The Case Against Inflation


Inflation, the Grim Reaper of Retirement Savings

By Richard Morey

Since inflation is one of the greatest risks to retirement finances, I have studied how to spot and protect against it continuously for the last 23 years. Thus far serious inflation has never struck, but it only takes one bout of it to destroy a retired person’s finances– forever. I have therefore watched it through the years. Specifically, I have watched as two huge and undeniable macroeconomic forces (debt & demographics) have driven it lower.

 Today almost everyone is sure inflation is roaring now and likely to get a lot worse going forward. I have found this quite odd, given that the underlying factors of debt and demographics, which nearly control inflation, have both continued in their deflationary influence. 

This prevailing view is also more than a little odd when we simply look at the numbers themselves. We will begin with the data straight from the Fed and the Bureau of Economic Analysis. First, please note these agencies provide numerous inflation measures. We’ll look at what people actually usually refer to when they think “CPI” or inflation. We’ll then look at the measure most trusted by the best economists at the Fed (who reside at the Dallas branch of the Fed and put out the Fed’s most respected analysis). 

The St. Louis Fed publishes what we commonly think of as the inflation rate in its monthly Consumer Price Index for All Urban Consumers: All Items Less Food and Energy in U.S. City Average. 

Both the St. Louis Fed and Bureau of Economic Analysis now have year-over-year core CPI at 3.8%. I verified these numbers using Fed data while writing this report. This is, admittedly, much higher than the .46% drop in CPI we had at the beginning of the pandemic, and from February through June of this year inflation was going up fairly sharply on a month-over-month basis. Then it slowed dramatically, rising only one-tenth of one percent in July and August. 

Given this, why are so many people – including much of the business and investment world – so sure inflation is taking off? The answer is the nature of the shutdowns and their impact on supply chains.  The shutdowns led to dramatic increases in certain items. Most consumers, including investors and business leaders, saw those large jumps and see this as proof prices are going through the roof. But the aggregate numbers do not show this. Moreover, our best measures show even less concern for inflation. And this makes perfect sense when looking at our entire macroeconomic picture.

In fact, we can basically prove our previous point that investors and business leaders are reacting to isolated price spikes by looking at a “heat chart” showing the price rises and falls in various categories included in the CPI in the last several months. You see huge increases in everything automotive, with substantial gains in food. That’s it. The other categories are mostly either flat or show price reductions. Combined it comes to 3.8% year-over-year. It stalled out to essentially flat this summer. 

Those numbers aren’t scary and are, thus far, exactly what I have been predicting all year.

For those who say inflation is actually much higher than is ever reported, I agree completely. It’s not hard to prove all their measures understate actual prices being paid overall by consumers. Most suspect they do this to keep the cost of living increases attached to government obligations like Social Security as low as possible. 

While I agree the government manipulates the numbers lower, their calculations do this every month of every year. This means their analysis of the relative growth or decrease in inflation may still be the most accurate we have – even though we know the numbers are always reduced by some substantial but unknown amount. In other words, just so they manipulate it lower consistently we can use their numbers for our analysis. (In fact, using these numbers has worked to predict long Treasury bond movements for decades.)

The best measure of inflation is done at the Dallas Fed. They created what is called the Trimmed Mean PCE* inflation rate. The word ‘best’ in this case means the one demonstrating the highest correlation to actual future outcomes. This means if their numbers say core inflation is rising at a certain rate, that is the most likely rate at which it will end up increasing, on average, over time. Their methodology can be used to measure core inflation over any time period. They report their findings monthly and year-over-year. 

Trimmed Mean PCE is currently at 2.62% annually and 3.22% measured monthly. This isn’t surprising, as it has tended to run below core CPI from the Bureau of Economic Analysis or St. Louis Fed and has therefore been more accurate for most of the last two decades. 

