FORECASTS & TRENDS E-LETTER
by Gary D. Halbert
June 7, 2022

IN THIS ISSUE:

1. Today’s Inflation Worse Than The 1970s? Here’s Why

2. Home Prices Soar Record 20.6% In Last 12 Months

3. Fed Meeting Minutes: Central Bank Can Be Patient

Today’s Inflation Worse Than In The 1970s? Here’s Why

Polls continue to show that Americans’ top concern remains inflation, even more so than record high energy and gasoline prices week after week. With the March headline inflation figure of 8.5% not having been experienced in the United States for more than 40 years, since 1981, the begging question is: Is the inflation of 2022 anything like the inflation of the 1970s?

The answer is mostly NO. Inflation today has come in far more quickly than it did in the 1970s and taken most Americans by an unhappy surprise. Inflation began at 5.5% in 1970 and hovered near that level – before culminating at 14% in 1980. This time around, inflation as measured by the Consumer Price Index soared from near 0% in May 2020 to the recent record high of 8.5% in a span of less than two years.

Not only that but tens of millions of Americans have never experienced anything like this in their lifetimes. Many were not even born by the late 1970s or were too young to remember anything about those times.

Let’s compare the two periods in terms of gasoline prices. In 1970, the average American paid $0.36 for a gallon of gas. That soared to $1.19 a gallon by 1980, a 230% markup in the span of a decade. Inflation-adjusted to today’s prices, gas went from $1.72 a gallon in 1970 to $2.95 a gallon in 1980, a 72% rise.

Today, gas costs an average of $4.62 a gallon, up from a recent low of $1.94 a gallon in 2020, according to the US Energy Administration Office. That’s a more than 120% jump in the span of just two years. No wonder so many Americans have been caught by surprise.

“Today’s record-high inflation comes as much more of a shock to the average person, who has no prior experience to draw on,” said Ed Cofrancesco, CEO of International Assets Advisory in a recent interview. “Also, so much of this inflation is self-inflicted by our political leaders. They were forewarned that the extra stimulus packages they unleashed were not necessary and would be inflationary. We have had historically low levels of inflation for the last 20-plus years.”

On top of this, the Trump administration succeeded in making the US oil and gas energy independent. By comparison, in the 1970s, the Organization of the Petroleum Exporting Countries (OPEC) took the US by surprise when the Mideast oil cartel suddenly decided to exercise its leverage and raised gas prices significantly.

Prompted by the green energy contingent of the Democrat party, the Biden administration made the proactive decision to cancel the Keystone pipeline in the US and halt drilling and exploration on federal lands as its first order of business – its first step away from the US energy independence achieved by Trump.

As Cofrancesco puts it, “The U.S. had proven in recent years that we can, and should, be energy self-sufficient. Instead, they [the Biden administration] have chosen to leave us energy dependent on madmen, dictators and mullahs, and then are surprised when the price of oil soars.”

On a side note, there is a growing argument that the Biden administration wants energy prices at today’s sky-high prices to hasten our transition to alternative sources and so-called “green energy.” I would like to think this is not true, but when we see President Biden begging Saudi Arabia and others in the Middle East to increase oil production, rather than opening up federal lands for drilling and exploration, one has to wonder.

With the mid-term elections just six months away, you’d think President Biden and the Democrats would want to get energy prices down as much as possible just ahead, especially with polls showing the Dems are likely to take a shellacking in November. Yet despite the political risks, President Biden apparently doesn’t want to do it.

This makes no sense whatsoever. Now let’s move on to other topics of interest today.

Home Prices Soar Record 20.6% In Year Ended March

Though rising interest rates have started to temper demand in the booming housing market, home prices still skyrocketed at the highest rate in 35 years in March, according to industry data released at the end of May, and experts say it’s impossible to tell when hot prices will begin to cool.

Home prices across the country skyrocketed 20.6% in March on an annual basis, climbing 2.6% from one month earlier, when prices surged 20% year-over-year, according to the closely watched S&P CoreLogic Case-Shiller Indices. This is the fastest annual increase on record.

