed is talking out of both sides of their mouth. They’re just slowing the rate of fuel they THEY have going into a red-hot and overheated engine, and that the Congress and municipal governments are dumping at least as much gas into the dumpster fire that’s already raging that the Fed is pretending to be taking out.

    I’ll believe the Fed is serious about reversing the inflation when — and only when — they start short-selling MBS and Treasuries.

    Wouldn’t that be fun, to watch Wolf and the other bond bears, and the bond trading desks, and all the egghead economists who don’t live anywhere near the real world — click open the new Fed balance sheet report and see that Powell & Co have shorted $5 trillion in bonds since the last update? Squinting to see if they’ve read it right? Looking at the header to see if someone is playing a joke on them?

    I can fantasize.

  29. JeffD says:

    When do all the people trading on margin get wiped out? At some point, leverage has to be a net loser, right?

  30. Crush the Peasants! says:

    The CARES Act appears whacked.

  31. historicus says:

    Two pivotal quotes from the sprung hubris and certitude of the central banking community.
    Jerome Powell, a few months before an explosion of inflation. (February 23, 2021)
    “Powell, 68, told Republican U.S. Senator John Kennedy, 69, about the once-important measures of cash and easily spent assets that was a central focus for the Fed in the past…
    “When you and I studied economics a million years ago M2 and monetary aggregates seemed to have a relationship to economic growth,” Powell said, referring to one main measure of the money in public hands. “Right now … M2 … does not really have important implications. It is something we have to unlearn I guess.”” Shortly after, inflation exploded and the reason why M2 is important was reasserted.
    Secondly,
    Former Fed Governor Fisher in the PBS Documentary “The Power of the Federal Reserve” (7:45 mark) ….said…
    “When you drive interest rates down all the way out it forces investors to taking bigger steps on the risk spectrum.”
    Thus the Fed skewed risk return ratios, PE considerations, et al to “force” investors to their tune. It also points to the futility of analyzing the yield curve as if it was some free market indicator of the future. The Fed’s involvement in the long end since 2008 muddles that analysis.
    Central bankers seem to believe themselves magicians, but they would be better to consider physics and the Law that states, “for every action, there is an equal and opposite reaction.”

  32. Spencer Bradley Hall says:

    Prophetic. Completely agree. Money matters. Velocity matters more. Income velocity is a contrived metric. The transactions’ velocity of funds moves in the opposite direction.

  33. nemo300blk says:

    As a small chemical manufacturer, we had an 8% price increase for distributors on September 1st. This increase is in addition to a 10% increase in January and three 5% increases in 2021. The sad part is that we could stand another 5% increase to get us back to pre-2021 profitability, but I don’t know how much more our market can bare.

    I feel bad for the 75% of the population that lives check to check because they are drowning in inflation, just trying to survive weekly.

    • random guy 62 says:

      I feel your pain.

      We have jacked our truck equipment prices to the moon to cope with rising input costs on everything from steel to healthcare to coatings.

      Margins in 2022 are still medium-low relative to historical averages, but slowly improving with recent price hikes and modest softening in commodities.

      I seriously worry we are going jump out of the frying pan and into the fire as demand collapses into 2023.

  34. Xavier Caveat says:

    Joe sez inflation only went up a tenth of a percent last month, ain’t no big thang.

  35. Randy says:

    Never been a business owner so my opinion may not amount to much.

    As inflation continues…
    1. Businesses can tell their input sources to stop raising prices or they will find another source (wholesalers). Or, more drastically, find another product mix altogether to, again, avoid having to pay higher input prices.
    2. If overall demand starts to fall they need to either:
    a) lower prices to stimulate more demand (its not good to lose customers !)
    and/ or
    b) raise prices to compensate for the reduced volume and/or
    c) cut my costs

    If they are lucky they can do all three. Some customers will still buy their product at higher prices… raise it for those customers. Those that no longer can afford the product… sell them at a reduced price.
    Clearly option b) must be enacted sufficiently along with cost cutting to offset option a) effects if profits are to be maintained.

    This already goes on. Grocery stores charge more, in general, for the same item in expensive neighborhoods than in poor ones.
    Maybe not always but I have evidence this is true where I live. But i readily admit this intuition might not hold up for other non economic (?) reasons.

    I only bring this up because… well, inflation existed 5 years ago. At a much lower level.
    Why didn’t inflation reinforce itself (i.e., gain momentum) then ?
    Not as much $ sloshing around is the standard response I suppose. Okay maybe thats it.
    And external (to U.S.) influences that I don’t understand so well. Asian supply issues, etc…

    To my surprise i recently read that Nixon tried price controls in 1971 (?). Not sure it worked well but Vietnam was not going well and there were other problems so maybe those were factors too. Plus conservatives generally dislike any price controls (Nixon was a Republican though, interesting) so maybe it was bound to fail due to politics. And of course companies hate price controls, no small thing.

