Update on inflation… “Inflation is always and everywhere a monetary phenomenon” — Milton Friedman. Currently the Federal Reserve has the most control of the money supply, the monetary phenomenon. The Fed ignored their contribution to inflation, assuming there were other causes. They now admit they were late taking action. In March 2022, the Fed stopped printing money and began reducing the money supply. Perhaps coincidentally, a first step in the fight against inflation occurred in April and May; inflation continued but stopped accelerating. We think the Fed will not want another mistake and cause a recession.

Additional help in reducing inflation and a possible recession is also coming from these factors.

Semiconductor prices have begun to fall, indicating production is increasing to the point of reducing shortages. Resolving the chip shortage for auto production will have a major impact on inflation numbers.

China’s virus shutdown is over, opening the manufacturing sector and the supply and shipping chain. The removal of tariffs on Chinese goods is under discussion. Lower tariffs reduce costs and increase domestic and foreign sales of U.S. corporations.

Professional hoarding is declining. Hoarding drives up prices, and since borrowing is usually used, also drives up interest rates. Rising production eliminates the need and the opportunities of hoarding, thereby provoking liquidation which drives down both prices and interest rates. Sales of unwanted inventory which arrived late also reduce prices and interest rates.

Unexpectedly, a significant portion of the coronavirus government cash distributions went into savings and debt reduction. Consumers now have record high savings and record high assets as a percent of income. These funds are available in case of a recession.

Inflation and recession predictions.

The Fed will release June inflation data around July 28. We would not be surprised by a large drop in the growth rate of inflation. The number is most likely less than 1%, a penny increase in a dollar soda. The press will emphasize the predicted annualized number which has been 8+% for the last three months; however, inflation in the second half of the year is generally lower than in the first half.

There is a substantial number of higher inflation predictions comparing today with the 1970s. There are even more predictions of falling stock prices. Strangely, this is good news. This always happens near the bottom of markets. The best time to invest. “The stock market has predicted nine of the past five recessions.” The quote by Paul Samuelson in 1966 is still valid.

The best predictor of future markets comes from the front lines of the economy — two insider trading events occur. The insiders of corporations are purchasing record high numbers of shares in their personal accounts, and the boards of directors are authorizing record high amounts of share repurchasing. This is now occurring.

Stay the course.

Katz Family Financial