Andreas Steno: Is the U.S. Headed for Baseline Inflation Above 2%? ft. Mike Mish Shedlock

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0:38Will inflation bottom above the target of 2 %? Welcome to this deep dive interview at Real Vision. My name is Andreas Steno. I'm the senior host here at Real Vision and founder of Steno Research. And I'm thrilled to be joined by Mish Shetlock this week for a discussion on U.S. inflation and whether we will at all get back to the target of 2%. Welcome to the show, Mish. It's a pleasure to host you. Hey, it's a pleasure to be back on. And it's been a while, so I'm looking forward to this topic. This is a great one. It is a great one. And you're one of the best thought leaders on this exact topic of inflation in the US.

1:18Mish, I'm asking this question up front, whether it is at all feasible to get back to 2 % given everything we've seen in this inflation cycle. What do you make of that topic up front here? It's going to be very difficult. The Fed really has its work cut out for it. And a lot of the problems are of the Fed's own making. We had fiscal stimulus on top of that, two rounds under Trump. And the last big one, huge one, totally unwarned under Biden. So we had this unleash of inflationary forces from two fronts, one from QE, one from fiscal stimulus happening at the same time. and we can throw policy mix into it as well.

2:07Just looking at reports just from yesterday, Biden wants to make some improvements for union wages, for prevailing wages, and how they're going to determine that. So it looks like we're going to have a huge increase in wages. what government has to pay for federal projects, roads, buildings, all of that. At the same time, we have global forces. We've gone from just-in-time manufacturing from overseas to trying to exclude China, trying to exclude Russia from minerals and energy standpoint. Well, it's a monster inflationary mix everywhere I look, and I just wonder how the Fed actually thinks it's going to address these because most of these forces are out of the Fed's control other than what it did on QE to inflate the price of housing over the years.

3:22Yeah. And obviously, QE is not a thing right now, at least, Mish. If we look at the most recent data print for US inflation, we had a swift move below 3%. I think we went as low as 2.97%, right? And now we're back at 3.2%. So what do you make of that local bottom? Do you actually think that we will re-accelerate from here, Mish? We might head down from here. That can easily happen. My immediate forecast here, though, is for a rise in energy prices. So that's going to filter back into the CPI. The point that's on everyone's mind that everyone has been predicting wrongly, not in this corner, though, was that the price of rent was going to drop.

4:12And the reason why they felt that is the price of new leases actually is declining. Actually, maybe the decline is over because it's heading back up. But for about the last 18 months, we've seen the price of new leases drop. And everyone kept saying, well, this is going to filter in to how the BLS determines rent. I said, well, it's not going to. And it didn't. And in fact, we've had 18 consecutive months now where the price of shelter has gone up at least four tenths of a percent. 18 consecutive months. Now, since that's part of core CPI, and that's what the Fed is watching most, the fact that used car prices dropped a bit and medical insurance dropped a bit, so they claim, we're not going, and energy certainly did collapse.

5:20So that made for an easy transition lower. But rent or shelter is 34.5%, something like that, of the CPI. It is going to be very difficult for inflation to come down in a meaningful way unless the cost of shelter comes down. So far, it's been stubborn. The way the BLS produces or calculates rent is a rent increase happens all at once, and it lasts for a full month. The BLS smooths that in over a 12-month period as existing leases expire and new leases are written. But we saw these massive jumps in rent from Zillow, from ApartmentList, from a whole bunch of sources, and then those started turning lower.

6:32But the existing rents and new rents are completely different animals. One is sticky. The other one isn't. We've certainly got a lot of houses under construction, and people are hoping that, well, when these complete, the price of rent's going to go down. I don't know. So there's a wild card there. But even if rent comes down, there's just too many inflationary forces from deglobalization and from what Biden is trying to do with wages and from what Biden is trying to do with energy. that even if we do see the CPI come down, I don't think it's going to plunge like it has before. The world has changed.

7:23Mitch, we'll get back to those exact questions in just a second. I'm European, and I'm born and raised in Denmark. And if we look at the European methodology, we basically look at inflation ex-shelter, de facto. The shelter component is only 5 % of the total inflation basket. And as some of my clients told me from the US, well, you basically target the homeless inflation basket in Europe since you don't measure the rent of shelter de facto, right? But if we look at the inflation ex-shelter in the US, we're actually very close to zero. So what do you make of that discussion? Is it even feasible for the Fed to look at inflation outside of shelter as a gauge of the overall inflation pressure?

