The primary consensus for 2023 is that the rate of inflation will contract dramatically. The following will somewhat verify what the street has been saying.
That was way too obvious a choice.
I guess his assumption is that farmers are going to magically reduce the cost of production with magic beans.
And on and on and on they went. For months now almost every analyst, same for commentators, etc. have come out and said that the US economy has seen peak inflation and that the rate should decline further in 2023 setting up a Fed “pivot” or pause.
These are the same individuals who said inflation was transitory and that the measurements in food an energy are not as important as the core rate, be it CPI or PCE. They should try telling that to the lower and lower middle income families who are struggling to survive in this economy.
The reality is that there is a huge risk that inflation will rebound in the first half of 2023. The obvious bogeyman for this will be the rebound in energy prices and sudden realization that the intermediate inflation, long ignored by many market gurus and economists, will become a problem in the first quarter of this year.
Many commentators, including myself to some degree, have been comparing this current inflationary regime to that of the 1970’s. I do not see any reason to disagree with analysis, but let’s take a quick look at the nightmare of that era and why a bounce higher within the CPI is not all of that far fetched of an idea in 2023.
The hopium displayed by market gurus who think that in this modern era it is impossible to have a 1970’s style of cyclical long term inflation is not shocking. The majority of the mindset is mired in the philosophy that the US economy has evolved and changed and the American consumer’s behavior is much more sophisticated.
This is why I think the 2023 March CPI report might just sneak back up to around 8.5% on an annualized basis which also why I predicted a shocking 0.50% Fed Funds rate increase at the March 22nd FOMC announcement. The Fed’s core PCE rate will also creep up again with a short term bounce and that will be their justification for the rate increase that will bring the rate to 5.25-5.50% range.
The risk of inflation remaining sticky for longer will become the terror of equity and bond markets as the US 10 year Treasury yield will probably skyrocket higher towards the 4.50-5% area. What will crush the bulls however, is the projections that the Fed Funds Rate has room to top out between 5.75%-6.25% as outlined in future Federal Reserve Governor’s speeches and papers. This will be the major drag on equities, bonds at sovereign and corporate level, along with creating larger economic problems in the second half of 2023.
The reality is that food and energy were a staple required for basic subsistence in the 1970’s and that has not changed now. Now for the new economics lesson which is old that shall be taught in the 2020’s which has long been forgotten by market participants of the modern era:
The US economy is not special nor exempt from having an inflationary recession.
Good times baby, good times as the Fed has to Whip Inflation Now.