Capital outlook: Fed fiddles as inflation burns

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JP Szafranski

It is not transitory. In early August, amid chatter from U.S. Federal Reserve officials and market commentators that concerns about continued high inflation were unwarranted, we voiced our skepticism in our Inflation – What Would Milton Say? We recognized at the time that the Fed was right to point out temporary disruptions in supply and demand for economic reopening in areas such as used cars and airline tickets. In fact, it is already playing out. In the most recently released Consumer Price Index (CPI) data for August 2021, prices for used vehicles and transportation services fell 1.5% and 2.3%, respectively , compared to July.

Our main point is that money supply growth as measured by the Fed’s M2 index, up 35.7% since the start of 2020, is much faster than during the previous period of money printing. from 2008 to 2011. More newly created dollars flowing through an economy, especially an economy that would grow naturally on its own, is bound to be inflationary.

Take the housing market for example. The Fed, according to its own data, has bought more than $ 1 trillion in mortgage-backed securities since March 2020. This massive injection of newly created dollars has lowered mortgage rates. All other things being equal, a given monthly mortgage payment could suddenly go towards a significantly larger loan balance. Of course, there are other factors that push house prices up, some transient and others maybe less, but mortgage rates are a big driver of prices.

The S&P CoreLogic Case-Shiller US National Home Price Index is now up 19.7% year-on-year. Rental property prices are also levitating, with data from Zumper.com’s National Rent Report showing a 13.1% median increase in rents nationwide for a two-bedroom home since March 2020. Housing costs are obviously an important part of measuring the impact of inflation on the cost of living. They currently represent 32.6% of the total CPI index.

One would assume that real estate inflation drove the headline CPI up 5.5% year-on-year from the August 2021 report. One would be wrong, however. According to data from BLS.gov, the CPI shows a year-over-year increase in rents of 2.1%, while equivalent rental costs for landlords rose 2.6%. Despite real-time data from CoreLogic and Zumper, housing data is currently pushing down the overall CPI rate. This warmer housing inflation data is likely to hit CPI numbers in the coming months. This inflation story does not seem so transitory.

What is the Fed doing about it? On September 22, the Federal Reserve’s Open Market Committee declared that “a moderation in the pace of asset purchases may soon be warranted.” Federal Reserve Chairman Jerome Powell also expressed his sorrow at a roundtable hosted by the European Central Bank last week, saying “it is also frustrating to see the bottlenecks and problems of supply chain not improving – in fact, the margins seem to be getting worse. We see this probably continuing into the next year and sustaining inflation for longer than we thought. “

To sum up, time is running out and the Fed may be talking about pouring a little less gasoline on the fire soon by simply reducing the rate of money printing, while also pointing the blame for inflation on chain issues. “transient” supply. that they have no control. Oh, and there’s also an official Fed trade scandal unfolding. President Powell does his best to pose as the Disaster Girl meme. At the same time, Zoe Roth, the Disaster Girl herself, won $ 500,000 this year to sell the original meme as a non-fungible token. Ironically, she might consider sending a thank you note to President Powell for helping raise NFT prices.

JP Szafranski is CEO of Meliora Capital in Tulsa (www.melcapital.com).

This column was prepared by an employee of Meliora Capital, LLC. This column is for informational and illustrative purposes only. This is not and should not be taken as investment advice or as a recommendation with respect to any security mentioned herein. The opinions expressed here are current opinions as of the date appearing in this document only and are subject to change without notice. Reasonable parties may disagree with the opinions expressed here. Statements made in this column are based on publicly available information and assumptions about future economic variables which may or may not reflect actual events. Meliora Capital, LLC, its employees or its affiliates may have an economic interest in the securities identified in this document.

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