The headline from the BLS on Friday is that inflation is up. Way up. I'm now mostly quoting from this article in the FT:
The monthly rise in the consumer price index was 1%, which is significantly higher than the 0.3% increase in April and above economists’ expectations of a 0.7% rise. This takes the annual rate of inflation to 8.6 per cent, the highest level since December 1981.
Of course, you have to look at the components of the gain: 3.9% of the monthly rise comes from energy prices, but services inflation is up 5.2% for the year as well.
One of the reasons I write this newsletter (and, I recommend that anyone who is interested in making predictions or investing write with a regular cadence) is it provides the ability to go back to old thinking.
In Declarative Statements w.79 (Jan 26, 2021) about 18 months ago, I included the transcript of, as well as commentary on, a podcast with Paul Singer titled The End Game. His prediction for the next 18 months of Fed policy and inflation were spot on:
The Fed has announced that it is dangerous to be under 2% inflation, and in the fall they would like to average to 2%. Average to 2% when you are coming from below means your target has to be above. So when it gets to 2.5% in a couple of periods, how will the Fed react? And is it possible that it causes an inflation break out?
When inflation lifted off, it just kept going in the 1970s. There is a good chance given the determination to spend trillions on COVID-19 relief to guarantee low-interest rates that we will experience a tremendous surprise in the near future.
What would the surprise be?
Consumer price inflation breaking out and keeping going.
The Fed's smug assumptions will start to be challenged, and then what will they do?
What will they do? That's the right question.
Market consensus is that they will raise interest rates by another half point next week, although some suspect we will see three-quarters (prompting Friday's losses). But, what else? Or what more?