*The Trimmed Mean PCE inflation rate produced by the Federal Reserve Bank of Dallas is an alternative measure of core inflation in the price index for personal consumption expenditures (PCE). The data series is calculated by the Dallas Fed, using data from the Bureau of Economic Analysis (BEA). Calculating the trimmed mean PCE inflation rate for a given month involves looking at the price changes for each of the individual components of personal consumption expenditures. The individual price changes are sorted in ascending order from “fell the most” to “rose the most,” and a certain fraction of the most extreme observations at both ends of the spectrum are thrown out or trimmed. The inflation rate is then calculated as a weighted average of the remaining components. The trimmed mean inflation rate is a proxy for true core PCE inflation rate. The resulting inflation measure has been shown to outperform the more conventional “excluding food and energy” measure as a gauge of core inflation.

Since our inflation scare began the Fed has maintained the price increases we have seen are primarily due to the pandemic. When it finally ends, the pressure ends and prices return to their pre-Covid trendline. (This is when they constantly struggle to hit 2%.) 

While the Fed is notoriously wrong in some of the largest possible ways, on this one the data suggests they are correct. In our July Economic & Market Report, right when the inflation noise and fear was at its peak, I said the Fed would soon be shown to be correct on their “transitory” inflation theory. Thus far both they and I are turning out to be correct.

When Covid is through, we’ll see inflation going back down, and down and down. The economic forces of debt and demographics will outlast Covid by a very long time. They have led us to deflation for over twenty years, and it looks highly unlikely this is going to change in 2021. 

Large anecdotal evidence for my thesis of falling inflation can be seen by looking at Japan’s experiments and resulting experience. We have been following their monetary policy lead broadly since Greenspan first became Fed Chair, and quite specifically since 2010. This means larger and larger government debts and quantitative easing to create the money to finance those debts. For over 20 years Japan has tried the very policies we are attempting to increase their core inflation rate to 2%. Thus far the policies they have tried, which are the same exact monetary policies we have been and continue to use, have failed. No matter what they do, which is what we are doing, they can never get inflation “high enough.” 

I therefore predict the same policies will continue to fail here. This must be the case – unless we have some magic the Japanese can’t access. Perhaps our Fed uses sorcery? No, what we see today in terms of faith the Fed will be able to generate a growing economy, leading to higher inflation and interest rates, especially given our economy-wide debt level, will turn out to be misguided. Again. 

What Would Change My View?


The answer is easy – actually two answers.

The most immediate thing would be serious wage inflation. Some wage inflation was unavoidable due to Covid-related dislocations, and I have been hearing about worker shortages daily in the financial news. This is a very real concern. Given their size in our economy, wages and salaries spiking is a near perfect match to ignite overall inflation.

So are wages inflating? The answer is a clear no. In fact, wage has been and continue to be, overall, sluggish. The Bureau of Economic Analysis employment cost index summary dated July 30 reads: 

Compensation costs for private industry workers increased 3.1 percent over the year. In June 2020,the increase was 2.7 percent. Wages and salaries increased 3.5 percent for the 12-month period ending in June 2021 and increased 2.9 percent in June 2020. The cost of benefits increased 2.0.

Anyone who believes a 3.1% salary increase for workers is dangerously high has spent far too long in an economy abusing its workers. Once again, people see labor disruptions in certain select industries due to Covid and immediately extrapolate this to other sectors where there are no wage pressures. They just figure it must be going on in other places, or will once it “inevitably” catches on. But the numbers don’t bear it out. You add them all up and you find the entire workforce saw a 3.1% increase in compensation over the last 12 months. 

The other thing which would change my view would be if the government continued to deposit an extra $2+ trillion a year directly into the bank accounts of consumers and businesses as we did from last March through this July.

However, there is close to a zero percent chance we see any more multi trillion-dollar handouts directly to companies and consumers anytime soon. In other words, our economic “Santa Claus” has left the scene 

We might see an infrastructure bill pass, and our nation certainly has plenty of needs. Let’s say Congress manages to pass a $1 trillion infrastructure bill. These bills are intended to spend the money over up to 10 years. This would therefore lead to $100 billion a year in new government spending. This is less than 1/20th the amount the economy was receiving from last March through this July , i.e. $100 billion versus roughly $2.5 trillion annualized. (Yes I know that number may prove to be higher.)

What Does the Greatest Authority Say?


