Is The High Inflation Under Control?

Posted On 2 January 2023

Last updated on April 6th, 2024

So, the CPI and PPI were slightly lower than expected for the month of November 2022. Has this wild inflation been tamed? Are the interest rate increases going to bring inflation down to the desired level?

I am not a trained economist, although I do have a history degree and decades of life experience. The views in this post are what I see happening.

It’s Still 3.5 Times the Target Rate

The markets responded well to the news that inflation came in lower than expected. Yes, it is lower, but it is still high at 3.5 times the Fed’s target inflation rate of 2%!

Let’s look at this like we are driving down the highway. Say the speed limit posted is 65 MPH. In many states the police won’t bother you as long as you are less than 5 or 10 MPH over the limit. (If you do this and get a ticket, don’t blame me! This is only an analogy.)

Say the 10 MPH over the limit is the same as 2% inflation – fast enough to speed up the drive, yet not fast enough for the police to notice. That would put us at 35 MPH over the limit! If we told the officer, “At least you didn’t see us when we were going 40 MPH over the limit!” would he be proud of us? Not give us a ticket? We all know the answer.

Can You Hear The Words?

Jarome Powell said that there will be a lot of pain to come. He also said that the Fed has a job to do and will stay on course until it is done. Can we rely on everything that the Fed has to say? No. We should still pay attention to what they say.

Our job is to connect the dots the best we can. The biggest problem that the Fed has to face is the economy that they have distorted so much over the last few decades. Cheap money made available through low interest rates has become the standard. Now, we are just getting back to “normal” interest rates.

I have heard many times this past year about the sky-high interest rates. The truth is that between 1971 and 2022 the average Fed Funds rate was 5.42%. March 1980 had the highest rate of 20.0% and the lowest rate was 0.25% in December 2008. Right now the current Fed Funds rate is 4.5%, or still lower than average!

PPI Is Still Positive

I previously wrote a post about how the economy is like  a pipeline. PPI goes in and CPI comes out. PPI is up both from the previous month as well as the previous year. With price increases going into the pipeline, chances are really good that prices will be high or higher coming out.

As you can tell, I am not convinced that inflation is in retreat. The growth in inflation has definitely been slowed. Maybe we have seen the peak. Either way I think higher than wanted inflation will be around for a while.

The Middle Class Is Being Eroded Away

Stocks were in a bull market that seemed like their value would only increase forever! It’s impossible for stock prices to drop much. The truth is that stocks can drop. What if we’ve entered into a bear market that will last a long time? How many 401(k)s are now not what they used to be dollar-wise?

The economy is slowing down and companies are shedding workers in an effort to make their numbers work out. A lot of these jobs are tech jobs, which are middle class jobs. Sure, a laid-off tech worker can get a service industry job. The problem is that the pay cut would not support their lifestyle.

Middle class families typically have the majority of their wealth in their home. With the price of houses rising faster than incomes and with good paying jobs evaporating, what is a person to do? How about the young adults who want to buy their own home? Even if they could come up with the down payment, the current mortgage interest rates make home ownership even more out of reach.

Credit Cards to the Rescue

Credit cards can be used as an emergency fund. While not the way credit cards should be used, it does allow people to “kick the can down the road.” They can put off the reality of the negative cash flow and keep things going… for a while.

This can seem like a blessing, but eventually the credit limit will be reached. When this happens, they realize that the mess is even bigger.

Financial cycles are long – measured in months, years, and decades. People tend to think short term. This can be seen by how many people live paycheck to paycheck.

Something Will Break

The most likely thing that will happen is that the economy goes into a recession. It could already be in one! Since Jerome Powell is planning on “staying the course” in his fight against inflation there will be some more interest rate hikes.

How high will they go? Who knows! Debt does have to be refinanced when the note comes due. There is A LOT of debt out there – government, business, and individual. As long as people can dip into their savings accounts and use their credit cards, life can continue. Once people (or companies) run out of money there will be a change of heart.

The Fed to the Rescue

The Fed will pivot, and the question is when will they pivot and stop raising interest rates? They hope that they can be the heroes by getting inflation under control before all hell breaks loose.

With inflation tamed, the hero Fed can then offer stimulus checks to help out the people and the country! Yes, that would lead to more inflation in the future, but most people tend to care more about the now. People will accept the money. Maybe it will even be a digital dollar. They could reset the currency at the same time as introducing this new, exciting money.

Inflate Their Way Out of Debt

Is there a reason that the government would want higher inflation? Yes, to pay off their massive debt! Borrowing valuable dollars, then paying the debt back with worthless dollars is a great deal for the borrower.

Unfortunately, that is a rotten deal for the lenders. The citizens wonder how they are earning more than they have, yet they are poorer. Inflation is a way that wealth can be stealthily taken from the citizens.

There is Hope

I can’t leave this post without giving some hope. We can figure out how to unpeg our income from time. When there is a period of financial turmoil, there are deals to be found. It comes down to us preparing ourselves. Yes, it is sad to see others go through hardship. If we can be there to help by buying things from them, we can be a blessing to them.

When we are able to see the storm coming, we can prepare for it. There is a financial storm coming. We can put ourselves in a position that we can benefit even though there is a downturn. Just remember, there were a lot of people that put themselves in a position to profit during the great depression. We can do the same!