The Inflation Reset



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Yesterday’s discussion of “The Great Reset” (at Bloomberg) looked at 6 economic categories that were impacted by the pandemic and re-opening. Today, I want to focus on one of those: Inflation.

In my adult lifetime, Inflation has been (mostly) accumulating slowly; the 2000s were a notable exception. But like pressure building up along tectonic plates, there are occasionally big resets – post WW2, mid-90s boom, after the GFC, and now during the post-pandemic re-opening.

You may find it helpful to consider the differences between price volatility and inflation. Prices that fall and then recover are very different than prices that steadily rise and compound over long stretches of time.

Lots of current hot inflation calls are often accompanied by aggressive chart crimes. Perhaps the year-over-year measure of prices, from the depth of the Covid collapse to the peak of the re-opening, is the worst of these.

Lately, its Gasoline prices. Year-over-year, gas prices have skyrocketed 52%! Of course, that ignores context: From June 14, 2018, to the lows on April 27, 2020, Gasoline fell 39.31%. The rise of 52% barely returns you to 2018 highs. That lack of context (Denominator blindness) is more reflective of volatility and mean reversion related to post-pandemic re-opening than to true inflation.

Ask yourself: What has been the rate of price increases over the past decade or two? Are we seeing volatility, or increases that compound? Gasoline versus Real Estate might offer good long-term price comparisons.

Rather than cherry-pick one favorable date set to my argument, here are lots:

Gasoline prices *

1 Month: +4.58%

3 Months: +11.19%

Year to date: +34.26%

1 Year:    +53.18%

3 Years:  +2.75%

5 Years:  +23.05%

10 Years: -21.00%

20 Years: +79.58%

You can easily select whatever time frame you like: From 07/14/2008 to today, gasoline fell -27.11%; even better, from 2008 highs to the 2020 lows, gasoline fell -57.80%. The tell you need better context is found in the 1 and 3-year data points: When the 1 year gain is +53.18% but over 3 years it is +2.75%, you obviously including a collapse and recovery in the shorter time frame. Without the proper context, it’s misleading.

My position: we are experiencing a sharp rise in inflation, compounded by spot shortages of commodities, issues in supply chain logistics, labor shortages. Add in all of the pent-up demand caused by the newly vaccinated as we re-open and you get a spasm and reset. But give it a year, and I expect things to more or less revert back to the prior state of affairs. Deflation, with occasional spasms of inflation.





Data courtesy of YCharts, FRED



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