Dr. Lacy Hunt is our nation’s leading authority on inflation (and economics, monetary policy, and government bond markets). For over 30 years he has accurately told us which direction inflation is moving and, therefore, bond prices.

The best article I’ve read by Dr. Hunt on inflation was his quarterly report published in April when inflation was first going up sharply on a monthly basis. 

The report was titled The Case for Decelerating Inflation. In the report (link:, Lacy gave seven reasons which, combined, indicate markedly lower inflation in the coming quarters. Here is my simplified summary of those seven points:

1. Inflation is a lagging indicator. Over the last 40 years, inflation hit its lowest point, on average, over four years after the end of recessions. (It never hit bottom sooner than a year and a half after a recession ended.)

2. Productivity rebounds strongly after severe recessions. Rising productivity is the number one way to keep unit labor costs down and, therefore, inflation.

3. Many of our supply chains were broken due to the pandemic, and this is where those scared of inflation see some large price spikes – on certain items. People don’t seem to realize these supply chains are being restored, and every single time one is smoothed out we will see prices of those items falling.

4. Accelerated technological advancement leads to increased productivity and therefore less wage pressure and inflation. During the pandemic numerous technological inventions were funded and their development sped up.

5. The next reason inflation is headed back down points to an essential fact nearly all investors are blissfully ignoring (at their peril). I’ll quote from the report:

Fifth, eye popping economic growth numbers, based on GDP in present circumstances, greatly overstate the presumed significance of their result. This is where the fallacy of the broken glass comes into play. Many businesses failed in the recession of 2020, much more so than normal. As survivors and new firms take over their markets, this will be reflected in GDP, but the costs of the failures will not be deducted.

I’ve been writing about this fact for some months now – namely that investors are, thus far, completely ignoring all the damage that has been done to our economy.

6. Inflation goes down when debt exceeds a certain level. When an economy blows through the danger level, as we have today in reaching the most over-indebted state ever, this leads, almost inevitably, to the lowest level of inflation.

7. Demographics. An aging population is so deflationary it has taken Japan well over 20 years now to reverse deflation and create inflation without lowering their debt levels. They have failed.

Concerns About the Chinese Real Estate & Corporate Debt Markets


In addition to this discussion of inflation, our July Economic & Market Update also mentioned a possible “black swan” event that bears watching closely. This is particularly the case in a week (September 14, 2021) in which China’s second largest real estate developer, with $300 billion US dollars worth of debt, is in process of going through a (hopefully) managed bankruptcy. 

Here was my concern regarding China from that July report before China Evergrande emerged as a leading candidate to create their version of our “Lehman Moment” which sparked our financial crisis in 2008:  

A Black Swan?


A quick look overseas shows potential debt trouble brewing in China. The amount of corporate debt in China is staggering. Their economy is 30% smaller than ours in dollar-denominated terms. We have the largest corporate debt bubble ever in the U.S., yet China has approximately 40% more corporate debt ($17 trillion to approximately $11 trillion). If or when their corporate debt market cracks, we will see a tsunami of losses (and another huge wave of deflation coming to our shores).

Now we hear China’s largest, state-owned companies are increasingly facing bankruptcy. At the same time, China’s government is losing its appetite to bail them all out. At the very minimum this will be a drag on the world economy. It could easily lead to a bursting of our corporate debt bubble in the US.. Europe would surely join in, creating the largest debt liquidation event in world history. 

Every depression I’ve ever studied was started by a debt liquidation event. No debt bubble has ever ended without a liquidation of the bad debt. This is the largest debt bubble ever, by far and by any definition of the term, encompassing the entire world. 

That’s sobering, and I do hope the obvious implication turns out to be wrong. I just can’t figure out how all the bad debt doesn’t do what bad debt always (and I mean every time in the last 700 years) does. Richard Morey from Inflation, Bonds, and the Strange State of the Economy, July 2021



The “growth” called reopening, and the free government money, have nearly run their course. Now in the second half of the year we will start to see the damage done – to the labor market, the commercial real estate market and, most importantly, the debt-bloated balance sheets of corporate America. 

Stay tuned.







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