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5 Reasons Inflation May Have Peaked

Inflation may well take its time coming down, yet the likely root causes have all been addressed in full or in part.



Inflation may well take its time coming down, yet the likely root causes have all been addressed in full or in part.

The U.S., along with the U.K., the eurozone countries, and many other nations around the world, are in a deep inflation hole. In the U.S., headline inflation is running at more than 8% on a year-over-year basis, while core inflation, excluding food and energy, is running in the 6% territory.

Graphic: U.S. Consumer Price Inflation: Headline Versus Core

When will this inflation episode abate? We don’t have a specific view on pace and timing, but we do have some observations as to why inflation may have reached its peak and may decelerate going forward. In particular, we want to tap into the wisdom of Will Rogers, who is quoted as saying, “If you want to get out of a hole, the first thing you need to do is stop digging.” 

Below, we examine five of the often-cited possible causes for the inflation episode in the U.S., and we ask the basic question of whether we have stopped digging yet – a key prerequisite for inflation starting to decline.

1. Pandemic Shift in Consumption Patterns

The pandemic dramatically shifted consumption patterns with the partial shutdown of the U.S. economy. The relative share of goods consumption moved upward at the expense of services, with the limits on travel, tourism, dining, etc. For example, in the 12 months from July 2020 through June 2021, durable goods spending was 25% higher than in the calendar year 2019, and non-durable goods spending was up 9%, compared to modest declines in services spending. Not surprisingly, the initial upticks in inflation were most severely felt in the durable goods category, followed by non-durable goods.

More recently, the growth of durable, non-durable, and services spending from January 2022 through June 2022 rose 9%, 10%, and 8%, respectively, compared to the previous six months. That is, spending growth has evened out among these three critical categories.

Graphic: Consumer Price Inflation: Durable Goods, Non-Durables, and Services

Our conclusion is that the pandemic-induced boom in spending on goods has run its course and that in the post-pandemic world the U.S. is returning to a more typical balance between goods and services consumption.

2. Supply Chain Disruptions

The global goods-producing engine was not remotely ready for the surge in the pandemic-induced demand for goods, especially durable goods, such as automobiles. At the same time, in the early phases of the pandemic, covid was disrupting both the production and transportation of goods. That is, goods markets were hit simultaneously both by demand and supply shocks. 

For example, computer chip shortages hit new car production especially hard, leading to a major surge in the prices of used cars. On the transport side, many of the goods in high demand were produced in China, and shipping costs from Shanghai to Los Angeles soared.

While it takes billions of dollars and years of planning and construction to build new computer chip factories, suggesting a lengthy multiyear period to resolve many supply chain challenges, there is clear evidence in prices that the worst is over. Shipping costs from Shanghai to Los Angeles are well off their peaks, even if they remain well above pre-pandemic norms. While we are probably a few years away from resolving the vast majority of supply chain challenges, there is no question that progress has been made and that supply chain disruptions are no longer pushing prices higher and higher, even if in many cases prices remain elevated.

Graphic: U.S. Used Car and Truck Prices

3. Pandemic Emergency Fiscal Stimulus

Both the Trump and Biden administrations provided trillions of dollars of emergency fiscal spending during 2020 and early 2021 to offset the worst of the pandemic’s impact on job losses. Much of the emergency government spending was made in the form of direct transfer payments to individuals, of which a considerable amount was spent within months of being received. Indeed, one of the main differences in the fiscal response to the Great Recession in 2008-2009 and the pandemic in 2020 was the massive fiscal response to assist individuals to keep spending even if they had lost their jobs.

The result was that personal consumption expenditures rapidly regained their pre-pandemic peak, while after the Great Recession, there was no quick recovery at all in personal consumption, which makes up roughly two-thirds of the U.S. economy.

The point we want to make is that the emergency fiscal spending has run its course and is not being renewed. Indeed, the U.S. government federal budget deficit, which hit $2.4 trillion in the fiscal year 2021, is on track to come in at $637 billion in the fiscal year 2022, and decline further in 2023, according to the projections from the Congressional Budget Office (CBO). The inflation impetus from fiscal spending during the pandemic was, no doubt, massive, but fiscal policy as a source of future inflation is no longer in play.

