In recent months, we have seen a flare-up in prices that have eroded the savings and paychecks of millions of American citizens. We haven't had inflation this high since the days of the beloved Ronald Reagan.... but something is changing, and with that, U.S. monetary policies will most likely change.
In this article, I'll list all the economic areas in the U.S. that are already showing signs of running out of steam in the upward run of inflation.
Cars and Semiconductors
There are millions of users in America who have old leases and are waiting to renew them in order to get a new car.
The supply freeze, both of auto semiconductors and of new cars themselves, has put these renewals on hold. But at some point, the resumption of these supplies will unlock lease renewals and bring all those old cars to market when they are replaced by new ones.
This sudden increase in the supply of used cars will have a deflationary effect on a market that is known to have come in at very high prices in the U.S. today.
Real estate market
The figure below shows the increase in home prices in the 20 largest cities in the US:
As you can see, the index has already peaked in July (the last peak on the right), although it still remains very high.
Soon, though, the index's descent will become steeper, thanks to rising mortgage interest rates.
In fact, already now 30-year mortgages have increased from an average rate of 2.65% to 3.56%.
And for homeowners, this increase means having to spend an average of $2,300 more each year on their mortgage...that's about $192 a month more to spend, adding to the already high property tax bills.
This increase in costs would get even worse if the Fed raised interest rates, and could force many homeowners to decide to spend less on other products or services.
Rising mortgage rates would also increase the expected outlays for those who want to buy property, thereby discouraging demand and reducing prices in the market.
Rising mortgage rates would therefore have a double deflationary effect, both on property prices and on consumption in general.
Conclusion
Looking at its long-term trend on an annual basis (figure below), we can see how inflation behaves:
Even during periods of strong acceleration, inflation has never been smooth, but has produced very steep peaks and troughs. The most obvious example is in the middle of the chart, which concerns the famous inflation of the 1970s.
The average inflation in an inflationary decade should therefore be thought of as a middle way between maximum and minimum values, very distant from each other, which will be gradually touched during the entire period.
The only thing that remains constant over the course of a long inflationary phase is the fact that the descents from the peaks never bring inflation back to the previous minimum levels, but always to higher minimums.
We can therefore hypothesize that, in our days, the vertical ascent achieved so far by inflation cannot continue for long.
On the contrary, it is very likely that the factors I have listed above, along with many others, will cause a strong downward reversal of inflation; although, on the other hand, we will no longer return to the prices that were there before 2020, but will stabilize at higher lows.
When relating the stock markets to inflation or inflation expectations, one must therefore expect volatility in the markets to reflect the ups and downs of this graph as in a mirror (i.e. in reverse).
I therefore suggest investors or advisors to obtain the real time version of the chart, because with it one will be able to anticipate a reversal to the upward trend of the stock markets (in the medium term) whenever inflation, after having reached an intermediate peak, will start to fall steeply.
Furthermore, considering that - even if the peaks will always be temporary - a rising minimum inflation will be present throughout the entire inflationary season, it is always good for investors to procure in any way instruments that provide passive returns in the long term, such as those offered today by stablecoin deposits in many lending services.
Thanks for reading