Prices should begin to climb at a slower pace, perhaps around 4 or 5%, for the foreseeable future. You already know that “Putin’s Price Hike” is nonsense, so let’s leave blame aside and focus on the problem.
Inflation results from money printing (now reversing per Quantitative Tightening). Inflating the money supply leads to demand-driven inflation. But inflation is also driven by structural supply shortages caused by the China Virus and, more recently, Deglobalization.
Deglobalization (bringing manufacturing and other things we previously imported back home) requires a longer-term transition with inefficiencies, higher production costs, and higher prices.
The market is confused, the hallmark of a trading range, because it does not believe that the Fed can, needs, or will raise interest rates or implement Quantitative Tightening at the promised levels.
On the issue of need, the inflation itself is already leading to demand destruction. Consumers cannot afford the higher prices, their wages are not rising to keep pace, and they are cutting back, as evidenced by the Retail Sales figures missing their mark last week. There will be no need to raise interest rates as promised because the economy (and demand) is already peaking.
On the issue of can, the Fed is in no position to sell off its balance sheet as promised in Quantitative Tightening. There are not enough people who want the U.S. paper, as the treasury market is the most illiquid in a generation. Also, the Fed will be competing with the U.S. Treasury itself, which needs to sell $1.5 trillion to finance the latest budget deficit. There are few buyers for various reasons – a subject for another day.
On the issue of will, the Fed will need to discount treasuries to sell them. The fear is that the Fed could lose control of interest rates and the bond market – perhaps necessitating yield curve controls if they dump into an illiquid market. You can see why the Fed delaying QT is more likely than trying to sell into a market that does not want any more U.S. Treasuries, especially with the elections ahead.
The Fed may eventually cap interest rates with yield curve controls as it realizes it has lost control of the bond market and interest rates.
On the supply side, the transition from globalization to deglobalization will be a painful process. I could write volumes on this. Even though demand destruction will happen from higher prices and a possible misstep by the Fed tightening into a slowing economy, it will not stop the higher inflation coming from these challenging structural supply changes.
With the election on the horizon and the Democrat Party slated for destruction, I would not be surprised to see the Biden Administration implement wage and price controls to make the public feel as if the administration is doing something. Such action will worsen inflation, as happened under the Nixon Administration.