Graphic: Personal Consumption Expenditures: Great Recession vs Pandemic

4. Central Bank Asset Purchases

When the government embarks on a major new spending program, it has the choice of financing the new spending by raising taxes, selling debt to the public or selling debt to the central bank. The latter is what goes by the name of Modern Monetary Theory, and this is what happened in 2020 and 2021 in the U.S. The trillions of dollars of new spending by the federal government were largely bought by the Federal Reserve, limiting the amount of new borrowing required from the public sector.

A key point to appreciate when government spending is massively increased and associated with equally massive debt purchases by the central bank is the price discovery process is prevented from working. The presumption is that without central bank debt purchases, and without any tax increases, the additional supply of government debt sold to the public would have pushed bond yields higher, perhaps significantly higher. Higher bond yields would have meant higher mortgage rates, and the boom in housing prices that occurred in 2021 might never have happened, impacting durable goods demand associated with house purchases.

Importantly, there is a distinction here between central bank asset purchases that support increased government spending and central bank asset purchases that occur independently of fiscal policy. The latter version of quantitative easing (QE), as it has come to be called, appears to have contributed to significant asset price inflation in the 2010-2016 period, but QE without accompanying fiscal spending does not appear to encourage either faster growth in the real economy or inflation in consumer prices.

That is, what made the Federal Reserve’s asset purchases so important as an inflation driver in 2020-2021 and not in the 2010-2016 period was the linking of the asset purchases to massive new government spending. Regardless of one’s view of the role of central bank asset purchases as a cause of future inflation, the Federal Reserve is now shrinking its balance sheet, and this source of future inflation is no longer occurring.

Graphic: Federal Reserve Total Assets

5. Interest Rate Policy

Our last observation is that the era of near-zero short-term interest rates has ended. To the extent that an accommodative interest rate policy was a driver of future inflation, that driver is being withdrawn.

Importantly, the short-term interest rate increases taken by the Federal Reserve in 2022 are often described as an “aggressive tightening” of interest rate policy. Our interpretation is decidedly different. In our interpretation, any level of short-term rates that is below a reasonable view of inflation expectations remains accommodative, just not as accommodative as zero rates. That is, the Federal Reserve, in moving the effective federal funds rate from around 0.10% to 2.33% from January through July 2022, has merely taken its foot off the accelerator, but it has not hit the brakes. This is better described as a withdrawal of accommodation and not a tightening of monetary policy. 

Regardless of the preferred interpretation, interest rate policy as a source of future inflation is being withdrawn. And very importantly, a change in interest rate policy is typically thought to impact the real economy with long and variable lags. While mortgage rates have already doubled, the longer-term implications for the housing market have not yet been observed. Put another way, whatever the long-run impact higher rates are going to have on the real economy, it has not been felt yet.

Graphic: Effective Federal Funds Rate

Inflation May Be Sticky, but Is Easing

Every one of the five factors discussed has changed course in the past six to 12 months and is no longer likely to be a source of future inflation, regardless of its role in creating current inflation. That is, if Will Rogers was right that the first step in getting out of a hole is to stop digging, well, the digging has stopped. Inflation may well be a bit sticky and take its time coming down, yet the likely suspects of the root causes of the current inflation episode have all been addressed in full or in part.

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Decrease in Japanese children’s ability to balance during movement related to COVID-19 activity restrictions

A team of researchers from Nagoya University in central Japan investigated how restrictions on children’s activities during the COVID-19 pandemic affected…



A team of researchers from Nagoya University in central Japan investigated how restrictions on children’s activities during the COVID-19 pandemic affected their life habits and their abilities to perform physical activities. By comparing medical examination data before and after the onset of the pandemic, they found that physical functions among adolescents deteriorated, including their dynamic balance. They also found that the children had higher body fat levels and worse life habits. Rather than a lack of exercise time, this may have been because of a lack of quality exercise due to activity restrictions.  

Credit: Credit must be given when image is used

A team of researchers from Nagoya University in central Japan investigated how restrictions on children’s activities during the COVID-19 pandemic affected their life habits and their abilities to perform physical activities. By comparing medical examination data before and after the onset of the pandemic, they found that physical functions among adolescents deteriorated, including their dynamic balance. They also found that the children had higher body fat levels and worse life habits. Rather than a lack of exercise time, this may have been because of a lack of quality exercise due to activity restrictions.  

