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Is This the Return of the 1970s?

Another hot inflation reading this morning with CPI coming in at 6% on the headline. The good news (if there is any) is that it does look like year over year inflation peaked back in February, but the outlook going forward is more and more muddled as time goes on. On the one hand, you have broadening services inflation and surging commodities. The war in Ukraine and potential for a conflict in Taiwan are strong arguments for continued high inflation. And on the other hand, you have rising recession risk, slowing house prices, crashing shipping costs and the potential for an overly aggressive Fed who could crash credit markets and actually cause deflation.

As I describe in the attached video, I think the higher probability is that we’ll continue to see a falling rate of inflation in the coming 18 months. I also think there’s an outside chance that we have outright deflation at some point in the coming 18 months if the Fed hits the brakes and the housing market grinds to a halt. On the other hand, there’s the Ukraine and China risk which would keep pressure on supply chains and commodity prices. It really could go either way at this point depending on which scenario plays out.

Or, adding a third scenario into the mix – you get some combination of the two. The Fed makes a big policy error, crashes housing AND you get a prolonged war in Ukraine (or war in Taiwan). They say predictions about the future are hard, but boy, this is something else. We’re all just guessing at this point….