Economics

[RDU Irish]

You can't just look at overall CPI and assert that inflation is over. Overall CPI is a volatile number that depends on rapidly changing food and energy prices. The reason that overall CPI is coming down is because food and energy prices rose so much in 2021 and 2022.

Other metrics don't look as rosy.

Core inflation excludes food and energy prices and, as such, is less impacted by daily rate changes.

Here's core CPI inflation rates over the last 5 years:
View attachment 3054106

Target core inflation is 2%. we are still more than double that. Yes, core inflation is down from a peak of 6.6%, but 4.7% is still atrocious compared to the 2% target. Core CPI says that we aren't out of the woods yet. More data is needed to claim that "inflation is over"

Rates have declined due in large part to the Fed Reserve raising interest rates to slow the economy. I moved all of my retirement holdings into inflation backed treasury bonds in 2021. I felt like sustained inflation was inevitable, and I'm not sure why more people didn't see it coming.

Also, I've seen this graph floating around. The trend is similar for many other countries as well. I can't help but wonder if history will repeat itself.

View attachment 3054108

It's going to get interesting as debts get refinanced - US government has something like half the outstanding $30T coming due over the next 3 years which will be reset from near zero to over 5%. At the same time the Fed is trying to shrink it's balance sheet (i.e. now a seller and not a buyer of debt). SS and Medicare are going to be net spenders whereas they have been effective buyers of government bonds for their entire existence. Massive pressure on higher rates for longer, IMO. I am still amazed at real estate market resilience in the face of 6% 30 year mortgages. Seems to me there are a whole lot of people banking on a return to 3% on the 10 year Treasury that might get in serious trouble if it actually goes to 5% and stays there.

That last leg down for inflation is going to be a sticky wicket IMO. I don't think we get back to 2% without a recession and current rates don't look like enough to get the job done.