Inflation is when everybody is so rich nobody can afford anything”

There is not much the world has not witnessed lately. Take your pick, and chances are that mother earth has endured whatever scenario we can imagine. There is, however, one event which has eluded us lately, leaving more than one expert scratching the head. We are, of course, talking about Inflation.

When it comes to Inflation, there are generally three schools of thought about what is needed for inflation.

  • Money supply – central banks have printed money at what could easily be characterized as “explosive” levels, and the Fed seems totally fine with this.
  • Fiscal deficit – not much to add here besides to observe that we are way off the charts.
  • Expanding economy – if you think that a hot economy is a trigger, you would say that we are about to get a fair amount of inflation, correction, a LOT of inflation.

So, no matter which of either three you look at, they all point towards the same thing – higher inflation.

So far, we have managed to steer clear of inflation, and it does indeed look like we are in for calm waters in the near future. Back in 2012 the Fed set a 2% inflation target, and the economy has pretty much stayed below this benchmark.

On Wednesday the 13th, the (US) Labor Department reported a rise in the consumer price index of 0.4% for the month of December, which marked the fastest clip since summer. Try expanding this, and you will see that the year-over-year basis (CPI), rose to 1.4%, up from a rate of 1.2% the month before. In fact, it marked the seventh consecutive month of rise, but still far below the Feds 2% target.

When observing the bond market, we see that the yields on the benchmark 10-year T-note managed to hit the highest levels in 8 months before retreating somewhat on the above mentioned Wednesday. Reasons are plenty, but the Biden fiscal stimulus package has almost certainly had an impact.

If the economy remains robust, there are also widespread opinions that the Fed will ease up on the bond purchases in 2021. To put this into perspective, the Fed has purchased around $120 billion each month of Treasury bonds as well as mortgage-backed securities in the last half of 2020. Does this sound familiar to you?

When confronted with direct questions, even the Fed seems reluctant to respond in a clear tone. For the time being, we can conclude that traditional economics is either preparing the fat lady to sing, or is sharpening the sword.

What do you think?