The Fed would have you believe that inflation is rampant and that another couple massive rate hikes are necessary to tame it. When you drive down the road, do you look in the rear view mirror to see where you are going? No — you would wreck your car in a spectacular manner. The Fed is looking at the rear view mirror for inflation that happened months ago.

There was a 0.1% increase in headline inflation in the month of August, following a 0.0% increase in headline inflation in the month of July. That is 0.1% of headline inflation in the last two months. Annualized it would be 1.2% inflation annually, below the 2% target. The Fed wants to ignore drops in the price of food and gas because they are volatile. However the cost of oil drives the cost of almost every manufactured and delivered good as well as food. Lower oil prices will result in even lower food prices in the future, as well as cost reductions for manufactured and transported goods.

A Strong Dollar

Remember when it took 1.4 US dollars to buy a single Euro? No more! A dollar is now worth more than a Euro! That is deflationary! Every good and service we buy from Europe now costs less. 

In short, everyone seems to be fleeing to the Dollar:

Take a look at the Chinese Yuan versus the US Dollar. The Yuan is now worth roughly 10% less versus the dollar than it was a year ago. That is DEFLATIONARY folks! And we certainly buy enormous quantities of goods from China, now for 10% less dollars.

When we compete in the world markets for oil and other resources, the stronger dollar means we pay less. Deflationary.

Shelter — Rear View Mirror Syndrome

Increases is rent prices in particular are not reported in inflation metrics for 3–6 months because of the delayed way in which the Fed directly surveys renters instead of using some kind of real time data such as the average rent for a newly vacated residence.

The rise in rents that is now being reported happened 3–6 months ago. Property values are likely fall as normal people cannot afford to buy a house with a 6% mortgage rate. Falling property values will put pressure on rent prices. Deflationary.

Mortgage Refinance Rates

Super high mortgage rates means people cannot as easily get money out of their house. They cannot jump to a lower interest rate, take cash, and still keep the same monthly mortgage payment. This results in less money flowing from real estate to the real economy to be spent on renovations, vacations, cars, etc… Less money = ? You guessed it — deflation.

The Fed has finally stopped buying mortgage backed securities (MBS) in early September. This means that with less buyers competing for MBS, the price will go up causing 30 year mortgage rates to go higher. Higher mortgage rates = lower home prices = lower rents. Deflationary.

Crypto Crash and Stock Market Bust

No longer are crypto investors cashing out profits to buy cars, vacations or luxury goods. Instead they are licking their wounds. Ditto to some extent for investors in the stock market. These are not asset classes moving cash into the real economy – the way they were a year ago. Deflationary.

The Crowd Is Usually Wrong

Right now the majority view seems to be that inflation is here for a much longer time, interest rates are going much higher, and the stock market is going lower. Usually when almost everyone is conforming to one viewpoint it means that viewpoint has run its course.

Consider this last view bull run when the majority felt like the bull run would go on forever and that tech stocks had room to double again.