Inflation has come down a great deal from its peak, but what if that disinflation turns out to be transitory?
Certainly, there are important dynamics in commodities markets today that threaten to make the Fed’s job much harder.
'As in 1973-74, during the first oil shock when the Saudi grade was the market's main benchmark, central banks need to watch the cost of Arab Light to judge the outlook for inflation. As thing stand, the picture isn't pretty — and it's getting worse.' https://t.co/SvWfr2GC5q pic.twitter.com/cbDoZPBP1n— Jesse Felder (@jessefelder) September 14, 2023
In addition, a rising dependency ratio represents a structural tailwind to the inflationary impulse.
Meanwhile, the inflation already incurred by the economy may soon threaten the integrity of the “soft landing” narrative.
'Classical economists believe high unemployment leaves people with less money to spend, and so the economy slows which brings prices down, curing inflation. The real relationship is that high inflation brings high unemployment.' https://t.co/SRFoWSDRb0 by @McClellanOsc pic.twitter.com/u2wei5TreF— Jesse Felder (@jessefelder) September 14, 2023
Of course, the message from the bond market has not wavered. And, unlike economists, it has a perfect track record.
Perhaps it’s time for the “stagflation” narrative to make a comeback.