It would be a mistake to believe that the prices of goods and services can’t accelerate from here. Look at the trend (chart below) in Core CPI – it has headed in precisely the wrong direction since November 2022.
- Some of the Core CPI momentum is due to the Shelter category which carries a heavy CPI weighting and which lags real world figures. However, Shelter is hardly the only CPI category where the prices of goods and services continue to rise. Our view is that if the Fed continues to act with kid gloves toward fighting inflation, we could very well have a double dip inflation scenario as we did in the 1970s and the next peak could be significantly higher than the July 2022 peak. As it stands, the U.S. will not see a 2% CPI reading for at least another several years even if the Fed continues to tighten for the next number of months at its current pace.
- Our view is that it would be a mistake for the Fed to stop tightening now as inflation will likely accelerate if that were to happen. U.S. banks will be fine as they were bailed out on Sunday. Many U.S. banks will surely try to take advantage of the Fed’s forgiving Bank Term Funding Program which makes banks whole as it relates to their collateral (read more here). What bank wouldn’t buy bonds at 70 cents on the dollar when the Fed will lend to it at par value?
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