Stock Strategist Says We'll See 5% Inflation for the Next Decade

You can very well make the case that what really hurts is when you have inflation above 10%, or really unpredictable inflation, because this is when agents can’t plan for the future, investments don’t get made, people hoard stuff.

But as long as you have stable, somewhat moderate inflation, whether it’s 2% or 4% or 5% doesn’t really change things. And I think that’s the way most Americans also feel — most Americans don’t even know what the Fed does, they don’t know about the 2% inflation. They just think of inflation as whatever happened in the past. So that’s where the inflation expectation channel comes in.

A decade of 4%, 5% inflation is really not bad. We are in a period where we have a structurally tighter labor market, mostly because of demography, and also because we no longer have access to Mexican labor.

A lot of the great moderation of the past 30 years was with the product of free forces — on the labor side, you had about 12 million Mexicans that crossed the border between basically the end of the Tequila crisis in 1994 and 2007 — and this flow was stopped and even reversed since Covid. So we no longer have cheap labor.

On the good side, it was the China shock. If you follow what’s been happening in China right now, this is maybe not where you want your supply chain, and if you just get a demography of China, we’ll have a massive crunch in the population of young workers in China because of the one-child policy. So we don’t have cheap goods from China, we don’t have cheap labor from Mexico.

And then the last part was cheap capital. As the US had these massive deficits in the late 90s, what that meant is that you had all these countries that had very large surpluses — Europe, Germany, Japan; and then Saudi Arabia, commodity-producing countries.

And these surpluses would flow back into the U.S. Treasury market. So for the U.S. it worked great because we basically sent people Treasuries, and then we got goods from them. So it was fantastic. That channel is also clogged now.

So the three factors that made it so easy for us to achieve that 2% inflation are gone — cheap labor, cheap goods, cheap capital. So it would be a lot harder to get down to 2%.

I mean, I’m sure we could, like, if Powell wanted to be Volcker and he gets the fed funds right to 10%, we get to 2%. But what’s the point? Why would you want to destroy the labor market?