During the COVID-19 pandemic, in Japan, as in other countries, schools and sports clubs tried to prevent the spread of infection by reducing physical education and restricting outdoor physical activities, club activities, and sports. However, children who are denied opportunities for physical activity with social elements may develop bad habits. During the pandemic, children, like adults, increased the time they spent looking at television, smartphone, and computer screens, exercised less, and slept less. Such changes in lifestyle can harm adolescent bodies, leading to weight gain and health problems. 

Visiting Researcher Tadashi Ito and Professor Hideshi Sugiura from the Department of Biological Functional Science at the Nagoya University Graduate School of Medicine, together with Dr. Yuji Ito from the Department of Pediatrics at Nagoya University Hospital, and  Dr. Nobuhiko Ochi and Dr. Koji Noritake from Aichi Prefectural Mikawa Aoitori Medical and Rehabilitation Center for Developmental Disabilities, conducted a study of Japanese children and students in elementary and junior high schools, aged 9-15, by analyzing data from physical examinations before and during the COVID-19 pandemic. They evaluated the children’s muscle strength, dynamic balance functions, walking speed, body fat percentage, screen time, sleep time, quality of life, and physical activity time.  

The researchers found that after the onset of the pandemic, children were more likely to have decreased balance ability when moving, larger body fat percentage, report spending more time looking at TV, computers or smartphones, and sleep less. Since there were no changes in the time spent on physical activity or the number of meals eaten, Sugiura and his colleagues suggest that the worsening of physical functions was related to the quality of exercise of the children. The researchers reported their findings in the International Journal of Environmental Research and Public Health.  

“Since the outbreak of the novel coronavirus in Japan after April 2020, children have not been able to engage in sufficient physical education, sports activities, and outdoor play at school. It became clear that balance ability during movement was easily affected, lifestyle habits were disrupted, and the percentage of body fat was likely to increase,” explained Ito. “This may have been because of shorter outdoor playtime and club activities, which impeded children’s ability to learn the motor skills necessary to balance during movement.” 

“Limitations on children’s opportunities for physical activity because of the outbreak of the novel coronavirus have had a significant impact on the development of physical function and lifestyle and may cause physical deterioration and health problems in the future,” warned Ito. “Especially, the risk of injury to children may increase because of a reduced dynamic balance function.” 

The results suggest that even after the novel coronavirus becomes endemic, it is important to consider the effects of social restrictions on the body composition of adolescents. Since physical activities with a social element may be important for health, authorities should prioritize preventing the reduction of children’s physical inactivity and actively encourage them to play outdoors and exercise. The group has some recommendations for families worried about the effects of school closings and other coronavirus measures on their children. “It is important for children to practice dynamic balance ability, maintaining balance to avoid falling over while performing movements,” Ito advised. “To improve balance function in children, it is important to incorporate enhanced content, such as short-term exercise programs specifically designed to improve balance functions.” 

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Contradictions, Lies, And “I Don’t Recalls”: The Fauci Deposition

Contradictions, Lies, And "I Don’t Recalls": The Fauci Deposition

Authored by Techno Fog via The Reactionary,

Today, Missouri Attoney General…



Contradictions, Lies, And "I Don't Recalls": The Fauci Deposition

Authored by Techno Fog via The Reactionary,

Today, Missouri Attoney General Eric Schmitt released the transcript of the testimony of Dr. Anthony Fauci. As you might recall, Fauci was deposed as part of an ongoing federal lawsuit challenging the Biden Administration’s violations of the First Amendment in targeting and suppressing the speech of Americans who challenged the government’s narrative on COVID-19.

Here is the Fauci deposition transcript.

And here are the highlights…

EcoHealth Alliance - the Peter Daszak group - is knee-deep in the Wuhan controversy, having been funded by the Fauci’s NIH for coronavirus and gain of function research in China (and having worked with the Chinese team in Wuhan). What does Fauci say about EcoHealth Alliance? Over two years after the COVID-19 pandemic began, and after millions dead worldwide, he’s “vaguely familiar” with their work.

In early 2020, Fauci was put on notice that his group - NIAID - had funded EcoHealth alliance on bat coronavirus research for the past five years.

This coincided with early reports - directly to Fauci, from Jeremy Ferrar and Christian Anderson - “of the possibility of there being a manipulation of the virus” based on the fact that “it was an unusual virus.”

Fauci conceded that he was specifically made aware by Anderson that “the unusual features of the virus” make it look “potentially engineered.”

