At least two writers I follow, one in the US, the other in the EU, believe we are headed for an inflation overshoot. Neither is a permanent inflationista. 
Betting on EU Inflation
Eurointelligence founder Wolfgang Münchau says Time to Bet on an Inflation Overshoot emphasis mine.
Our main story today is a skeptical note following [ECB head] Christine Lagarde’s press conference [on July 27]. What became clear to us is that the ECB is still reliant on its forecasting model to determine whether it is on a trajectory to reach the 2% inflation target. This is not a technical issue, but rather it is critical for the assessment of what to expect. Since this model is biased in favor of forecasting the target, we conclude that the potential for a policy error is growing.
The big problem with data dependence is that it does not tell you what you need to know. You may know that inflation is coming down, but you don’t know whether or not it is coming down to 2%. Lagarde told us yesterday that the ECB was using the forecast, or projection as they call it these days, to make that determination. That alone tells us that the ECB will from now on tread more cautiously, because the forecast is hard-wired to predict outcomes in the vicinity of the inflation-target. In particular, it makes the assumption that the sheer announcement of an inflation target anchors people’s expectations. We know this is not true, but it forms an essential element without which the framework would not work.
The problem with this policy rule is that it would give you the same answer regardless of whether your target is 2% or 3%.
It is interesting that central banks have never subjected their forecast performance to outside evaluation. The ECB’s model has been giving wrong forecasts for the last ten years. It is not the forecast error that is the problem, but the forecast bias. The model is biased in favor of the actual target. If your benchmark is biased in favor of the target, then it is biased in favor of a lower interest rate. The reason we are focused so heavily on discussions of the model here at Eurointelligence is because it is the main source of policy errors.
If this happened in finance or in political polling, these models would have been kicked out a long time ago, along with the staff that produce them. That is not happening in central banks, whose economists are attached to what they like to call their workhorse models.
In its update of its World Economic Outlook, the IMF also warned about the asymmetry of inflation. So did several economists like Olivier Blanchard, Kenneth Rogoff. Some of them may be open to the idea of a higher inflation target.
We conclude therefore that the risk of a permanent inflation overshoot at the ECB is high.
Structural Inflation
“Many cheering softening prices, but look at wages vs. productivity to understand the structural inflation pressures in the US economy.”
Everything Fine Camp
For good measure, ponder the No Landing scenario.
No Landing Definition
Inflation Expectations, Forward Guidance, Biased Models
- Forward guidance has been a disaster in both the US and Eurozone. People take every word of Central Bankers as if it Gospel when history shows they are clueless.
- The central bank models in the US and EU are biased in favor of the outcomes the central bankers want. That’s been easy to see for decades.
- Inflation expectations are nonsense. A look at components of the CPI shows the silliness of it all.
CPI Percentage Weights
Over 70 percent of the CPI consists of inelastic items.
People will not rent two houses now if they think prices are going up. They will not stop renting if they think prices will drop. The same applies to eating, medical care, insurance and car repairs.
What people expect is irrelevant at least 72 percent of the time. It’s greater in practice because I missed some items. For example, discretionary items also include clothes. If your coat wears out you tend to get a new one. The same applies to a washing machine. And you surely don’t buy two washing machines in advance even if you think the price is going up next year.
Finally, those with ample wealth or income do what they want regardless of price. Yet, the Fed and ECB wizards all believe in this expectations nonsense.
The one place exceptions matter pertains to asset bubbles. People will buy stocks and houses if they think prices are rising.
Curiously, the one and only place expectations matter is the one place the Fed never looks. This is how the Fed blows bubble after bubble of increasing amplitude.
Mercy Me! Inflation Expectations Are No Longer Well Anchored
Recall my July 14, 2021 post Mercy Me! Inflation Expectations Are No Longer Well Anchored
Here is the key chart at the time.
Expectations Fantasy
- For most of 8 consecutive years, year-over-year CPI and PCE was under 2%.
- In that same time frame, the Median 3-year estimate and the median point projections was seldom below 3%.
- If inflation expectations mattered, that chart would be impossible.
- Alternatively, one might say people believe low inflation is transitory.
- Yet, we constantly hear the Fed yapping “Inflation expectations are well anchored”.
It’s a good thing for the Fed that expectations don’t matter because 5+% expectations can no longer be considered well anchored.
Please note that the Fed was hell bent on producing inflation, and for 8 years people believed inflation would be 3 percent. However, the Fed struggled to produce inflation, so much so that the Fed wanted to make up for prior lack of inflation!
A Fed Economist Concludes the Widely Believed Inflations Expectations Theory is Nonsense
On October 1, 2021 I noted A Fed Economist Concludes the Widely Believed Inflations Expectations Theory is Nonsense
In addition to my analysis, a Fed study debunked both the Phillips Curve and inflation expectation theory, yet every person on the Fed believes in this nonsense.
They are all so biased in their own groupthink, they do not even pay attention to their own research and data.
What a hoot.
Four Measures of Inflation, What’s the Fed Watching the Most?
