We will have a live Zoom event for paid subscribers on Monday evening, July 31 at 8 PM eastern time. I have not lined up a guest yet. Topic TBA also.
The recent good news has people talking as if inflation has been vanquished, and arguing over who deserves credit for having the right model. My line is that nobody I can think of had “lower inflation, higher interest rates, and no recession” on their Bingo card. But I do not believe that the fundamental outlook for inflation is much improved.
The government is still running very large deficits. This raises paper wealth, which is the fuel for inflation. The stock market is soaring. A friend who has been in a secure government job for over a decade now talks of becoming a day trader. That’s what time it is on Wall Street. “When others become greedy, I become even greedier” is the way people actually behave.
Prices for energy and rent have been held down by one-time favorable effects on supply. President Biden released the Strategic Petroleum Reserve. Remote work has allowed people to escape from high-rent cities, bringing down their housing costs. And robust construction of multifamily homes has brought housing to market. But those favorable supply shifts will soon be behind us. Even if we do not refill the SPR, we cannot empty it again. And even though the surge in remote work and multifamily construction may hold down CPI rent well into next year, we are not likely to foresee any favorable developments beyond that.
Bidenomics is heavy on regulation and “industrial policy.” That is a recipe for corruption and inefficiency. I expect adverse effects on productivity.
The Baby Boom generation needs to be replaced in the labor force. The mental and physical health of younger cohorts strikes me as worse. If my assessment is correct, then that will hold down productivity and increase the demand for health care services.
If it’s easy to find a primary care doctor where you live, tell me about it. Everyone I know is having a hard time. I get the impression that right now the salaries of health care workers are below market-clearing levels, which says that upward price pressures are building. And speaking of regulatory burdens…
Of course, there could be favorable developments on the inflation front. Biomedical research could result in low-cost ways to improve health. Artificial intelligence could substantially boost productivity. But I think those are likely to have an effect around 2030 rather than sooner. It takes time for entrepreneurs and customers to find effective uses of new technology. In the short run, people will make mistakes with AI, so that costs could exceed benefits for a few years.
Perhaps the best “hope” for inflation in the next few years is that the long-anticipated recession finally will appear. But no severe contraction appears to be on the horizon.
If I were to bet on inflation from June of 2024 to June of 2029, I would take the “over” on three percent.
"But no severe contraction appears to be on the horizon."
Severe contractions are never foreseen by the large, large fraction of predictors. However, I would argue that we have been in a low-grade recession for the last 18 months. High nominal inflation makes it relatively easy to game GDP numbers, either intentionally or by mistake. Labor force participation rate is still well under what it was in January 2020, before the COVID idiocy got started- that right there is your labor force tightness.
'Remote work has allowed people to escape from high-rent cities, bringing down their housing costs.'
This is difficult to square with the data. Rent costs never declined and have accelerated over the last 2 years
https://fred.stlouisfed.org/series/CUUR0000SEHA
Home prices didn't decline until mid '22 and acclerated upwards in '20 and '21.
https://fred.stlouisfed.org/series/CSUSHPINSA
Nominal housing prices are ~25% higher than the '12 - '20 trend would predict, which is measuring off a bottom, and the interest cost of buying a new house now is higher than at any point in that time frame.