I found the US Federal Reserve Chair Powell's speech at Jackson Hole reasonably hawkish...the repeated mantra of 'We will do what it takes to bring down inflation to 2%' continued.

The low hanging fruit on inflation is come the hard miles, to mix up my metaphors.

There are three components to core (non food and fuel) inflation.

1. Goods inflation which has come down, partly as the supply disruptions were gone. However there may be some long-term structural upward pressure as globalization partly reverses with on-shoring, near-shoring etc.

The Pandemic showef the risk of sourcing supplies from far away even if those were the least expensive on paper.

2. Housing or shelter related inflation, which while coming down, is moving slower than expected and part of the reason paradoxically is the Fed's own raising of interest rates.

Interest rates are raised to reduce demand for goods and housing. But this time there is a significant unexpected consequence.

The difference between the current rate to take out a mortgage (7%) versus the average rate on mortgages outstanding (3.6%) is the widest since the early 1980s!

In simple terms this means that anyone with a fixed rate mortgage cannot or will not sell their property as any new property will have to be financed at the new rate.

Hence old homes are not coming on the market for resale.

Homebuilders benefit from limited supply in resale market, as buyers then have to buy newly built homes.

3. The third component of core inflation is a category called non housing services where, as Chair Powell pointed out, the labour component is significant and since the labour market in the US remains tight, this component is not coming down fast enough.

The message remains same as ever... watch the macro data to see the Fed will likely do next.

From the desk of 

Devina Mehra

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