Posted on 06/17/2021 3:32:53 PM PDT by blam
A little over a month ago, BofA spooked even the most dovish elements on Wall Street and in the Marriner Eccles building, when the bank said that judging by the explosion of references to surging prices in Q1 earnings calls, the bank concluded that this “pointing to at the very least, “transitory” hyper-inflation ahead.” Yes… really:
Fast forward to today when BofA’s economist Alex Lin quantified what his bank qualified to so many shocked gasps one month ago. As Lin writes, with core CPI inflation at 3.8% yoy in May, “we must assess how much of the acceleration in inflation is due to transitory factors, and how much will be sustained over the medium term”, a task which virtually everyone is obsessing over (and which can be resolved rather simply).
So to contribute to the discussion, Lin introduces the BofA US “transitory inflation” meter. It will probably came as a surprise to nobody that said meter is currently at an all-time high, “suggesting that there is significant scope for a pullback over the next year.”
It also confirms what the bank said last month: that the US is currently in a period of hyperinflation, and hopefully the bank is also right that this period will be transitory.
So how does Lin determine what is and what isn’t transitory?
As he explains, economists have long been trying to distinguish between transitory and persistent inflation and “core inflation” was created out of this desire given the volatility of food and energy prices and their lack of signal for broader inflation pressures (core inflation is now more closely followed in real time versus headline inflation even if most consumers end up paying headline prices).
To this end, many of the regional Federal Reserve Banks have created their own alternative measures through which we can measure transitory inflation. Survey based measures of inflation expectations can provide another important perspective of transitory inflation, namely how consumers and economists view things. The BofA US transitory inflation meter accounts for all of this information, utilizing 11 different estimates:
1.Core PCE less the Dallas Fed’s trimmed mean PCE
2.Core PCE less the San Francisco Fed’s cyclical core PCE
3.Core PCE less the San Francisco Fed’s median PCE
4.Core CPI less the Cleveland Fed’s trimmed mean CPI
5.Core CPI less the Cleveland Fed’s median CPI
6.Core CPI less the Atlanta Fed’s sticky CPI
7.Core CPI less the Atlanta Fed’s sticky core CPI
8.Core CPI less the New York Fed’s Underlying Inflation Gauge – full data
9.Core CPI less the New York Fed’s Underlying Inflation Gauge – prices only
10.Survey of Professional Forecasters (SPF) 1yr CPI expectations less 10yr CPI expectations
11.University of Michigan consumer 1yr inflation expectations less 5-10yr expectations
For each estimate, the gap is further adjusted by the historical average gap between the measures involved, given that they may trend at different levels. For example, the San Francisco Fed’s cyclical core PCE has averaged 2.66% yoy from 1995-2019 whereas core PCE has averaged 1.72% yoy, or a historical gap of 94bp. BofA assumes this does not reflect transitory inflation and must therefore be adjusted out of the real-time gap.
The bank then takes a simple average of these 11 estimates, and calculates the distribution of this average through February 2020, i.e., until the pandemic started. BofA’s transitory inflation meter is based on where each data point lies relative to this distribution. Data in the far left tail (e.g. April 2020) have a meter score close to -100, the median of the distribution gets a score of zero and readings in the far right tail, like we saw in May, have a score of nearly +100.
With that background behind us, BofA states matter-of-factly that its meter is currently at an all-time high, which however is immediately spun as positive as it suggests that there is significant scope for a pullback over the next year. Which of course is true. It also suggests that prices -whether permanent or transitory – have never risen faster!
In short, hyperinflation.
As noted above, the BofA inflation meter does not itself give a sense of persistent inflation, only the bias in broader core inflation. Still, the implied “persistent” (as in non transitory) trends have been rising alongside transitory inflation up to 2.3% for core PCE and 2.5% for core CPI. This, to the BofA economists, “suggests that as transitory inflation pressures ease, core inflation is likely to settle above the Fed’s 2% target.”
That’s hardly the reason to be buying 10Y TSYs hand over fist, as algos, CTAs and a handful of carbon-based traders are doing today.
So what to do with this information?
First, the good news: according to Lin, high reading in the transitory inflation meter suggests that the persistent inflation trend is likely much lower than current readings of core inflation. Therefore, as transitory stories fade over the medium term it is likely that inflation slows dramatically. Of course, the opposite is true when there is a substantially negative reading in the transitory inflation meter, which suggests significant transitory disinflation with a much higher persistent trend than current core prints.
