Inflation, at any price

1 month ago 2

Inflation disappoints

I'm still slightly smarting from an extraordinarily expensive trip to the US, which was periodically peppered with the newsreels announcing the glorious victory over inflation by partisan academic economists.

Of course, while the inflation rate may indeed be lower, price levels for working folks are excruciatingly higher than they were 4 years ago, a point neatly side-stepped by commentators cheering hard for a Harris-Walz election victory.

In the event, inflation disappointed to the upside in September, rising by more than expected at +0.2 per cent for the month, and +2.4 per cent for the year (albeit this was the lowest annual headline inflation rate since February 2021).

The US inflation target is lower than that of Australia, at 2 per cent.

More concerningly, the core inflation figure rose by more than expected at +0.3 per cent, to pick up the pace to +3.3 per cent over the year.

Source: Bureau of Labor Statistics

At least the spike in freight costs has reversed, with prices falling again there.

Rates to fall anyway

Part of the reason that the US consumer economy has continue to rampage along has been the enormous deficits being run on an ongoing basis.

With a national debt of US$35 trillion and rising fast, and a gross interest bill steepling to US$1 trillion in 2024, interest rates practically have to come down regardless of the inflation rate tracking above inflation.

Markets are pricing for a 25 basis points cut in November, and another 25 basis points cut in December.

Get you hedge in

I think the following point is implicit in a lot of what I've written over the years, but it's worth reiterating anyway.

With developed economies running up such massive government debt balances deflation will be avoided at all costs - even by dropping money from proverbial helicopters if needs be - and you simply must get your inflation hedge in.

A look at the world inflation graph since the US came off the gold standard in 1971, effectively ending the Bretton Woods agreement, underscores the point.

Setting money on fire!

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