For the last few months, the Fed has been pushing to lower the inflation to their target which is 2%, but so far they are unsuccessful in doing so. This is not a surprise to the market’s ears because the major factor contributing to higher inflation is the lack of supply mainly in the energy sector which is heavily underinvested.
Energy is life, it is not petroleum only, but the food is also a type of energy. However, oil and gas also heavily contribute to agricultural production. they both are used to produce fertilizers and power the machinery we need to harvest the crop.
The current high inflation in the economy is not only a matter of excess credit in the system but also a consequence of lacking cheap energy, labor and commodities. For years, Europe had the advantage of receiving cheap energy from Russia and a few African nations to keep production and living costs low, and now that is gone. Cheap labor in China is not available anymore as their standard of living has increased in the last decade, which means no more cheap products from china will be sent with ships to the US.
And last, there is no growing population around the world anymore that puts pressure on central bankers to limit their printing press. This will prevent the central bankers and their respective governments from subsidizing industrial production, healthcare and many other social programs in the future.
To sum up, the era of high quantity of currency printing has ended and the era of high velocity of currency have been started, take Japan as an example. In this era, the definition of low inflation is not 2%, but more like 8% because we have depleted wealth from many financially disrupted third-world countries and there is not much left to absorb by the developed markets.
Bonus: if you sell energy and you have many mouths to feed will you accept 80$ per barrel of oil as a good deal? If you are a Turkish citizen struggling to earn enough to meet your need are you going to put a floor under SPX? In simple terms, the environment has changed and will stay this way unless the printing press starts again, accepting the high inflation as the new normal.