For a look at the most recent CPI and PCE numbers, please see Four Measures of Inflation, What’s the Fed Watching the Most?
The Housing Bubble, as Measured by Case-Shiller, Is Expanding Again
Also note that The Housing Bubble, as Measured by Case-Shiller, Is Expanding Again.
Meanwhile, the Fed is watching the PCE, seemingly oblivious to the massive asset bubbles in housing and the stock market that it helped create.
Productivity Dead Zone
Regarding productivity, Four to Six PM and Friday Afternoons Are a Productivity Dead Zone
What Now?
Bidenomics, EV mandates, and regulations are hugely inflationary. So are wage hikes without productivity gains.
At best, bringing down inflation is going to be a struggle unless either the economy or the stock market crashes.
Perhaps it could take both, and I do not rule that out.
I will post this again. How many of you out there correctly predicted that when the FED cut rates to 0% in 2009 that the following would occur: A taper tantrum a few years later where anyone offsides panicked and sold bonds only to regret that decision immensely when that was ‘transitory’. Bonds ripped higher when the FED had to keep rates at nothing. Years later, not only did rates stay at the ZERO bound but we actually had a period of ‘NEGATIVE’ rates where you paid banks to hold your money. This (in hindsight) was the ‘capitulation’ point in rates. Then rates stayed here for a decade and then we had full on helicopter money pouring from the FED during the COVID pandemic and the PPP fraud in the billions. Please do tell me that you have a grasp on where rates are going? We are going to ‘pay the piper’ for this absolute blunder in FED policy for years and years to come. “STUFF” isn’t getting anymore expensive. That is the wrong way to look at things. The US dollar that you’re buying said “STUFF” with is getting worth LESS and LESS and LESS and LESS and……….
we need up arrows, down arrows, time of posts and ignore buttons. like most blogs have. papa dave keep giving us investment ideas. you know your stuff. i come here to learn so i can profit. ZIM is my favorite stock, CARR next favorite. for some risk takers IIPR. and TLRY for real punters. MISH, keep up the great blog. i enjoy your stuff, in spite of some critiques. this seems to me like the post ww2 boom inflation after the world shut down to wage war. the Plague war of shutting down entire world in 2020 and 2021 was other worldly. like old movie planet of apes………….it could spiral into the 70s stagflation due to our constant warfare. which is huge for GDP, but in reality dumb “productivity”. we are a crumbling very nasty empire. our currency is worth less and less to trade for services and products, that most humans need.
Mish. Where is the IGNORE or BLOCK feature?
You are bothered that i agreed with you?
The economy runs on fossil fuel. Jake Sullivan met MBS last Thursday to improve
our relationship and turn the ME into “a safer, stable, flourishing and more connected to the world” ==> US will sell more weapons including nukes.
Amos Hochstein, Biden energy adviser, in the last year and a half was talking to MBS and Lebanon leaders to stabilize the ME. The last thing the world needs is oil rigs and oil terminals blowing up
Oil rigs and terminals blow up by themselves all the time.
You should have said “ The last thing the world needs is MORE oil rigs and oil terminals blowing up”
“Oil rigs and terminals blow up by themselves all the time.”
John Wayne starred in the movie- Hellfighters.
A large rotary cement kiln is a complex system with a multitude of variable inputs. Fuel flow, kiln speed, head draft, primary air supply, fuel temperature, the list goes on and on. It tends to flush and recede, flush and recede, as if instability is the norm. This causes unacceptable problems in terms of output volume, cement quality, maintenance frequency and so on. From experience and months of study, I found that all inputs have to be held steady for the kiln to “line out” and often achieve rock steady operation for days at a time (not referring to Jamaican “Rock Steady” here).
The economy is a much more complex system, where the mathematical adage that you cannot predict the outcome of a change in input, rules. It’s a complete waste of time to attempt to control every aspect, or even one aspect, of such a system by fiddling with the input parameters. A fool’s game played by CBs and govts. all over the planet, with a similar result – failure. That is why capitalism is the most successful economic system, who’s success is generally enabled by the degree to which authorities stay out of the way. See Hong Kong, Sweden, America in its early days, and other success stories of Laissez Faire economics.
The fed, along with lots of other government-approved economic meddling, is holding back the economy. All of it just gets in the way of stability. Every intervention, new rule, or industrial law or regulation just disturbs the equilibrium and typically slows things down over time.
Of course, if one is trying to make sense of official actions, you first have to determine what an official’s motivation is. That in itself is pretty impossible since they do all they can to conceal what they are truly thinking.
Governments, and the corporations they spawned, all are narcissistic constructs and so they can’t stop themselves when it comes to control issues. That’s why, even though decentralization is the most secure and productive approach, they must centralize everything. These imaginary constructs have done a fine job of gaslighting the slaves they need them. And so the victims adore their tormentors.
correct. or to simplify democracy works. narcissist violent imperial pigs, elect themselves. democracy works. for past 2500 years since ancient greece/romans. the middlebrows always miss this basic point. too ugly. also due to this a place like the FED reserve NY is private. just serving their owners. the NYC money center banks. all the rest is bs. mish thinks the fed is clueless. he misses the foundation of what it is and who it serves. he only sees the potemkin village they have erected to fool the hundreds of millions of human primates like himself. these are narcissist pigs.
