One of the biggest dividing lines in the views of investors for the coming years will be if the current crisis and the fiscal and monetary stimulus will lead to inflation.
I still think we are going to get lower inflation in the Us and the UK into the second half. The problem is that with Friday’s high inflation data the Fed has an incentive to hike even faster and even more. All of this makes a recession in the US in 2023 inevitable in my view. I think a soft landing has become impossible in the US by now.
Funnily enough, on Friday headline inflation rose while core inflation continued to drop. Officially, the Fed cares more about core PCE than headline PCE but as headline inflation remains high, we are also seeing more and more components of core PCE accelerate. And that is worrisome for the Fed.
We had a recession in Europe, but not in the US, thanks in part to US consumers continuing to spend like there is no tomorrow. I am really surprised how robust consumption in the US was despite the massive rate hikes. Part of it is due to 30-year fixed mortgages so higher interest rates didn't pass through as quickly as in Europe and the UK where we have 5- to 10-year interest rates and many people have seen their mortgage payments increase by a lot.
Another part is that fiscal stimulus in the US (IRA, etc.) has been larger than in Europe which helped the job market a lot.
It's been a year since you wrote this. Maybe you could do an update.
I agree with the comment above. It would be great to hear your thoughts on the inflation path now.
I still think we are going to get lower inflation in the Us and the UK into the second half. The problem is that with Friday’s high inflation data the Fed has an incentive to hike even faster and even more. All of this makes a recession in the US in 2023 inevitable in my view. I think a soft landing has become impossible in the US by now.
Funnily enough, on Friday headline inflation rose while core inflation continued to drop. Officially, the Fed cares more about core PCE than headline PCE but as headline inflation remains high, we are also seeing more and more components of core PCE accelerate. And that is worrisome for the Fed.
Two and a half years later, what are your thoughts? What kept a recession from occurring?
We had a recession in Europe, but not in the US, thanks in part to US consumers continuing to spend like there is no tomorrow. I am really surprised how robust consumption in the US was despite the massive rate hikes. Part of it is due to 30-year fixed mortgages so higher interest rates didn't pass through as quickly as in Europe and the UK where we have 5- to 10-year interest rates and many people have seen their mortgage payments increase by a lot.
Another part is that fiscal stimulus in the US (IRA, etc.) has been larger than in Europe which helped the job market a lot.
In any case, going into 2025, you can guess my view on inflation from this post: https://klementoninvesting.substack.com/p/have-we-slayed-the-inflation-dragon
Indeed (inflation dragon post), we don't know what we don't know. So "be diversified" is wise advice.