8:08And you know, Paul has been sort of alleviating to these ex-shelter pressures in various press conferences, but it doesn't seem like it is the actual target variable. So what do you make of that discussion, Mish? Let's discuss shelter in isolation. And the biggest component of shelter is something, is a price that is like imputed. And some economists say it's not even real. It's called owner's equivalent rent, OER. It's the price that someone would pay, believe it or not, if they were to rent their own house from themselves without furnishings and without utilities, unfurnished without utilities.

9:00So for somebody who owns their own house or got a mortgage free and clear, refinanced at 3 % a number of years back when they could have, their costs are not going up. Yet OER keeps going up because rent keeps going up. What the Fed did when they did all this massive QE, they lowered mortgage rates below 3%. Everyone was able to refinance. And everyone did. If you had a mortgage four years ago, three years ago, you refinanced at a lower rate, or you were crazy. And so everyone in this class has 3 % mortgages. Everyone renting now has seen their cost of rent go up 18 straight months, as I mentioned.

10:14And everyone that wants to buy a new home, home prices appreciated because the cost of a mortgage fell. So this is the mess that the Fed has created for himself. This is extra money in the pocket, effectively, when they lowered interest rates to 3 % and people refinanced. That's extra money in people's pockets. But it's clobbering. Lobbering. Anyone new. All the millennials and the Zoomers, Generation Z, that's looking forward to looking to buy a house now has to pay a mortgage rate of 7.25%, which was the price yesterday. It's been mostly above 7 % for quite some time or near 7 % for quite some time.

11:15So the Fed's created this sort of dual economy. And at the same time, we've got a push from the labor unions for big contracts. Auto contracts is coming up in September. We ought to take a look at that. It's possible that that alone could throw the U.S. into recession. But the Fed is in a problem of its own making here. So if it raises interest rates, it's going to decrease the amount of homes that are being produced, which is going to make rents or keep rents stubbornly high. So on the other hand, if they start cutting rates, they're going to refuel the housing bubble that we're still in. Home prices have hardly declined despite massive increases in the cost of a mortgage, the price of a mortgage.

12:21So it doesn't tie. So, you know, the Fed and Biden and Congress have made it made winners and losers here out of this in such a manner that it's impossible to untangle. angle. If the Fed has hiked all the way now and mortgage rates are 7%, well, that's going to slow construction of new apartments, although they're at an all-time high. I still don't know if there's enough. So what are we going to do? If the Fed suppresses housing, that's going to act to keep the rents of existing homes up. It's a really big mess here. And it's possible the Fed needs to crash the economy to bring inflation down under control.

13:22They don't want to do that. So what's the conclusion here? You add it all up. You add in the global forces. You add what the Fed's done. You add what Biden is doing. You add the the regulation, this huge push towards electric vehicles that is very inflationary. Where are we going to get all of these minerals from, the infrastructure from, add it all up and we have a very inflationary environment such that even if rents do start to decline and everyone lets out this big cheer. We're going to take a quick break and be right back with more of today's top analysis on the Real Vision Daily Briefing.

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15:04I don't think it's going to last. The Fed is going to be struggling with this for a long time. Very good point, Mish. And I'd like to pick your brain on the current policy path of the Biden administration in relation to this inflation question. You mentioned the energy policy. You mentioned the policy push towards electric vehicles. and you also mentioned the release of the Strategic Petroleum Reserve, if I'm not mistaken. So the Biden administration is trying to contain inflationary pressures short term, but long term pressures. There is still a dark horse given what they're trying to obtain here, Mish.

15:49So what do you make of the policy mix of the Biden administration in relation to this inflation target? Well, the mistakes just keep piling up and piling up. It was the Davis-Bacon Wage Act that Biden was the name that I was trying to come up with a little bit earlier and couldn't put my hand on it. But it's prevailing wages. Biden wants to raise the prevailing wages from$17 to$27 for federal projects. That's huge. If you look at the United Auto Workers, they're asking for a 46 % raise over the next four years. And on top of that, they want to cut the work week down from 40 hours to 32. And, you know, they want increased benefits.

16:43This can't possibly fly, all of it, but some of it will fly.

16:54And that is adding to the inflation push. But the thing about EVs that's most scary actually is, and I had a reader comment, gosh, my Tesla gets the equivalent of 100 miles per gallon. And I said, well, la-di-da. How does this scale? So it's fine for a person to go out there and say, well, I'm going to buy a Tesla or whatever car GM and Ford manages to produce, even assuming people start buying them. Where do we get the minerals from the batteries? And how do we plug them in? And how do we charge them? And then just from an environmental standpoint, assume we have another hurricane in Florida and 5 million people need to leave Florida and they all hop in their electric vehicle whose batteries all die after 300 miles.