Yeah, slaves always believe the premise they’re given. They never question authority, but they do think they’re so clever as they find little “flaws” that are actually features. Those silly Ivy League people, and longtime banking professionals, just don’t understand! Look at it as if it were a scam will get you the right answer 99% of the time, but slaves don’t really think; that would lead to them admitting the entire game is a con. Way too invested for that! Slaves are the real problem. They all suck.
The economy runs on fossil fuels; particularly oil. Whether it is used to generate electricity, heat homes, run machinery, transport everything and everyone, or create products:
link to ranken-energy.com
Our economy would collapse without it and our standard of living would collapse as well. It is a pretty large component of the cost of everything and it plays a big part in the inflation story. (Though I realize it is only a part of the story.)
In 2020, the price of oil dropped from over $60 to less than zero and the inflation rate dropped to 1%. By 2022 it hit $120 and inflation hit 9%. By June 2023, oil was back down to $70 and inflation was back down to 3%.
This month (July) oil is back up to $80 and is likely to go higher again.
My question is: What does the Fed have to do with oil moving from $60 to below zero, then up to $120, then back down to $70, and now back up to $80?
Similarly, food prices (corn, wheat, soybeans, milk, beef etc) fluctuate wildly as well. How does the Fed cause that?
I would be interested in getting a better understanding of this. Thanks!
Oil dropped to less than zero because governments around the world caused streets to be emptied of vehicles. The FED is not at fault for that.
The FED’s original mission was also changed- by the government, when it decided to get involved in WW1. It was also the government that dropped the gold standard, not the FED.
I agree the original intent was so be a lender of last resort to prevent a liquidity crisis. They took in good assests in exchange for a loan to prevent bankruns and the like. Its the corrupted additonal mandates that paved the way to the hell they created. No good deed goes unpunished.
The original intent is pretty straight up. Steal as much as possible. Enjoy your koolaid.
1) Four measures of inflation : in accumulation between 2008 and 2020. The bottom was May 2020. Wave #1 to 9.1%. Wave #2 between 10% and 20%, Wave #3…
2) The flow never stopped : higher lows, higher highs.
3) Tradingview, Inflation 1M : draw a resistance line from 1920 to 1947 and 1980 highs. Inflation might breach this line for the first time in 100 years.
4) Exogenous events cause inflation. The printing, the raids are the symptoms.
5) 10%/20% inflation reduces gov debt in real terms.
6) 10%/20% inflation devalue SS, medicare, transfer payments and unfunded obligations.
7) 10%/20% rectify RE in real terms.
I wholeheartedly disagree that history shows the central bank’s are clueless. History clearly reveals they are one of the most destructive criminal organizations in history.
I’m just shaking my head at all of this confusion people are propagating. First, break inflation of the money supply away from CPIflation which is rising (or falling) prices. We must do this or forever be “surprised” at what happens. The truth is that by raising interest rates on our own 32.5 trillion debt, we massively increase the annual cost of this debt. It now costs nearly a trillion per year to service the debt. The military budget for 2022 was “only” in the 750 bn range.
Raising interest rates in order to fight CPIflation works when you have no debt. But when you are in debt, it is the snake eating itself to survive. The system is flawed in the same way any con game is flawed – it’s a scam. Sooner or later ever con game ends either because all the Marks and Patsies have been fleeced and there is nothing left to take OR because Mark and Patsy have gotten wise to it.
C’entra Banks are grasping at straws to defend wherever is left of their credibility and relevance. However, even you continue to stick to this idea that inflation is largely a demand driven phenomenon, which is nonsense. Hence all this fixation for the Covid stimulus and Bidenomics. Along these lines, why not then blame military spending, which is the largest unproductive handout?
The reality is that the US has a serious problem with lack of competition, lack of supply and high industry concentration, all fueled by abundant lobbying.
But the capitalist cult prefers to blame lazy unproductive workers who increasingly struggle to pay their bills and have not seen real wages increases in decades.
“Forward guidance has been a disaster in both the US and Eurozone. People take every word of Central Bankers as if it Gospel when history shows they are clueless.”
And that is the issue. Listen to your own words. It does not matter if forward guidance is good or bad. People still listen to Central Banks, because Central Bankers make decisions that have an economic impact. People do not listen to you or I, because our decisions do not have the same economic impact.
It also does not matter what you or I think of the fed. Because you and I are not able to influence their decisions, let alone wish them out of existence.
“The central bank models in the US and EU are biased in favor of the outcomes the central bankers want. That’s been easy to see for decades.”
Irrelevant. It doesn’t matter what their biases are. Because people still hang on their every word. And markets jump around based on those words.
“Inflation expectations are nonsense. A look at components of the CPI shows the silliness of it all.”
Maybe. But expectations of what the fed will do, seem to be pretty important. If people expect the fed to raise or lower rates, markets often react, sometimes dramatically.