Applying a 12-month lead for BofA’s indicator and comparing it to actual % yoy core PCE and core CPI back to 1996, it appears to pass the smell test.
Fast forward to today, the transitory inflation meter is at a historically elevated level of 100, indicating that core inflation remains severely biased to the upside. BofA spins this in the only possible, that this argues “for substantial slowing next year back towards the trend in persistent inflation.”
Now the not so good news.
The next two charts illustrate the implied persistent inflation trend in core PCE and core CPI compared with the actual measures themselves. BofA’s estimates suggest that persistent core inflation has been on the rise alongside all the transitory pressure, with the underlying trend in core PCE at 2.3% and core CPI at 2.5%. Thus, even assuming no further improvement in persistent inflation, as these transitory price pressures ease over the medium term core PCE and core CPI are likely to settle to levels consistent with above-target inflation.
At this point even BofA admits that spinning this data in a positive light is problematic, and Lin writes that “we believe the risks are growing for higher persistent inflation amid wide-scale evidence of inflation pressures, including our own news-based indicator, which reveals that main street attention towards inflation is intensifying further.” And while there is a growing laundry list of excuses behind the transitory strength – which we profiled previously – BofA admits that “the risk is that as these pressures remain relevant in the near term, some could become embedded into inflation psychology.”
How key data should one track to assess the risks around persistent inflation? Here BofA recommends three factors: 1.Sticky inflation measures: These are the components of inflation that tend to be less volatile and more a function of the business cycle. The biggest is Owners’ Equivalent Rent (OER). OER accelerated to a 0.3% mom clip in May, returning to the pre-pandemic trend and therefore signaling a return to target inflation. 2.Wages: An increase in wages will facilitate greater consumer price pressure. As highlighted in Wages bubbling up (hot topic), frictions from bottlenecks and labor shortages have underpinned recent wage growth. While some softening could occur as these constraints ease later this year, BofA expects even stronger wage growth by the end of 2022 with the Employment Cost Index above 3% yoy. 3.Long run inflation expectations: rising expectations will turn temporary inflation into permanent. Repeated price increases have the ability to fuel inflation expectations. University of Michigan’s 5-10yr expectations mentioned earlier reached 3.0% in May, which is the highest since 2013, before settling back down to 2.8% in the June preliminary survey. Similar moves have been seen in the Survey of Professional Forecasters measures and market-based measures such as 10yr breakevens and 5y5y forward inflation swaps.
Bottom line: whether the record inflation print in BofA’s inflation-o-meter is temporary or persistent, the bank writes that it is “increasingly comfortable with the view that core inflation will settle above target next year as transitory stories fade into the background.” Consistent with this, after a hot 2021 with core PCE likely above 3% yoy in 4Q and core CPI around 4%, BofA expects cooling to 2.1% yoy and 2.5% yoy in 4Q 2022.”
Finally, how will we know when transitory inflation is cooling off or even reversing?
Pay close attention to the monthly trajectory of core inflation. Persistent inflation around target implies an average monthly trend around 0.2% mom, but we could see 0.1% or weaker readings if goods that have been bid up over the pandemic see a negative correction. A negative core inflation is also not out of the question depending on the magnitude of the pullback. Base effects are also a consideration for the % yoy trajectory. The elevated core inflation readings this year create negative base effects in 2022, mainly starting in March.
As such, Lin would expect to see the % yoy rate in core PCE and core CPI cool off more dramatically around that time, in addition to the transitory inflation meter
It is definitely new territory.
I may make a decision tonight as a new realization has come upon me.
We seem to be on the same road as Venezuela.
Probably not... That's why their called "Idiots".
One of my signals is product we buy.
The output after all is analyzed will be our own price increases.
So yes, product lines in and out are components.
I’m somewhat immune to all of what is coming. I own my home and am debt free. Although I’m on a fixed income. Property taxes are the only mandatory expense I can’t mitigate, easily.
I can go off grid and have plans to do so.
So inflate.
At some point, inflation will cause everybody to quit spending. Then the money will run out as our economy depends on the flow of money through the economy. If the flow stops, you are back to caveman survival mode.
Unlike Venezuela for example, Americans will not disarm and the Democrat Party government will have trouble controlling Americans. I personally don’t give a rats behind for Democrats and their cities, so, no great loss to me and most Americans. However for Democrats it will be a disaster.
If that is what it takes to crush the Democrat Party bring on the inflation and following Depression. I’m ready.
Are you saying those are components for manufacturing?
I’m actually thinking of leaving the country.
Iceland, Switzerland, Poland amd the Czech Republic lead the way.