18:02So I don't believe we've thought this through of the complications, not to say it's even excluding all of the people who live in high rises, in condos, that are not going to have a way to plug their car in without massive energy upgrades to the building, without massive energy upgrades on the infrastructure. the Biden's Inflation Reduction Act through tens of billions of dollars at this. But it's a drop in the bucket compared to what's needed, yet they're forcing everybody down this path. And I did a post on this the other day, and I said, it doesn't scale. You can take, and it's the same way with free money.

18:56All this stuff about living wages, where they gave people money in Toronto or Chicago, and we give everybody$300 who really needed it, and they did these reports, gee, it made my life better. Great. What's the cost of giving everybody in Chicago a living wage? $1 ,000. Here you go,$1 ,000 a month. Where does that money come from? None of these projects scale. I don't think EVs scale. I think there's other issues related to EVs. Biden wants those minerals to be produced here in the United States. It takes 12 years to get a new mine up. That's under optimal conditions. Meanwhile, the Greens, who want clean energy from all of this, fight every mine that wants to start in the United States.

19:50We're dependent on China for, gosh, it's like 90 % of the processed materials. China is like 75 % of the raw materials. But even countries that have the materials, have the metals and produce them, they mine them, they ship them to China

20:13for production because it's toxic. When you refine these metals, it produces toxic sludge, and China is the only nation that's willing to do this. So here Biden is hell-bent on increasing the sanctions and tariffs that Trump put on China. Biden's turned the screws more and more and more. China is already cutting back on two minerals that the U.S. needs for weapons manufacture. We have no other source for these things that I'm aware of. If we find another source, guess what? Guess what happens to the cost? So none of these things have been factored in. It's structural. We've got baby boomers retiring that in mass right now that are going to be more dependent than ever on health care and health care costs are rising.

21:17and the socialists, Bernie Sanders, the Elizabeth Warren want Medicare for all? How are we going to pay for this? No matter which way you turn, we've got fiscal problems. We've got energy problems. We've got regulation problems. We've got global decoupling where everyone is feuding with China and Russia here now, you know, from the start of the Ukraine war. I don't see a winning sustainable path for a long-term drop in inflation under these conditions. Too many inflationary forces. We're going to take another quick break and be right back with more of today's top analysis on the Real Vision Daily Briefing.

22:16Mish, I have to admit that this was a truly eye-opening answer to my question being born and raised here in the epicenter of the electric vehicle revolution, at least per capita here in Scandinavia, where I'm born and raised. Of course, what you were saying on the lack of security in times of hurricanes, the lack of trust in the system, the lack of scalability, it's a very feasible point relative to where I live, where we have extreme density. We have no hurricanes. We have no issues with weather in general terms. So great points, Mish. And you have a smaller population. You'll say, oh, Finland did this or Denmark did this.

23:02Well, scale this to the United States. Do it. Now, China has a big push for EVs. I mean, they're exporting EVs. And my understanding is the quality is really good. But guess what China is doing to get the electricity for these EVs? They've turned to coal mines and more coal mines and more coal mines to produce the energy for this. Now, Europe has something called, what is it, CBAM, Carbon Mechanism, CBAM, I think, where they want taxes. They want to raise the taxes. Okay, so they're going to get minerals from some country in Africa. Okay. Well, if that country in Africa didn't produce them using clean energy, they're going to put a tariff on it.

24:03Well, great. And we're seeing a revolt in Europe right now. The support for the Green Party in Germany has plunged. And the Marine Le Pen is more popular than Emmanuel Macron in France. And Italy is complaining right now. the prime minister of Italy, is verbally complaining about the president of France over France exploiting countries in Africa for the uranium that it needs for its nuclear reactors. I've never seen such amazing infighting in Europe between the leader of the second largest country economically in Europe and the third. Italy and France are in open feud over energy policies right now.

25:13It's quite something. And in Germany, AFD is more popular than Alternative for Germany, for Deutschland, is more popular than the Green Party now. Things are imploding faster in Europe than the United States. Why is that? Because of fiscal rules the EMU, the European Monetary Union, has that's not prevalent here in the United States. We go before Congress and we pretend to reduce some expenses, and there's a bunch of fighting, and the debt ceiling goes up and up and up and up, and we're going to have another battle in September over the same thing. But in Europe, you've got fiscal rules that are kicking in.

