{"id":25242,"date":"2023-06-20T22:57:47","date_gmt":"2023-06-21T02:57:47","guid":{"rendered":"https:\/\/ifintechworld.com\/news\/inflation-went-wild-heres-how-it-might-be-tamed\/"},"modified":"2023-06-20T22:57:49","modified_gmt":"2023-06-21T02:57:49","slug":"inflation-went-wild-heres-how-it-might-be-tamed","status":"publish","type":"post","link":"https:\/\/ifintechworld.com\/?p=25242","title":{"rendered":"Inflation Went Wild; Here\u2019s How It Might Be Tamed"},"content":{"rendered":"
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As inflation begins to moderate, Olga and Hugo examine the structural forces shaping the medium-term outlook in four categories: energy, housing, goods, and services. They uncover dynamics that challenge conventional wisdom about post-COVID shifts in the global economy.<\/p>\n

Hugo: <\/strong>Olga, let\u2019s talk about inflation. The annual rate is running at sub-4%, some way down from the peak. Give me the Complete Idiot\u2019s Guide<\/em> to which components of inflation are currently strong and which are currently weak. Looking ahead one to two years, I also want to understand the structural outlook for inflation. Clearly, there\u2019s still a lot of, let\u2019s call it, post-COVID weirdness in the economy.<\/p>\n

Olga: <\/strong>Hugo, let\u2019s look at the four largest components of inflation: energy, housing, goods, and services.<\/p>\n

Energy prices, as we know, are quite volatile, but they have come off the boil rather decisively over the past year. They\u2019re no longer a huge input to month-over-month inflation. While gasoline prices may remain too high for some people\u2019s liking, that\u2019s a price level; that is not the change in prices.<\/span><\/p>\n

The second big component is housing. That\u2019s 30% to 40% of the basket – it\u2019s the single largest component of inflation. Historically, in the United States, housing accounts for roughly 1.0 to 1.5 percentage points of annual inflation.<\/p>\n

More recently, the contribution from housing has been averaging considerably stronger, north of 2 percentage points. That has to do with a lagged effect that we\u2019ve seen from a sharp rise in rents and housing prices in the aftermath of COVID.<\/p>\n

Why the sharp rise? We had an eviction moratorium for over a year. As we reopened, landlords rushed to compensate themselves for their perceived loss of income. At the same time, many people were wanting to move to different locations – to the suburbs or to different states entirely. In the near term, we saw a massive increase in the pace at which house prices were rising.<\/p>\n

Both of those trends are now behind us, but they feed into the consumer price index with a lag of about 9 to 10 months. Recently, both imputed rents and housing price inflation have decelerated from roughly 18% year-over-year to closer to 0%. There are tentative signs that housing price growth is beginning to roll over, which should bring housing closer to historical levels this summer and into the fall.<\/p>\n

The third – and the most interesting – is the price of goods. Over the past two decades, we\u2019ve seen significant periods of deflation in goods prices and long periods of no change. Recently, goods prices are rising at a slower pace than they did after we reopened and experienced enormous supply-chain difficulties.<\/p>\n

In the longer term, we expect goods prices to be deflationary. We hear this from automakers: Tesla (TSLA) said it plans to cut manufacturing costs by 50% in its next-generation electric vehicle (EV) models. But for now, goods prices are still quite volatile, and their contribution to monthly inflation is very low but still positive. This is the category with the biggest delta compared with pre-COVID trends.<\/p>\n

Finally, we have services, where inflation is still quite robust – significantly stronger than it was in the pre-COVID period. Services inflation is very sticky, so we don\u2019t expect it to turn negative. In fact, you don\u2019t want deflation in services.<\/p>\n

But you do want services inflation to be lower than it is today – somewhere in the 3% to 4% range, which is what we experienced in much of the post\u2013World War II period in the United States and elsewhere in the developed world. We are gradually trending back down to those levels.<\/p>\n

To sum it up, if we take the monthly print – inflation that\u2019s already in the rearview mirror over the past six months – we\u2019re averaging an annual inflation rate of about 3.1%. Price levels should remain elevated relative to their recent history, but inflation is likely to moderate further.<\/p>\n

Hugo: <\/strong>Remind me why services inflation is so strong. How much of that has to do with the post-COVID unwind?<\/p>\n

Olga: <\/strong>Services are where we arguably had the biggest pent-up demand post-COVID. It was the part of the economy that was most impacted by widespread closures. In professional services, we could all move to a virtual working environment, but when you\u2019re a proprietor of high-touch services and you had to forgo a large chunk of your income, you\u2019re eager to make it back.<\/p>\n