    That said…
    Some people say the FFR and QT are blunt instruments. Price controls targeted at particular industries might make more sense ?

    Nick at Reventure Consulting would agree with much of what Wolf says, I think. But he has a video (4 days ago) in which 7:30 into it he says we are already experiencing some deflation and he goes on to say, I believe this is right, that we’re likely to experience deflation fairly soon… contrary to so much what we’re hearing now.

    Well I surely dont know.

  36. HollywoodDog says:

    The Fed is a slow learner. I’m amazed by how most of the readers of this blog were able to anticipate the embedded inflation we’re now experiencing. But not the Fed. Their only charge is to balance full employment with price stability. They literally had ONE job (albeit with two components). And they messed up. We’ve had nothing but vicious boom-and-bust cycles for the last two decades.

    • rick m says:

      The Fed is a foot dragger. Calling the financial shots in a political environment, it doesn’t pay to innovate and take risks that political opportunists will attack without themselves having to construct feasible financial alternatives. The feddies know but dare not act decisively. Relative inaction is safer and doesn’t negatively affect their personal pocketbooks and legacies. It doesn’t feel as if they have the stones for the long-QT to last as long as it seems it might be needed to kill inflation barnyard-dead. Always heard that if you don’t have time to do a job right the first time, when do you think you’ll have time later? this is the time and the future is overbooked already. You don’t want to get bumped.
      Senator j Kennedy and his cornpone philosophizing is a joy to listen to. The Fed isn’t.

  37. AV8R says:

    The aim of the current administration seems to me to be an effort to let the air out of only half a balloon.

    I dont see it working

  38. Randy says:

    Wikipedia has a write up entitled

    “Nixon Shock”. As they state it was
    “in response to increasing inflation, the most significant of which were wage and price freezes, surcharges on imports,”, etc.
    1971.

    As stated at the end of the subtitle “Ramifications”, economists apparently still debate its merits.

  39. ru82 says:

    Car lotas are filling up with cars in my area. I went car shopping a several times this summer in early to mid August. I was looking at mid size SUVs.

    Pretty much nothing in stock. Now many have 20 to 30 in stock. Just in 1 month time frame.

    The local Jeep dealer when from less than 5 to 10 vehicles to almost 200. The lot was pretty much empty for the past year and now it is full. Just as full as it was pre-covid.

    FYI – I see lots of “For Lease” signs in commercial and industrial parks and I also see about every fast food restaurant has help wanted signs.

  40. ru82 says:

    Also, Hotels are expensive. I was maybe looking to go to NY over past month. I thought it would be off season. Including tax and fees, rooms are running close to $400/night.

    Even in some small cities, hotels are running around $200 / night.

    Inflation I guess.

    • Xavier Caveat says:

      Motels & hotels raised their price to be more in line with what AirBnB charges.

      • Depth Charge says:

        They are also straight up gouging to try to make up for lost revenue. When I was on a brief road trip last spring, I booked a room at a place I have stayed in the past. The room was double. The night I arrived there were only a couple other people in the entire place.

  41. Franz Beckenbauer says:

    What’s all the fuss about “one inch” of inflation ?

    That’s what the guy in da white house said. Calm down.

    As for the housing market: It’s a gully.

  42. Depth Charge says:

    Still seeing massive price increases all across the board. Groceries, high quality clothing, materials, etc. This is not ending anytime soon. I’ve decided to stock up on some things, and “overbuy” which I generally don’t do. I figure if I spend a few thousand right now to get what I need the next several years, then I won’t have to deal with the massive price increases by then.

    • Davinsky says:

      D.C., still thing a can of Campbell’s chicken noodle soup may be the best investment out there for the next several years. Must use price per ounce because the cans are actually shrinking again.

      • Wolf Richter says:

        “Campbell’s chicken noodle soup”

        Is anyone still eating this stuff?

        • Anthony A. says:

          LOL!

          My wife is, and we buy the “store made” chicken noodle soup at Costco. About $14 for a huge container of it. She dishes it out into small containers and freezes them. She loves it. Old fashioned, I guess.

        • Davinsky says:

          Flies off the shelf, Wolf. Not all of us can afford gourmet soups.

        • Wolf Richter says:

          I think of Campbell’s soup as one of the most overpriced foods ever.

          When I was in college, Safeway used to have this huge aisle of soups. Lots of them were Campbell’s. Now they have just a small section, and Campbell’s is just a portion of that small section.

