Higher Inflation and Higher Interest Rates: Get Used to it

Last May I wrote that our economy is entering a new thirteen year cycle that would be characterized by higher inflation and higher interest rates. (See:Shulmaven: The U.S. Economy is Entering a New Thirteen Year Cycle ) In that post we noted that the forces of deglobalization and decarbonization were inherently inflationary which would increase the demand for capital, and hence real interest rates. Whether or not there was a global savings glut, the demand for capital would mop up whatever excess savings there is.

In this post we add a third factor. Real wages have collapsed as inflation of 8% has swamped wage gains of 5%. Trust me, there is going to be a catch up which will put pressure and corporate margins and pricing. This will hardly make for a good environment for both interest rates and stock prices. 

Further although money growth has slowed dramatically over the past year, the 25% annual rate of increase in M2 over 2020 and 2021 will provide more than enough fuel to ratify the price increases that are coming.  As a result instead of having the wind at its back, the Fed will find it increasingly difficult to bring inflation down to its 2% target.