Prices in the nation’s largest cities swelled even more rapidly, with the Case-Shiller 20-City Index, which measures prices in cities such as New York, Los Angeles and San Francisco and others, climbing 21.2%.

Tampa, Phoenix, and Miami reported the highest year-over-year gains among the 20 cities in March, with Tampa home prices jumping 34.8% year-over-year to unseat Phoenix prices, which posted a 32.4% increase and led gains nationwide for nearly three years.

Some  large cities not included in the Case-Shiller Index saw even larger gains. In Austin, TX, where I live nearby on beautiful Lake Travis, the average home price spiked 40.8% in the 12 months ended March. Austin has been deemed “Silicon Valley II” and people are moving here in record numbers. Traffic is a nightmare; thank goodness I don’t have to go there that often.

Fed Meeting Minutes Suggest Central Bank Can Be Patient

The Federal Reserve is on a mission to bring down inflation, which as noted above rose to an annual rate of 8.5% for the 12 months ended March – the highest level in 40 years. Its plan to do this is by raising short-term interest rates as much as necessary to slow the economy down and hopefully prevent further price increases.

Through policy statements and speeches by Fed bigwigs, including Chairman Jerome Powell, the Fed has made it clear it is prepared to raise the Fed Funds rate at each of the remaining Fed Open Market Committee (FOMC) meetings this year, if necessary.

The Fed has suggested it could raise the key short-term rate by as much as 0.5% (50 basis points) at each of the next two upcoming meetings, which will occur on June 14-15 and July 26-27, and perhaps thereafter if needed. And it has suggested there could be more rate hikes in 2023 if necessary.

The Fed began this rate hiking cycle by raising the Fed Funds rate target from 0.00%-0.25% by 25 basis points in March. On May 4, it hiked the Fed Funds rate by 0.50% to 0.75%-1.0%. If the Fed hikes the rate by 50 basis points at the next five meetings this year, the Fed Funds rate target will increase to 3.0%-3.25% – the highest level since 2007 prior to the financial crisis.

Fed Chairman Powell has said publicly that the Fed intends to raise the Fed Funds rate by 50 basis points at the next two FOMC meetings, next week (June 14-15) and July 26-27. He has not alluded to the scope of rate hikes beyond the July meeting, but there is a broad consensus in the financial markets that there will be more 50-point rate hikes, most likely all year.

However, the official minutes from the Fed’s latest policy meeting on May 3-4 were released on May 25, and those minutes suggested the Fed is not committed to 50 basis-point rate hikes at every meeting this year.

More specifically, those minutes indicated that while a 50 basis-point increase is all but assured at the next two FOMC policy meetings, it was also clear the Fed will be open to smaller rate increases at subsequent meetings this year. In essence, the Fed will hike by 50 basis-points at the next two meetings and then reassess based on the outlook for inflation at that time.

My point today is while the financial markets are expecting the Fed Funds rate to soar to 3% or higher by the end of this year, the members of the Fed’s policy committee said in late May they will be more flexible with rate hikes following the next two FOMC meetings next week and on July 26-27. I don’t believe the Fed wants to raise rates to 3% or higher this year out of fear it could spark a new recession. I agree.

Put differently, it is my feeling the Fed does not want to take the Fed Funds rate to 3% or higher unless absolutely necessary to get inflation under control. So, while a 50 basis-point hike is almost certain next week and at the July 26-27 policy meeting, what happens beyond that is very uncertain in my view.

If by the September 20-21 policy meeting the Fed thinks it is making good progress on slowing the rate of inflation, I could see the FOMC voting to return to rate increases of only 25 basis points.

The Fed Funds futures market is not anticipating such a moderation in the central bank’s policy. And I’m not saying such a moderation is the most likely course, but it could well happen – if it looks like inflation is peaking.

Time will tell, of course, but it gives us something interesting to watch over the next several months. Remember, you read it here first.

Very best regards,

Gary D. Halbert

SPECIAL ARTICLES

Fed Raises Rates By Most In 20 Years To Fight Inflation

Fed To Raise Rates, But Sensitive To Economy

Gary's Between the Lines column: Consumer Confidence Dips In May Amidst Inflation Worries

 

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