When your favorite haircut place reopened post-COVID, the prices shot up by 30% to 50% in many cases. But that doesn\u2019t mean that prices will continue to rise at a 50% pace. That would be quite simply unsustainable.<\/p>\n

In the long run, services inflation moves more or less with nominal income growth, and wage growth has been decelerating. Price levels are likely to remain higher than pre-COVID – I don\u2019t know if we emphasize that enough – but the appreciation is likely to be slower.<\/p>\n

Hugo: <\/strong>I\u2019m interested in how demographics might affect medium-term inflation. There is certainly an inflationary component to an aging society; you\u2019ve got fewer workers, so you have to pay more for them. Of course, the other side of that is that old people consume less.<\/p>\n

Olga: <\/strong>As you pointed out, services pricing is driven by demographic trends: specifically, the aging population and the decline in the dependency ratio. If you look at the data in the United States, since around 2011, the number of people 65 and over has begun to grow at a significantly higher pace than in prior eras.<\/p>\n

Around 2008, we also saw a decisive break in birth rates. Before, the U.S. birth rate averaged just at or above two births per woman, around replacement rate. We\u2019ve moved decisively over the past decade and a half to below 1.7 births per woman – meaningfully below replacement rate.<\/p>\n

With both of these trends in place, services prices should accelerate, but we\u2019ve actually not seen this. There are lots of components of demographics here, and working out the net direction is devilishly difficult.<\/p>\n

Nursing and skilled-care facilities – anything that has to do with services for the elderly – may indeed experience higher rates of demand and, therefore, more wage pressures.<\/p>\n

At the same time, pressures on childcare and education may be lower. In a number of cities, we\u2019re already seeing that there are way too many public schools for the population of children.<\/p>\n

Hugo: <\/strong>For energy and goods prices, what forces are affecting the medium-term outlook that might be different from what we saw pre-COVID?<\/p>\n

Olga: <\/strong>On the energy side, a lot of folks are arguing that our push to decarbonize has left us too exposed to volatility and underinvestment in fossil fuels, and that as a result we are doomed to experience higher inflation in energy.<\/p>\n

I couldn\u2019t disagree more. This is the ultimate illustration of our perpetual growth machine. Every technology, as it moves through its cycle and matures, is hugely disinflationary. We\u2019ve already seen that play out in renewables, where both solar and wind power prices have plummeted 10-fold over the past two decades.<\/p>\n

All the estimates of how much it would cost for the world to decarbonize or move to more sustainable sources of energy are linear, using the current price of inputs. They don\u2019t think about the fact that as we invest in figuring out solutions to move away from carbon-based energy sources, those solutions should become ever cheaper.<\/p>\n

On goods prices, a lot of ink has been spilled on deglobalization and how that is going to be a tailwind for higher inflation. I think this perspective is confusing decoupling<\/em> with deglobalization<\/em>.<\/p>\n

As the United States and China look to decouple, that doesn\u2019t necessarily mean that we\u2019re going to have less-globalized supply chains. If Apple (AAPL) is diversifying away from Chinese plants into Vietnam or India, it doesn\u2019t mean less globalization. In fact, it could mean even more, if they\u2019re spreading their factories around the world rather than concentrating them in one trading partner.<\/p>\n

Also, decoupling doesn\u2019t necessarily mean higher prices. The attendant capex may put temporary pressures on intermediate goods that are necessary to get factories up and running. But, again, we\u2019ve seen this in the past. As we globalized, we didn\u2019t see higher inflationary pressures – we saw lower inflation. And this is broadly the pattern that I expect to continue.<\/p>\n

Original Post<\/em><\/p>\n

Editor’s Note:<\/strong> The summary bullets for this article were chosen by Seeking Alpha editors.<\/p>\n<\/div>\n

Read the full article here<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

As inflation begins to moderate, Olga and Hugo examine the structural forces shaping the medium-term outlook in four categories: energy, housing, goods, and services. They uncover dynamics that challenge conventional wisdom about post-COVID shifts in the global economy. Hugo: Olga, let\u2019s talk about inflation. The annual rate is running at sub-4%, some way down from […]<\/p>\n","protected":false},"author":1,"featured_media":25243,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"gallery","meta":{"footnotes":""},"categories":[236],"tags":[83],"class_list":["post-25242","post","type-post","status-publish","format-gallery","has-post-thumbnail","hentry","category-news","tag-featured","post_format-post-format-gallery"],"yoast_head":"\nInflation Went Wild; Here\u2019s How It Might Be Tamed | iFintechWorld<\/title>\n<meta name=\"description\" content=\"As inflation begins to moderate, Olga and Hugo examine the structural forces shaping the medium-term outlook in four categories: energy, housing, goods,\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/ifintechworld.com\/?p=25242\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Inflation Went Wild; 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