          We make delicious vegetable soups from scratch — and the costs are minimal. we have a pot that boils and grinds the veggies in just the right sequence and for just the right time. You just throw the raw stuff in it, add water and some spices, and let it do its thing. It beeps when it’s done. Two quarts of delicious soup for the costs of the raw veggies. Very healthy too. How much does it cost to buy two quarts of Campbell’s soup?

  43. QQQBall says:

    Wolf,

    I heard a podcaster opine that every $500B in QT is equivalent to a 1% interest rate hike, so 2% per Trillion Bucks. Any thoughts?

    • Wolf Richter says:

      People are all trying to put QT into some kind of perspective. The problem with this “equivalent to a x% interest rate hike” is that rate hikes push up short-term interest rates via the Fed’s short-term rates, particularly the FF rate, the interest on reserves, and the interest on RRPs. But QT pushes up long-term rates and pushes down asset prices.

      So I see QT as a complement, not something that is equivalent to x rate hikes. In other words, to me, QT makes the rate hikes work better because it pushes up long-term rates, and long-term rates are ultimately what slows down demand in a credit-based economy.

  44. ru82 says:

    Oil has certainly rolled over from the peak in June. It looks like it could be heading to $65 if global economies keep slowing down. That should help knock down inflation.

  45. John says:

    $SPY flying back to the moon Monday. Lol. Markets said what inflation and who cares about the falling housing market. All is well in market paradise. Big cap stocks Apple and Google being bid back up.

  46. John says:

    Beautiful day for markets and longs. Makes you wonder if inflation and housing collapsing mattered much today.

    • Wolf Richter says:

      After a horrible week, a little bit of relief. People deserve a break occasionally, no?

      And the one-year yield rose to 4.08% today.

  47. Gerry says:

    Please: I want a written article. Video does not allow me to skim and see if i want to spend 13 minutes on this. Further, if I want to send only a portion to my buddy, I have to transcribe.

    • Wolf Richter says:

      Yes, what tragedy. I feel for you. “I want, I want I want…” Don’t we all. Rolling Stones comes to mind: “You can’t always get what you want”

      But in this case, you can get what you want. Regular readers know that I post the transcript in a few days. So stay tuned.

      • bruce says:

        I wonder how the $2TT Reverse Repo balance plays into all of this?? still seems like *some* people still have too much CASH while the masses will probably face starvation

  48. drowningfish says:

    wolf, so you were right about the fed, that it was not happy about the market’s misinterpretation.

    but you are saying that the fed be willing to maintain rates this high for a long time? what are the odds that they will break something before they even get inflation under control? if you are saying that this will take years (a bit on the pessimistic side), then surely before these years come to pass we will have a recession that will force the fed ease up again.

    • Wolf Richter says:

      “what are the odds that they will break something…”

      I hate to tell you this: but the hugest thing that the Fed is in charge of has already broken: inflation (price stability). Inflation is out of control. And every thing else that might break is going to be a minor annoyance, in comparison.

      • Arya Stark says:

        100%

      • shandy says:

        All the federal reserve is doing now by saving themselves from financial ruin is destroying lifes and family worldwide.
        The congressional authority they continue to use is not broken.
        Inflation (price stability? inflation is long over in the USA. It is obvious that a increase in monetary feb bucs ain’t going to happen.
        When stagflation (no more fed bucs) which started last week before the clowns jackson pie hole world result, leads to uncontrollably hypo inflation the Fredral Reserve Broatd will certainly be only a minor annoyance, in comparison.

    • The Real Tony says:

      It took 15 years to get inflation under control because they eased up too soon on interest rates from the 1970’s. This time around they have to get the homeless off the streets by bringing down home prices and subsequently rents. So rates could stay high for longer.

  49. The Real Tony says:

    Inflation will come screaming back once the midterm elections are over. Watch for inflation to take a second leg up around the start of 2023. I also tell everyone the same thing on other blogs and on youtube.

  50. DawnsEarlyLight says:

    The way the 13 T-bill is taking off, the EFFR is going to be pulled up by it’s nose!

  51. Swamp Creature says:

    Talk about services inflation. My homeowners policy with USAA just went up to nearly $1,500/year. I looked at my policy back in 2010 and it was only $650/year. Not only that, their handling of claims has now reached rock bottom. Most if not all their adjusters are now WFH and located all over the country rather than San Antonio. They are even bragging about this. I had a recent claim with them for over 20k and no one from the company ever visited my site. Everything is done virtually. The processes is slow and bureaucratic. The adjuster has to go to a person above to make any decisions, sort of like the used car salesman who has to go to the “Man with the white hat” before finalizing the deal. I just cancelled my policy with them and went with another company for both my auto and homeowners ins and saved 25%.

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