The Surrender of Inflation? — The Current Wave of Inflation is Real

We have all been reassured. Inflation can be easily defeated by the Federal Reserve. And according to economist Paul Krugman, it is already in retreat.

The current wave of inflation is real,’ concludes Adviser Investments, ‘but it’s not a long-term trend.

Today, we look at reports from the front.

Whoa! Here’s CNN:

America’s factories are struggling with supply chain issues and material shortages. Now, that’s showing up in prices: in June, manufacturers reported the biggest price jump in 42 years.

The Institute for Supply Management’s manufacturing price index rose to 92.1% last month, up 4.1 percentage points and hitting its highest mark since July 1979. It was the 13th straight month of price increases in the sector.

“Record-long raw-material lead times, wide-scale shortages of critical basic materials, rising commodities prices and difficulties in transporting products are continuing to affect all segments of the manufacturing economy,” said Timothy Fiore, chair of the ISM’s manufacturing business survey committee.

And what’s it like in the trenches? Let’s check with our dear readers. Here’s Marius M:

My company […] builds high-pressure washers for the oil industry. Beyond having to wait two or three months for components, like pumps, motors, and engines, prices for them went up, on average, 250%. Steel, which we use to build the structure on which we assemble an installation, went up 220% so far.

Even when we complete such an installation, that should be shipped to the customer, the wood to build a pallet went up 320%. And the cost of shipping itself went up 400%. That’s inside the U.S. We have installations ready to ship to Dubai and Abu Dhabi, but we cannot find a shipper at any price.

Finally, who do you think is gonna pay for all this mess? Granma Yellen? Just look in the mirror and find out!

House or home?

Meanwhile, in the housing market…this is the report at Yahoo! Finance:

Home price growth in the U.S. surged in April at a pace not seen in more than 30 years.

“April’s performance was truly extraordinary. The 14.6% gain in the National Composite is literally the highest reading in more than 30 years of S&P CoreLogic Case-Shiller data,” said Craig J. Lazzara, managing director and global head of index investment strategy at S&P Dow Jones Indices, in a press statement.

And here’s a frontline report from another dear reader, Roger L:

In 1973, my apartment in a major metropolitan area (Chicago) cost $200/month. Rent varied slightly but was similar in other large cities. As a young, freshly minted college graduate, my salary was $13,000/year.

Presently, equivalent rents are $2,000–2,500, a multiple of 10. Salaries for new college graduates start at maybe $60,000–$70,000, a multiple of 5. The frustration among millennials is palpable.

Housing is a bridge between Wall Street and Main Street. For most families, it figures prominently both on balance sheets and expense ledgers.

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As we explored last month, to an investment outfit like Blackstone, with US$619 billion in assets, including the 17,000 residential units it recently purchased from Home Partners of America, a house is just another asset to be leveraged, shorted, hypothecated, and so forth.

But to most people, a house is a place to live. Mortgages or rents must be paid. Upkeep and utilities, too. Families typically spend about a third of their income on housing. So when house prices rise, inflation invades household budgets in a major way.

And now — like the US Army crossing the Ludendorff Bridge in 1945 — inflation is rushing across the housing market to establish a major bridgehead in the consumer economy.

Business Insider explains how the bridge was captured:

The onset of the coronavirus pandemic — and its intense economic fallout — prompted the central bank to use its most powerful tool and set its benchmark interest rate near zero. Looking to further aid financial markets, the Fed also began purchasing $120 billion in assets per month, including $40 billion in mortgage-backed securities.

This kind of outsized support wasn’t anything new. The Fed had previously combated recessions with rate cuts and emergency asset purchases. But where the housing market was ground zero during the Great Recession, the Fed’s actions made it an unexpected beneficiary during the COVID-19 downturn.

The rate cuts dragged mortgage rates to historic lows, and asset purchases further boosted the market. Sales boomed through 2020 as Americans fled cities and capitalized on low borrowing costs. But then supply tumbled to all-time lows and persistently high demand has led prices to climb at a record pace. Other indicators flashed their hottest readings since the mid-2000s bubble, leaving some to question just how long the market can boom before homes simply aren’t affordable anymore — and what the Fed will do about it.

Ready to surrender?

Inflation has battled its way from the ‘canyons’ of Wall Street into the suburbs…where it is boosting house prices at an unprecedented rate.

But wait…the Fed could bring out its big guns — interest rate hikes — any day. And lumber prices are plunging…down more than 40% in June.

Does this mean inflation is beaten already, as Paul Krugman says?

Or is it just trembling in its boots, seeing what it is up against — Jerome Powell and Janet Yellen…some pretty tough hombres, for sure?

Is it ready to hand over its sword, like General Robert E Lee at Appomattox…and go home…?

What do you think, dear reader?


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Bill Bonner,
For The Rum Rebellion

PS: The Rum Rebellion is a fantastic place to start your investment journey. We talk about the big trends driving the Australian Economy. Learn all about it here.

Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries.

A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America’s most respected authorities.

Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally.

With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance.

Bill has been a weekly contributor to The Rum Rebellion.

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