26:14And, you know, Germany's got to figure out, well, do we do this stuff for the Greens or do we do other stuff? Do we fund NATO? Well, the and and France and Italy is Italy's has a banking system, I believe, is insolvent. And here we are pushing energy mandates, or the EU is pushing energy mandates on Italy that Italy can't afford. But it's blowing up in Europe first because by the Maastricht Treaty, the nations are restricted to budgets of 2 % deficits. We don't have that in the U.S. In the U.S., we just pretend we can print money at will at no consequence. So that's the difference between what's happening in Europe and what's happening in the United States.

27:13But you can rest assured, Miss, that no one in Europe is complying with these rules. Except for the country I live in.

27:26So, Mish, I wanted to pick your brain on the topic of whether the inflation target could actually be moved as a consequence of the green revolution that we're talking about. Let's assume that we're going to push ahead. We want the EVs. We want to greenify the whole electricity production. And it comes at a cost, right? So is it even feasible that the Biden administration openly accepts a higher inflation target for the Federal Reserve? I think if that scenario that you just outlined happens, I think the Fed would be forced to go to a higher rate. You know, and they would do it by pretending the same way that Europe pretends about meeting its budgets, right?

28:22The Fed would say, just like it has, well, you know, we're on this path and it's going to work. Just give it time. And they'll keep repeating that, just like they did in the opposite direction, by the way, until it smacked them in the face. I'm not positive that the overlying assumption is true. And by that, I mean, we don't know who's going to win the next presidential election here in the United States. You know, will it be Biden? Will it be Trump? Will it be either of them? Because, you know, we don't know what's going to happen to Trump with four indictments. And we don't know whether Biden can last mentally last two years to make it through a campaign.

29:18So we don't know. And the same thing. We don't know in Europe. the political parties and right now there was an election. The existing coalition would not come to 50 percent. So what happens to the Green Party? Does it even make it into the next coalition. So there's pretending, a lot of pretending everywhere. And in Germany, they say, well, no coalition will ever agree to let AFD in the coalition. Well, excuse me, but if AFD rises to just a few more percentage points from where they're at, it's going to be almost impossible if you throw out AFD and throw out the radical left and throw out this and throw out radical parties.

30:23The center isn't big enough, even if you merged them all together. And even if you did merge them all together, the Greens certainly want something different than CDU, CSU. So, you know, that's what's going on here in Europe. Now if a Republican wins the next presidential election here, guess what's going to happen? We're going to undo all of these regulations that Biden just did. Now, that would be good from an inflation standpoint, but it certainly doesn't appease the Greens or, you know, here in the United States. So we're extremely polarized. in Europe and the United States to such an extent that I don't think anyone can genuinely say, you know, people tell me, well, Trump would win.

31:11Well, would he? I don't know. From jail? You know, maybe he would from jail. Who knows? It's possible. There is no law that I'm aware of in the United States that says a felon can't be president. So it's very, very troubling times here. And so I don't know if your premise is correct, but if we say it is and Democrats are still controlling the energy policy in the United States, I don't believe the Fed will have much of any choice other than to literally force the economy into a steep, steep recession. or just mentally raise their targets and say, you know what, we're going to pretend our target is 2 % when really it's 4%.

32:10Remote work is in fashion, Mish, so why not be the POTUS directly from jail? Mish, we've had a credit downgrade of the US Treasury lately, and it comes on top of a credit downgrade from the S &P. Was it a bit more than 10 years ago? Was it in 2012 or 2011? So what do you make of this credit downgrade of the U.S. government debt? Is it a theme for the upcoming election? And do you find it fair that U.S. Treasury debt is downgraded? Well, it'll probably be a theme for the upcoming election. We'll also have to see what happens, whether Fitch raises it back up. to AAA, but actually the US is AAA. The downgrade made actually no sense.

33:07The reasons Fitch cited for the downgrade are all true. You know, they looked at the fiscal budget, the unsustainable path. None of that has anything to do with default. Default in the technical term, which is what Moody's, Fitch, the S &P, the big three, all go by, is whether or not interest will actually be paid on the debt. The U.S. is not going to default on interest. Now, the dollar might cheapen. OK, some people will say, well, that's default. That's not technical term of default. So Moody's and the S &P didn't downgrade, just Fitch. And if you just look at it, if you just say the U.S. isn't going to default, then there was no reason for a downgrade.

34:02I don't know. Maybe this, or we're going to have another round of this in September. They have to pass 12 bills, and only one of them is passed. and the radicals in the House are saying, well, we're just going to let the U.S. default no matter. I don't think they will. If they did, we're going to see massive downgrades and massive consequences. It hasn't happened yet. And I think these things are always a political sideshow. So from that standpoint, that's all it is. It's just a political sideshow, not a reality. But we do have the reality that Fitch meant we are on a fiscally unsustainable path, but it's not one that leads to default.