Fauci couldn’t recall why he sent an article discussing gain of function research in China to his deputy, Hugh Auchincloss, telling him it was essential that they speak on the phone. He couldn’t recall speaking with Auchincloss via phone that day. But remarkably, Fauci did remember assigning research tasks to Auchincloss

Fauci was evasive on conversations with Francis Collins about whether NIAID may have funded coronavirus-related research in China, eventually stating “I don’t recall.”

The phrase “I don’t recall” was prominent in Fauci’s deposition. He said it a total of 174 times:

For example, Fauci couldn’t remember what anyone said on a call discussing whether the virus originated in a lab:

During that same call, Fauci couldn’t recall whether anyone expressed concern that the lab leak “might discredit scientific funding projects.” He also couldn’t recall whether there was a discussion about a lab leak distracting from the virus response. Fauci did remember, however, that they agreed there needed to be more time to investigate the virus origins - including the lab leak theory.

What else couldn’t Fauci remember? Whether, early into the pandemic, his confidants raised concerns about social media posts about the origins of COVID-19.

Yet Fauci did admit he was concerned about social media posts blaming China for the pandemic. He even admitted the accidental lab leak “certainly is a possibility,” contradicting his prior claims to National Geographic where he said the virus “could not have been artificially or deliberately manipulated.”

Fauci also couldn’t recall whether he had any conversations with Daszak about the origins of COVID-19 in February 2020, but admitted those conversations might have happened: “I told you before that I did not remember any direct conversations with him about the origin, and I said I very well might have had conversations but I don't specifically remember conversations.” And he couldn’t recall telling the media early on during the pandemic that the virus was consistent with a jump “from an animal to a human.”

Fauci said he was in the dark on social media actions to curb speech and suspend accounts that posted COVID-19 information that didn’t fit the mainstream narrative: “I’m not aware of suppression of speech on social media.” Yet it was Fauci’s proclamations of the truth, whether about the origins of COVID-19 to the effectiveness of hydroxychloroquine, that led to social media companies banning discussions of contrary information.

Regarding those removals of content, Fauci had no personal knowledge of a US Government/Social Media effort to curb “misinformation.” But he conceded the possibility numerous times.

Then there’s the issue of masks. In February 2020, Fauci informed an acquaintance that was traveling: “I do not recommend that you wear a mask.” Fauci would later become a vocal proponent of masks only two months later.

I’m near my Substack length limit - posting the excerpts does that - but you can see from Fauci’s testimony that his public statements about COVID-19 origins and the necessity to wear a mask didn’t match his private conversations. This has been known for some time, but it’s finally nice to get him on record.

Again, read it all and subscribe here.

Tyler Durden Mon, 12/05/2022 - 21:40

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Global Wages Take A Hit As Inflation Eats Into Paychecks

Global Wages Take A Hit As Inflation Eats Into Paychecks

The global inflation crisis paired with lackluster economic growth and an outlook…



Global Wages Take A Hit As Inflation Eats Into Paychecks

The global inflation crisis paired with lackluster economic growth and an outlook clouded by uncertainties have led to a decline in real wages around the world, a new report published by the International Labour Organization (ILO) has found.

As Statista's Felix Richter reports, according to the 2022-23 Global Wage Report, global real monthly wages fell 0.9 percent this year on average, marking the first decline in real earnings at a global scale in the 21st century.

You will find more infographics at Statista

The multiple global crises we are facing have led to a decline in real wages.

"It has placed tens of millions of workers in a dire situation as they face increasing uncertainties,” ILO Director-General Gilbert F. Houngbo said in a statement, adding that “income inequality and poverty will rise if the purchasing power of the lowest paid is not maintained.”

While inflation rose faster in high-income countries, leading to above-average real wage declines in North America (minus 3.2 percent) and the European Union (minus 2.4 percent), the ILO finds that low-income earners are disproportionately affected by rising inflation. As lower-wage earners spend a larger share of their disposable income on essential goods and services, which generally see greater price increases than non-essential items, those who can least afford it suffer the biggest cost-of-living impact of rising prices.

“We must place particular attention to workers at the middle and lower end of the pay scale,” Rosalia Vazquez-Alvarez, one of the report’s authors said.

“Fighting against the deterioration of real wages can help maintain economic growth, which in turn can help to recover the employment levels observed before the pandemic. This can be an effective way to lessen the probability or depth of recessions in all countries and regions,” she said.

Tyler Durden Mon, 12/05/2022 - 20:00

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