“More Volcker!”

Wall Street is truly smoking something. Every time the 10-year UST—which is the benchmark security for the entire global capital market—-tries to correct toward minimal rationality, the excess liquidity joy riders marauding around the casino come charging back into the bond pits, pushing yields back down—as if to say the fantasy must go on.

A few days ago, for instance, the 10-year yield raised it helmet on the end of a bayonet cautiously above the 4.0% parapet—-only to have it blasted off with malice aforethought. Accordingly, the inflation-adjusted or “real yield” still stands at negative -1.3% because the current 3.7% nominal yield does not even come close to the 5.0% Y/Y increase reported this week for June on the 16% trimmed mean CPI.

And, yes, the true inflation trend is still 5%, not the headline CPI number of 3.1% reported for June. When it comes to the latter, we are dealing with distorted anniversary effects of the trend in energy and food. One year ago owing to the initial war disruptions, the food and energy components were posting crazy highs and have now come back to earth in terms of the rate of change flowing through to the headline CPI. Hence the 3.1% headline reading.

As always, however, the 16% trimmed mean CPI (yellow line) gives a clearer sense of the inflation cycle under way. The headline CPI (red line) overshoot by 200 basis points on the way up, peaking at 9% versus 7% for the trimmed mean CPI, and is now undershooting on the way down, also by 200 basis points, owing to the impact of sharp but temporarily reversing energy and food gains.

Self-evidently, the yellow line is the more reliable guide to the immediate future. And it is not even close to a sustainable range. As we indicated yesterday, at the current 5.1%  inflation rate, today’s dollar would be worth just 36 cents after two decades.

Y/Y Change In 16% Trimmed Mean CPI Versus Headline CPI, February 2020 to June 2023

That the yellow trimmed mean CPI line is likely to remain way above the Fed’s sacred 2.00% target is evident in the cumulative change in groceries and gas since February 2020. Not withstanding the  recent pull-backs in the rate of change, these items are still up over the 40-month period (February 2020 to June 2023) by 24% and 29%, respectively.