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A little datapoint out of Canada: the labour force survey reported 108,000 net new jobs were created last month. The unemployment rate was unchanged and the number of people in the labour force ticked up. This fully reversed a very mild decline since the summer. Wages are up 5.6% year over year while productivity growth is near zero.
All this despite interest rates rising by 350bps this year. Currently the policy rate is 3.75% and everyone expects it to peak at less than 5%.
I don’t believe it. Inflation and the labour market which underpins it have not reacted at all to the current interest rate policy. Rates are going to need to rise much more than people think. Both here and the US.
Canada has the worlds biggest housing market bubble currently.
When rates rise beyond some point there is going to be a panic cut in government spending at all levels. Either that or we give up and let inflation rip. Buckle up. We’re in economic accelerationism now.
I think this reasoning is wrong for the US for a couple reasons.
First, over the last 3 months, inflation has averaged 2% (annualized).
Second, the financial markets expect inflation to be brought back under control: the 5-year breakeven inflation rate has fallen from 3.6% in March to 2.6% today. Meanwhile the break-even inflation rate for the subsequent five years (2027-2032) fell from 2.67% to 2.35% over the same period of time. The most parsimonious explanation is that inflation will fall from 3-4% to 2.4% over the next couple years.
So, for the US at least, I don't think an inflation apocalypse is all that likely.
I don't know about Canadian financial markets, but inflation in Canada was basically zero over the last 3 months, despite pretty rapid inflation before that.
The market expectations for inflation might expect it to go down, but they also didn’t expect the inflation to happen in the first place. These have been consistently wrong for past year, why should we believe these are correct now?
See for example the nice graph in this blog post.
The US money supply has shrunk slightly since the start of 2022:
https://centerforfinancialstability.org/amfm_data.php
There is not enough money to keep up the present level of spending. Hence, there is not enough to keep up inflation.
With market expectations, I take this to be strong evidence that inflation will fall to about 2% in the next few years.
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The question is not "is this prediction correct", the question is "can you do better".
And I'm not trying to be dismissive. It doesn't have to be your own analysis - do you have a pundit who can do better? An organization? A MIT professor?
Just as Nate Silver can predict elections "wrongly", the market can get predictions "wrong" - but that doesn't mean I have a better source of future predictions or that a better source even exists.
To predict housing prices, I look at the single futures market that averages ~1 trade per day and where 75% of trades involve a single man. Do I trust it? Does that question even make sense? It is, in a sense, just a single expert's predictions - but at least he puts money on the line and is even a market maker - a degree of exploitability you'd expect to create a degree of honesty. It's certainly less efficient than the trading of Walmart stock, but can I (or an institution I can identify) do better? I don't think so...
And so we come to this. Someone on this forum makes a claim with pretty minimal actual justification - probably mostly just intuition, but possibly a bunch of unshown work. Do I trust their predictions more than the bond market's? No - not even close.
So, under the naive assumption that we seek "truth" on this forum rather than "feeling smart" - the market is the best forecast until someone actually puts in the work to identify a better one.
Cochrane, whom I linked, has been predicting inflation way back in 2020 and early 2021, purely as a result of massive fiscal stimulus. Lawrence Summers did the same at the time, and was widely ridiculed. I mean, shit, I did it myself, and I benefited from this prediction.
The problem here is that if I point to people who predicted inflation at this time and turned out to be correct, you'll say "yes, but they predicted 8 out of last 2 inflation spurts", and, indeed, you'll be correct. Nevertheless, this attitude:
is just terrible. Just because I can't do better doesn't mean that I somehow logically have to accept shit predictions.
Of course, but you know what's the lesson here? Just ignore Nate Silver. I cannot predict who will win the Super Bowl any better than my crazy uncle, but that doesn't mean that I have to listen to my crazy uncle, if he has terrible track record.
Assuming you have to make actual decisions that will be affected by inflation, you want to use the best predictions you can get.
