2022-12-12

Inflation

The annual inflation rate in the US slowed for a fifth straight month to 7.1% in November of 2022, the lowest since December last year, and below forecasts of 7.3%. It follows a reading of 7.7% in October. Energy cost increased 13.1%, below 17.6% in October, due to gasoline (10.1% vs 17.5%), fuel oil (65.7% vs 68.5%), and electricity (13.7% vs 14.1%). A slowdown was also seen in food prices (10.6% vs 10.9%) while prices of used cars and trucks declined by 3.3% (after a 2% rise in October). On the other hand, the cost of shelter increased faster (7.1% vs 6.9%). Compared to the previous month, the CPI edged up only 0.1%, the least in three months, and also lower than forecasts of 0.3%. The shelter was by far the largest contributor rising by 0.6%, and more than offsetting a 1.6% drop in energy cost. Despite the bigger-than-anticipated slowdown, the annual inflation is set to remain more than three times the Fed’s 2% target, pointing to broad price increases across the economy. source: U.S. Bureau of Labor Statistics

— Trading Economics

The ‘miss’ of 20bp did the following: - pushed up US equities by ~1% (most NDX of course), - pushed US 10Y yields down 10bp, - pushed the DXY down 1%, - pushed crude up 2%.

This is all predicated on the falling inflation pushing the Fed into a pivot.

Talking about inflation, Mohammed El-Erian had an interesting ‘Markets Insight’ piece in today’s FT. Basically, he said that the Fed needed to switch to a 3-4% inflation target, but that this would be impossible for political reasons. By pretending to aim for 2% but really targetting 4%, Powell could appear before Congress and say “We saw inflation coming down, our models said it would reach 2%, so we eased off the pressure on the brake, so we can have a longer glide path down to our target.” This is a lot better than saying “Yes, well, our mandate is to maintain price stability. We were surprised you bought the idea that debasing the currency by 2% per year was the same thing, but meh, it works for us, and by the way we’re going to target twice the old rate now, so prices will double every eighteen years.”

As I’ve said repeatedly, the only way out of this mess is to allow inflation to wash away the sins of fiscal incontinence. Nobody wants the alternative, which is markets carnage, not least because almost everyone in Congress, the Senate and the FOMC is massively long risk assets. OK, maybe poor people would like to see their credit card balances evaporate, and, hmm the US Treasury would sure like to see bonds crash so they could be bought up for cents on the dollar but … OK, maybe there is a constituency for that.

The NHS

The US has an insanely expensive health care system, because it has allowed its government to be captured by corporate and producer interest from insurers, doctors, hospital groups, and the complex ecosystem of rent seekers who sit between patients and their treatment. The rest of the world has a variety of systems which are variations on a theme of a state-controlled insurer which collects premiums from taxpayers and largely pays out controlled prices to medical professionals. Patients mostly pay some modest fees for modest treatment. Except the UK, where the NHS is a sort of church, accountable to nobody, which doles out spotty healthcare in decrepit hospitals.

As in most churches, the paid employees are mostly treated badly and paid poorly. There are some very well-remunerated bishops, who are paid so much they decide to retire a decade before the rest of the working population, complaining that they pay so much tax that the vocation is spent.

Still, the Church of the NHS dispenses a lot of good care, and the people love it. They even are OK with the nuns getting a big increase in their pay (currently, maybe, as much as 19%), at least those who imagine that their tithes won’t go up very much to pay for it.

But the Church of the NHS is slow to respond to changing times, just like the poor old CofE. Back in the late 1940’s, illness was short and acute. You went to hospital and were fixed up, or you died. Now, sadly, disease is overwhelmingly chronic, either because it intrinsically is (Alzheimer’s) or because we’re so good at keeping previously fatal conditions under a sort of control that what used to kill us simply makes us miserable and disabled (like diabetes or cancer or AIDS), or because we’ve redefined some extreme positions on various personality dimensions as pathological, a condition we now call mental illness.

It’s a mess, and although everyone knows we can’t keep increasing the NHS spend ad infinitum no politician wants the person who says “Enough is enough!” All this, I’m sure is painfully familiar to everyone. Especially everyone who was born more than fifty years ago. But I guess we’ll continue in a state of political denial until … something turns up.

For a relatively grown-up discussion, listen to this: Is the NHS beyond saving?. Spoiler alert: the podcast does not really come up with an answer.