The PCE(personal consumption expenditures) price index for January was out this morning and it was surprisingly hot: 0.6% vs. 0.4% expected MoM. If we are really in a disinflationary environment, shouldn’t the PCE be in-line with the estimate? My personal expenditure index is still rising. My kids’ summer horse camp is gonna be $995 per week per person(!!!), up 7.5% YoY and I had to sign up within 24 hours when the registration was open. I feel that the price increases are being normalized for services and demand still outstrips supply. I live in Silicon Valley, the epi center of the current tech layoffs. You would think there would be a bit of localized recession going on and demand for services will soften. But I haven’t actually observed any meaningful changes yet. Perhaps it just takes time.
Bloomberg also published a report recently saying the Fed may need to hike to 6.5% to cool prices. That sounds absurdly high. But I just realized that from 1995-2000, the fed fund rates ranged from 4%-7% for the whole time!!! I couldn’t believe the dotcom bubble occurred when the rates were so high. On the other hand, the 1995-2000 era taught us that we don’t need low interest rates to have a thriving economy. The current high rate environment is no fun as the asset prices are being adjusted down to reflect risks and most people lose money as a result. But I believe it is more sustainable in the long run to quit our addiction to the zero-interest rate and to focus on creating real economic value that benefits everyone.