Your insistence on using black-or-white "either this pundit is perfect or useless" is not useful in the real world.
If Silver has better calibration and discrimination than your crazy uncle, his predictions are better. If I have to make an investment decision that depends on who wins the election, I'm, therefore, going to trust Silver much more. Is he perfect? No. But if you can't do any better, then his are the predictions you should use when computing expected returns.
This is not a "terrible" attitude - it is the attitude any adult who needs to make real decisions has to take.
You also seem to have a myoptic view of what counts as evidence for a predictor being useful. I don't trust markets merely due to their empirical record. I trust them because they aggregate the beliefs of informed and intelligent people with significant skin in the game. Your approach seems to be "who got the last 2 predictions closest", which... well, it should be obvious why that heuristic is shit.
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Likewise given how the official inflation numbers have consistently failed to reflect actual prices why should we believe that "2%" value in the first place.
Meta: Not loving your habit of criticizing arguments in "nephew" comments rather than "children" comments.
Again, you have provided zero evidence for your claim that official numbers don't reflect actual prices. The one time you tried, I demonstrated that, in fact, the price changes you experienced matched the official numbers.
To quote the relevant parts:
and I responded
[Apologies for quote/list formatting - they aren't playing nicely for me]
You then shifted your argument
Never mind that the CPI methodology bases its weights on the purchases of the average consumer, and therefore has an actual justification beyond HlynkaCG's gut (what percent of people buy lumber on a weekly basis??).
But you continue to ignore any of this nuance and just continue to complain about the experts being "wrong", and me being stupid. Rather than the obvious being true:
You had no clue the sub-indices agreed with your lived experience, but don't want to admit that maybe the experts were right
You disagree, now, not with the basic methodology, but with the weight given to specific prices, preferring your idiosyncratic weighing to a basket representative of the purchases of the average consumer
You know you once asked me why I'm so dismissive of you, and I refrained from answering lest I run afoul of the antagonism rule, but to be blunt this sort of attitude right here is why.
@IprayIam (who I don't think has made the jump to the new site) made an effort post about the threat of inflation. You made a reply to the effect of "WeLl AkShUaLly ExPeRtS aGreE tHaT InFlAtIoN FeArS aRe OvErBlOwn". I replied with some personal observations supporting IprayIam's claims, and you accused me of making shit up, to which I replied with a !remindme link. 6 months later when the link pops, we're looking at a 40 year high for inflation and you're pulling the "WeLl AkShUaLly ExPeRtS aGreE" bullshit yet again.
My reply to that is well actually IprayIam called it, his/my/our low-iq Hueristics based on
nothingchanges in our monthly expenses and a read of the local business environment turned out more accurate predictors than your expert consensus yet somehow despite having made the call correctly I'm the one who needs to update my priors rather than you.I didn't accuse you of making shit up. I provided concrete verifiable evidence that your "personal observations" literally matched the expert metrics you were criticizing. If you're referring to my use of the term "cherrypicked", I literally apologized for that in the next comment:
.
As I said at the time you made that remindme link:
So, no, I never agreed beforehand that your prediction would fail to occur. I never agreed to eat crow if it did occur. You merely asserted I should. Given that, it is bullshit for you to think I should be changing my mind and kowtowing to your superior wisdom.
I am not asking you to "update your priors". I am asking you to simply acknowledge that
the literal price changes you chose did in fact match the price sub-indices reported by the Bureau of Labor Statistics
therefore, your actual disagreement with the "ExPeRtS" computation of the CPI is almost entirely simply how much they weigh the subindices.
You haven't done either of these things. Instead, you continue to insult me. C’est la vie.
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To add further credibility to the CPI, it also roughly agrees with inflation measures constructed using different methodologies, e.g. the GDP deflator. Is it perfect? No. There are especially problems measuring over long periods of time. However, it's a good approximate indicator of what's going on with prices.
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