February Charts of Interest: The Impacts of Inflation and Interest Rates

Michael from California posted over 2 years ago:

The observation "consumer prices are continuing to trend downward" seems to be misleading. The rate of increase is slowing, but prices are still rising.

Michael from California posted over 2 years ago:

The observation "consumer prices are continuing to trend downward" seems to be misleading. The rate of increase is slowing, but prices are still rising.

Larry from California posted over 2 years ago:

Remember inflation is transitory - except for the unfortunate continued tenure of Jay Powell

Rob from NC posted over 2 years ago:

I'd be truly surprised if we're finished with inflation, since the federal government is still running the printing press at full tilt. If we see another significant uptick in oil, it will really be a mess. One reason for increased food prices is the enormous increase in theft from grocery stores in the past year or so. People I know who work in that industry are alarmed and disgusted by it, and it's not confined to Los Angeles, San Francisco, and "blue states."

Karl from WV posted over 2 years ago:

If you will look at the inflation chart carefully, you will see that inflation has not dropped significantly in at least 4 months. I doubt the Fed will take any action to reduce interest rates until we see either the economy slowing to the brink of a recession, or the inflation rate dropping significantly below 3% for several consecutive months. In fact, unless one of those two things happens soon, I would expect another .25% increase. Aside: We will actually see prices drop when inflation goes negative -- and then it is called deflation.

Barry from TX posted over 2 years ago:

Charles, you called out something important that The Fed data hides and most people do not consider -- the rate of inflation integrates and compounds along multiple dimensions. (#1) As the inflation rate rises or falls, the percentage changes are computed using larger/smaller base rates. A 1% rise on a base rate of 5% is 0.5%; a decrease at 3% is 0.3%. Stock markets experience an inverse relationship; if stock prices decrease by 20%, it takes a 25% increase to recover those losses. (#2) The rising prices for the final products that consumers see incorporate ALL prior inflation rises at ALL intermediate production levels starting with basic commodities. (#3) A significant component driver of inflation is increasing salaries and benefits that compound the rate of inflation. The “fully-burdened” costs of employees are 40%-50% added to their base salaries through workplace needs (space, tools, etc.) and benefits (insurance, retirement, etc.) (#4) Workers in industry sectors demand higher salaries and benefits to help them cope with inflation and management – or unions – raise salaries and benefits to achieve “parity” with other industries. This compounds inflation as industry sectors impose rising costs on the other industries they supply and the compounding of inflation spreads. There have been several prior periods where inflation soared much higher than today. In my personal experience, I remember the early 1980s when I faced 12% inflation, had a 15% mortgage, and saw gasoline double year over year. What I saw then is what I see now. Volker was the Powell of the 1980s. When I read/hear FOMC pronouncements that inflation is “coming down,” My first thought ... wait for the other shoe to fall. One more thought to ponder. (#5) How much of the inflated stock valuations at 50% above the market index average earnings are driven by/derived from (a) the costs of economic inflation, (b) a shrinking money supply, and (c) increasing government/business/household debt? What percentage of the “profits” in your portfolio are “inflated dollars?’ Do we have inflated dollars chasing inflated dollars? If so, the risk-reward profile has shifted adversely. How far? Charles, thanks for being a thought leader with this article.

Ken from NC posted over 2 years ago:

Thank you Charles for this informative Investor Update. I have shared this info with my sister-in-law who is currently in the market for her first house purchase, but isn't having much success. Yes, the media hype about the first rate cut occurring in March was just a shooting star, and the media hype and the shooting stars that it produces is a false reality that we investors need to be very cautious about. I got an invigorating chuckle about your real-life experience with AI. Thus, all the media hype about AI and Nvidia -- watch out for those shooting stars! Lastly, I agree with the previous comments regarding inflation. I try to keep a close watch on where our money is going and the grocery food budget is a big one. Over a two year period our grocery food costs is increasing at 4.45% per annum as compared to 1.78% over a five year period. So, disinflation is good, but some deflation would certainly be more welcome!