Inflation

 I'm travelling and needed to get a leaky tire fixed. Sitting in the waiting room, I heard two people talk about prices. It was interesting in that they were saying they "couldn't eat out every night." Were people eating out every night in 2019? Nevertheless, inflation is a real issue, less so because of actual economic conditions than vibes, but there are underlying aspects of inflation that make it tricky.

The first fact is that inflation has returned to "good" levels. The economy is growing, wages are rising and that entails some mild inflation. The problem is that prices are rising from their inflated levels vis a vis 2019. A 2.5% inflation rate on a higher basis feels like more inflation. It will take a year or more for people to normalize the new price structure.

The second issue is housing. My tire shop friend was talking about how he keeps chickens. About a year ago, we saw a massive spike in egg costs that was not only part of the overall inflation picture, but was accelerated by avian flu. There were simply fewer chickens. Now, there are enough chickens, because it only takes a few months to turn chicks into layers. Housing is waaaaay stickier. Plus, we have raised inflation rates to tackle inflation.

These high interest rates have done a good job of corralling inflation, but if you're in the housing business, it's been brutal. High rates mean that average people can't buy housing. (You can add in private equity buying homes to be Airbnbs, he typed from his Airbnb.) This makes it really hard to find financing to build new housing, and the lag time between wanting to build housing and actually having new housing units is a lot longer than turning chicks into layers. Plus, if you own a small home and want to upgrade, you really can't afford the new mortgages, so you stay in your small home. This means that smaller, cheaper homes aren't even on the market.

The decision to avoid a recession was likely the right one. Given the energy crisis created by Russia's invasion of Ukraine, we could have had the sort of stagflation that Europe is seeing, if we hadn't have stimulated the economy the way we did.

Still, we'd better hope that people's perception of inflation starts to change over the next 9 months. Just to make sure about next November.