Inflation ticks down, however the victory it’s seems to be far!

Inflation continues its downtrend , and although seems that it peaked in June 2022, with some underlying issues still unresolved the years ahead can prove to be difficult to keep inflation under control, and its risk of resurgence in the years remains elevated. Even harder to achieve the 2% YoY inflation rate that the FED set as its target.

Figure 1-CPI Index since 2003

Last reading of inflation released on 14th of February came little higher as consensus forecast 6.4% vs. 6.2%. Despite food , and used cars prices slowing down, sticker components of energy , and cost of shelter still causing pretty significant inflation ,and inflation remains three times above the target.

Zillow rent index that leads the rent CPI which constitutes one of largest proportion in consumer price index are cooling off their highs , and tend to be leading indicator by 6–12 months. As expected we should have better news in the coming months on that front too.

Figure 2- Zillow Rent Index vs US Rent CPI

Well, if everything just seems fine, and things are heading into the right direction we can assume that good days are back.

Yes, and no. While chances for a soft landing increased in the US following a decent job growth-in order to better predict the landscape of inflation over longer term we need to understand its causes.

Inflation tends to happen when to much money chases not enough goods and services in the economy. According to the chart below broad money growth has high correlation with CPI growth, as such examining broad money supply we identify periods where the expansion of money directly causes inflation growth.

We can observe two periods in the last century where broad money supply growth wasn’t followed by CPI growth highlighted in green. The last instance when this occurred was the last 2 decade, when offshoring was highly used by big companies( manufacturing, IT-offshoring ) mainly to enjoy lower costs , and cheap labor. China, India, Ukraine were prominent in the offshoring space to name a few.

Figure 3- Broad money supply; correlation with CPI
Figure 4-Inflation causes

As tensions , and ever growing competition over dominance between powers such as US-China-Europe grows the golden age of offshoring in countries such as China are over, and US are looking for alternative ways to solve this problem ,and to decrease its dependence on them, however it won’t be straight forward process. In addition Russia-Europe relationship rubs salt into the wound on a larger scale, and cheap energy that Europe has enjoyed from the trade with Russia are over too.

Where are we now

Remain to be seen how these structural changes will be solved- energy shortages in Europe as no longer trades with Russia. Increased tension between US and China doesn’t seem likely to finish soon , if not worsen ,and re-enter a healthy competition, trade agreement to allow both countries to grow as before.

Inflation since Covid-19 was mainly caused by unprecedented fiscal stimulus as economies came to halt combined with supply chain disruptions.

Supply chains improved recently and the FED entered a period of tightening monetary policy that will probably end this year, and start easing in the months to follow. The main reason I believe they must ease monetary policy, and start money creation again are the unprecedented debt levels- that can’t be sustained with interest rates level at 5% for too long, as just servicing the debt (120% debt to GDP) can prove to be extremely difficult.

Figure 5-Debt to GDP


As broad money dramatically increased, and tight monetary policy will prove to be hard to maintain over the long run, adding the supply chain disruptions that happens on macro landscape I expect inflation to remain higher than many expect with periods well over the 2% target. Yes downtrends will occur as we are in now, but structural improvements will have to occur on nations levels to solve inflation.

And although inflation will come and go , this could only occur in rate-of- change terms year over year, but prices will remain permanently elevated as money in the system is more abundant, and high debt levels will likely push the FED to even more money creation -which ultimately will be reflected in the growth of financial asset prices.

Have a beautiful day!

Disclaimer : Views are my own and do not intend to advise any party for any kind of action , nor represent investment advice!

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Inflation ticks down, however the victory it’s seems to be far! was originally published in Coinmonks on Medium, where people are continuing the conversation by highlighting and responding to this story.