Inflation Or Recession? INFLATION

Higher interest rates cannot save the hyperinflation to come. 

Some of the best workers have left the workforce for good. They figured out how to make a living on their own. A company that is looking for really talented people must spend a lot more. 

A lot of people have left the full time work slave train for the gig economy. They drive taxi's deliver food, work on onlyf.. sell services on fiver and on and on. 

Then you have many people that are now drug addicts thanks to the weapon called fentanyl. Over 100,000 people died from an OD last year, this thing is a weapon and most do not die from OD's but their life is destroyed, not people you want working for you. 

Even the good people a company finds, everyone is just getting the job until they figure out how to go on their own. 

The only reason some companies can still hire competent people is because some people like the bragging rights of saying "I work for...." They will give up better living conditions and money for those rights.  

All this will lead to companies having to pay significantly higher wages and those savings will be heading right to the consumer.  

The consumer will have to charge more for their services and suddenly you will have hyperinflation that will make Zimbabwe look like the most stable currency. 

It will all lead to the great reset, exactly what they want. We will beg for it, just like they planned it. 

If you think the reset will be good for you, call me, I have a bridge to sell you, it comes with a loaf of bread.  

Bringing down inflation through monetary policy means slower growth, but how much inflation and growth will decline is the question. 

A dirty little secret about the economics profession is how imprecisely we understand the inflation-generating process. The Fed and most mainstream economists have in mind a version of an “expectations-augmented Phillips curve” to describe cyclical inflation. Inflation is driven by inflation expectations and whether the economy has slack and inflation falls or is overextended and inflation rises. That cyclical component ignores other short-term factors, like swings in oil prices or the current supply chain frictions, that can temporarily push inflation up or down. Framing inflation this way has some thorny implications for the next few years, particularly if most of current inflation is cyclical, not temporary. 

Core PCE inflation just hit roughly 5%, or about 3 percentage points above the Fed’s target. If the extra inflation is cyclical, policy will have to slow the economy to create enough slack to bring it down. If it is mostly Covid driven and temporary, inflation will come down on its own. Our house view is that the majority of the extra inflation is Covid driven, not cyclical, but what if we are wrong? 

Suppose two-thirds of the extra inflation (2 percentage points) is cyclical and only one-third is temporary. The Fed’s baseline estimate of the Phillips curve has a slope of about 0.1, that is, a 1-percentage-point increase in the unemployment rate lowers core PCE inflation by only one-tenth of a percentage point. Simple arithmetic says that a 20-percentage-point increase in unemployment is needed to bring inflation down by 2 percentage points. But even if the relationship is 5 times larger, as may have been the case decades ago, the Fed would need to orchestrate a 4-percentage-point increase in the unemployment rate to wring out those 2 percentage points of inflation. Any time unemployment has risen by 50bp, we have had a recession. 

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Powell refused to refute speculation of a 50bps rate hike this year and we may get another sharp drop of futures - we would say hawk but that's meaningless now that even the uber-doves have turned hawkish to appease Biden and his imploding approval rating... hinted at a 50bps rate hike in March. 

In an interview with the Financial Times, Raphael Bostic, president of the Fed’s Atlanta branch, said the Fed could "supersize a rate increase to half a percentage point if inflation remains stubbornly high." 

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Here is a look at component-level trends: 

Used cars, hotels, new cars, nonprofit services, furniture, and transportation services are much stronger than usual on a year-on-year basis, boosted by supply constraints and base effects. 

Used car auction prices increased 0.6% to 56% above the pre-pandemic level in the first half of January, after adjusting for depreciation, which could push consumer prices even higher. 

Goldman's shelter inflation tracker increased to +6.3%, pointing to a pickup in the official shelter series from its current +3.7% year-over-year rate. 

On the other hand, a High-frequency tracker of hotel prices and airfares has dropped to 18% below the two-year ago level amidst elevated virus spread. 

Here are the key key inflation drivers: 

The Goldman composition-corrected wage tracker increased to +4.3% year-on-year and the GS wage survey leading indicator stands at+3.8% — each series’ highest level since the early 2000s. 

The GS low-wage wage tracker increased to +7.5% year-on-year, its highest level in at least three decades. 

Industrial metals prices increased to 161% of the pre-pandemic level and energy prices rebounded sharply to 141% of the pre-pandemic level. Goldman expects the boost from commodity prices to year-on-year core PCE inflation to decline from a peak of 80bp in 2021Q4 to 40bp by 2022Q4. 

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GS inflation forecast: 

After completely fumbling its inflation forecasts in 2021, Goldman expects that ongoing supply chain disruptions will raise the prices of some goods further above the pre-pandemic trend and boost sequential inflation through mid-year. However, declines in durable goods prices are likely to drive inflation lower by year-end, more than offsetting a sharp acceleration in year-on-year shelter inflation. 

Higher interest rates cannot save the hyperinflation to come. 

Some of the best workers have left the workforce for good. They figured out how to make a living on their own. A company that is looking for really talented people must spend a lot more. 

A lot of people have left the full time work slave train for the gig economy. They drive taxi's deliver food, work on onlyf.. sell services on fiver and on and on. 

Then you have many people that are now drug addicts thanks to the weapon called fentanyl. Over 100,000 people died from an OD last year, this thing is a weapon and most do not die from OD's but their life is destroyed, not people you want working for you. 

Even the good people a company finds, everyone is just getting the job until they figure out how to go on their own. 

The only reason some companies can still hire competent people is because some people like the bragging rights of saying "I work for...." They will give up better living conditions and money for those rights.  

All this will lead to companies having to pay significantly higher wages and those savings will be heading right to the consumer.  

The consumer will have to charge more for their services and suddenly you will have hyperinflation that will make Zimbabwe look like the most stable currency. 

It will all lead to the great reset, exactly what they want. We will beg for it, just like they planned it. 

If you think the reset will be good for you, call me, I have a bridge to sell you, it comes with a loaf of bread. 

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