Share this page

Weekly Updates

  • The Federal Reserve continues to raise rates with all the automation of a robot engaged in a repetitive task. The ECB appears to be fumbling for the “off” switch to the interest rate autopilot, while still intending to tighten policy further. But discussion about what rate hikes are supposed to achieve is still limited.
  • If central bankers believe inflation is caused by labor cost pressures, raising rates must try to weaken the labor market to lower labor costs. But real wages are almost universally negative across the developed world—exactly the reverse of the wage cost/price spiral of the 1970s.
  • Today’s inflation is mainly driven by profit expansion as companies exploit a narrative that convinces consumers to accept price increases. Policy therefore needs a different objective. If demand weakens, profit expansion will not continue. Weaker labor markets would weaken demand—but so would other things. A fear of unemployment, reduced access to credit, a higher cost of credit, negative wealth effects from house prices (or possibly equity markets), or weaker “animal spirits” may all slow demand.
  • If inflation is more profit than labor driven, a central bank pivot does not have to depend on unemployment. Instead, investors should focus attention on trends in consumer demand.

Stay up to date

Subscribe to receive Paul's daily investment views and insights.

Explore more CIO Daily Updates