If I must live in Socialism, it won’t be here. Too many “non Europeans”...
Well, sort of by nature inflation is transitory. Sometimes there are deflationary periods but more or less it goes up every year. Sometimes more than others. The real question is “how transitory” and “what’s the new normal”. When, if ever, will it fall back under 2% annually?
I am expecting inflation and shortages in commodities going deep into 2022 at least. Not just because of covid and not just because of the money supply and low rates.
I purchase source materials that are used in all kinds of industries from health care, beauty, textiles, industrial products, consumer products you name it.
These items are generally cheap. They are input into manufactured goods and resold as finished products or used to finish products (like, say, scotch guard some textile), so consider them part of the “producer price index” or “input cost”. But the prices for them have gone through the roof. Part of it is because a lot of this comes from Asia and there are a number of issues impacting it - there is a palm oil shortage for one, because of an embargo on Indonesia. Of course, all the Indonesians will do is sell them to China or Phillipines or somewhere else, repack it and reship it. But that’s going to add cost. Then there is a container shortage. Used to be to ship a container from Asia to Pacific Coast USA was about $1000. Now, its $5000 and climbing. That is not just because of fuel costs, it’s because they are running out of containers! They ship us so much stuff and the containers just sit here because we don’t have anywhere near as much stuff to ship back. Shippers are loathe to send an empty boatload across the ocean. For low cost low margin goods, that adds a lot. Worse, the higher margin goods like TVs and iPhones are paying shippers to jump the line because they can afford to grease their way in front, but the commodities guys and bulk shippers don’t have so much extra room to pay off the transport schedulers. So you have shortages and lead time problems, demand outstripping supply and thus price increases.
One day I received 2 price increases on the same day. An item that used to cost 78 cents a pound is now costing me $1.26 a pound. That’s small money, but big money considering it is used in just about everything and ships by the tonnage.
I had a transitory love once.
Well, probably more than once.
Everybody has a fit about inflation but it’s better than deflation.
So what is the magic inflation number where everybody will be happy, kind of like an economic Gaia will be pleased with us.
And can we control inflation to stay at that number forever?
2% inflation is very low compared to the average over the last 50 years. Now everybody acts like it’s lethal.
That is remarkable like being shelled by enemy artillery. Any move you make, including standing still, can result in the round killing you.
“Well, sort of by nature inflation is transitory.”
True, it was transitory in Weimar Germany, Zimbabwe, Argentina, etc. “Transitory” is the latest weasel word.
Good riddance to this now banned TROLL!
Bank of America is not a good source for sound investment advice. They also have a low stock valuation, trading under $40 a share.
If I bought BOA stock on Jan 4 1837 at $120 and sold June 17 2021 at $39.85.
I’m down $80.15 over the 184.5 year period.
If Bank of America can’t grow their own stock worth a shit.
Why should I listen to their economic predictions?
If you can tolerate drastic market swings over time, a simple investment approach IMHO would be to: (1) Invest based on dollar-cost-averaging. (2)Invest in a S&P 500 index fund or etf with low fees, e.g., Vanguard.
As I look back over the years, I see that I made the mistake of many investors, which was bailing when the heat (losses) became too great. It's difficult to hold-pat, when the market tanks and you see your investments lose 40% of their value. However, if you have the nerve and patience to hold fast, you will eventually see a rebound if history repeats itself.
VFIAX - lifetime (20.5 yrs) return - 265%; Lifetime annual average - 12.9%.
Why Index Funds Beat Actively Managed Funds:
https://www.thebalance.com/why-index-funds-beat-actively-managed-funds-2466411
Most of these advisory sources are just propaganda merchants as far as I'm concerned.
When it comes to stock, you gotta know how to analyze them before you purchase them, and not go on what some slick propaganda guy says.
Don't invest money you are not willing or able to lose.
I still have BAC stock that I bought in the 1990’s at about 13 bucks per share. Most of it I sold before the 2008 melt down. I only have a couple of hundred shares left.
Does this mean tech stocks or cash investments?. . . .
It means, get out of cash and get into commodities, now while there are still some you can afford.
My money is in weed, gold, tech, and Michael Burry’s positions...
Meanwhile groceries and gas are up 20%+.
Housing is up AT LEAST that much in the last year...whether rent or purchase.
So those who spend the bulk of their income on groceries, gas (and all energy) and housing are feeling the hammer.
That’s about 90% of the country.
But govt says core inflation is under 3%.
I say they’re full of shit.
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