Good Tuesday AM,

Markets flat. That is the headline for today. In spite of elevated inflation numbers yet again (5.4% vs 4.9% expected), markets are taking it in stride. If you were to look at bonds the prices are off about 20bps but that is not due to data, it is just monthly rollover time where the next month’s coupons become traded and with the time value of money, the price is adjusted downward. The rollover is accounting for 19bps this month and there is no change to pricing as a result (more on this anytime you like). 

Speaking of inflation, here is a really good piece from Bloomberg on the subject. Could our inflation be caused by demand elsewhere (China)? Could be becoming an export nation? It’s economics not politics folks. 

Today at 8:30 we get the latest installment of the CPI report, and once again it’s expected to be hot on a historical basis. Forecast for the headline number is 4.9% year-over-year, and 4.0 if you exclude food and energy.

Of course, as soon as the number comes out, the world will likely be divided into two camps, those who point to the headline number and sarcastically say “transitory!” and others who go into the guts of the report, and look at what were the key drivers pushing the number on one direction or the other.

And while it can be dangerous go spelunking into the various subcomponents in search of confirmation bias it’s still wise to get a good grip on what categories are making the difference.

I was listening to Skanda Amarnath of Employ America on David Beckworth’s Podcast Macro Musings last night. And Skanda was making the point that if you look at what was driving inflation pre-Great Financial Crisis, it was in large part oil and other commodities, which were associated with the boom in China and other EMs.

Here’s a longer chart of monthly YOY CPI prints (white) alongside crude oil (red) and you can see how the soaring price of oil in 2006, 2007, 2008, coincided with rapidly increasing CPI.

Now the Fed, obviously, is not a fan of any sustained inflation. But it’s main tool is simply to weaken the domestic economy (by raising rates), putting people out of work, lessening demand and hoping that that feels upward price pressure. Except that if all of the inflationary impulse is coming from Chinese oil demand, what exactly is that accomplishing?

So again, you don’t want to be the person who just shouts “transitory!” a second after the release hits, as if your sarcasm is some useful insight. And you don’t want to hunt too deep just for a piece of information that supports your macro view. But to actually understand the current conditions, there’s no substitute for looking at the drivers of inflation and assessing how long they’re likely to continue and whether the Fed has the levers at its disposal to do anything about them.

For a while it was used cars going to the moon that was the big story, but now they’re rolling over.

And while I know today’s piece is already a bit long, I wanted to share a little more on debt and inflation from the WSJ. We are quite literally borrowing from ourselves (and our kids) tomorrow to pay for today. Global debt is 130% of GDP in the 20 most advanced economies. What about the less advanced economies? I guess at zero percent interest, borrow all you can…

The pandemic has pushed global government debt to the highest level since World War II, surpassing the world’s annual economic output. Governments, especially in rich countries, are borrowing still more, partly to erase the damage of Covid-19. Advocates say the spending could usher in a period of robust global growth, reversing the malaise many wealthy countries have felt this century. But if those theories are off-base, the world could be saddled with debts that can be absorbed only via inflation, high taxes or even default, Marcus Walker and Peter Landers report.

The pandemic has pushed global government debt to the highest level since World War II, surpassing the world’s annual economic output. Governments, especially in rich countries, are borrowing still more, partly to erase the damage of Covid-19. Advocates say the spending could usher in a period of robust global growth, reversing the malaise many wealthy countries have felt this century. But if those theories are off-base, the world could be saddled with debts that can be absorbed only via inflation, high taxes or even default, Marcus Walker and Peter Landers report.

Please remain safe and healthy, make today great!