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Team Transitory made a comeback this week as commodity prices fell to pre-war levels and inflationary expectations sagged. Bernard Hickey explains why he's still a paid up Team Transitory member

Personal Finance / opinion
Team Transitory made a comeback this week as commodity prices fell to pre-war levels and inflationary expectations sagged. