Max Disinflation

But Inflation is Still High! For Now...

I developed my Anderson Inflation Gauge to take into account lots of things that the government reports don’t so that I can get a clearer picture of where inflation is currently and where it’s headed. It uses the personal consumption expenditures index (PCE), import prices, export prices, gross domestic product (GDP), output gap, M1 currency supply, and the 10-year Treasury yield. All government numbers! But without the explicit inflation manipulations present in CPI such as seasonal adjustments, substitutions, hedonic adjustments, weighting, excluding food & energy, et cetera.

According to this indicator, the actual price inflation rate today is around 16% (pink line). Overall, the signal (blue uptrend, gold downtrend) is deeply disinflationary (-100%) right now. The Effective Fed Funds Rate (EFFR) is currently at 5.33%, which is historically quite accommodative, but in the present bubble economy is very restrictive. The currency supply is now in deflation as the Fed pursues quantitative tightening (QT) and banks have largely tightened up lending. That has helped to bring inflation down (disinflation) from almost 80% in November 2021.

This indicator turned positive in late 2022, early 2023, which stoked the AI Bubble. But the Silicon Valley Bank/Signature Bank/First Republic Bank collapses helped freeze up credit again as deposits fled the banking system. I expect this will turn to actual deflation during a panic crash in which banks and other companies go bankrupt and lending is brought to a standstill later this year or early 2024. As you can see in the chart, this signal can remain pegged to -100% for a period of months during disinflation or deflation like in late 2019, early 2020, and most of 2022.

In response to a major panic, the Fed will very likely step in with emergency rate cuts and quantitative easing (QE), coupled with fiscal stimulus from the government, and then inflation will go stratospheric again, but until that happens, inflation is not my proximal concern. The effects of inflation are certainly still a hangover on the economy, but the near-term threat is total global economic collapse as a result of tight monetary policy popping the copious and pervasive bubbles affecting every sector and financial asset class, particularly stocks and commercial real estate. This will be like the Dot-Com Crash and Housing Crash combined. Worries about inflation should take a back seat until that happens. That’s why the yield curve is in the process of reverting (bull steepener). Near-term, economic collapse will bring deflation. That will be followed shortly thereafter by very high inflation (like the 2020 response on steroids) or even hyperinflation as people lose faith in the currency.