Posted on 06/16/2021 4:21:00 AM PDT by blam
This post is a follow-up to our inflation piece from last night, Inflation In Context: A Liquidity Adjusted CPI Index, which was a bit too wonky, and we don’t think we were clear in making our points.
Inflation And Loose Financial Conditions
Our central thesis of last’s night piece is that inflation is rapidly accelerating, not just due to the “base effect,” and that financial conditions are far too loose.
We’ve taken the previous three very hot core inflation prints – 0.7%, 0.9%. 0.3% — to construct an annualized 3-month core inflation rate. It’s now running at 8.21 percent, its highest level since July 1982, when financial conditions were very tight during Volcker’s war on inflation, and a month that ranked in the 97 percentile in terms of the most restrictive financial conditions measured by the Chicago’s Fed’s National Financial Condition Index (NFCI).
May’s NFCI was still extremely loose. in the 14th percentile of tight monetary conditions out of the 604 months of the life of the index.
Our Point
That is our point: rapidly accelerating and high short-term inflation with extremely loose financial conditions.
The following chart illustrates our 3-month core CPI index with an adjusted version – 3-month core CPI minus a scaled-up version of the NFCI. It gives more context to the historical inflation data as to whether financial conditions are tight or easy.
Our adjusted core CPI index came in at 8.92 percent in May, the highest since September 1981.
Feels Like 1977
We also looked at all the monthly inflation prints for our core CPI data in the bottom quintile of the months with the easiest financial conditions — i.e., the 20 percent of the 600 plus months where the NFCI was less than -.66215. Just an aside, the monetary authorities, though they have a considerable influence on the NFCI, market conditions, such as the stock market, credit spreads, mortgage rates, also play a huge role. Here are the 105 indicators the NFCI is constructed from.
Case in point, during the depths of the Great Financial Crisis (GFC), even while the Fed was in panic-easing mode, November and December 2008 ranked in the 96th percentile of tightest financial conditions in the history of the NFCI. That was a rare case but becoming more common as financial markets now have an outsized influence on the asset-dependent economy.
The above table illustrates that in the bottom quintile of the months with the easiest financial conditions as measured by the NFCI, the May 3-month core CPI print was the highest of the bottom quintile, somewhat disturbing as it joins the unique company of months just before the big inflation spike during the Carter administration.
Monetizing The OPEC Supply Shock
History Repeating?
Monetary policymakers are faced with a similar dilemma as they were during the mid-1970’s – though there are also many differences. Faced with the COVID pandemic supply shock, they also seem, at least to us, to be repeating the same mistaken reasoning and logic as economic policymakers did back then.
(snip)
All by design to weaken the middle class…
You don't even need to go back in time to experience real socialism.
Beat me to it. Yup back to the future.
The second show hasn’t dropped yet. We still have record low financing rates. When those balloon, THEN it will be the 70s.
Welcome Back, Carter.
Currency COLLAPSE and Hyperinflation in Iran (what it looks like) One donut = 1 USD.
Note the comment about the 50,000 Tomans actually being 5,000 as the govt. has moved the decimal to the left by one (1:45) - coming here soon.
What pisses me off is that we are using our reserve currency as a political club instead of just a mode of commercial funds transfer.
No wonder many foreign banks are looking for some other basis of wealth than the dollar. I thought it was only because our printing presses were running overtime, but the political punishment is another aspect.
What gets me is you couldn’t get a job in 1980.
Now you can’t get a worker.
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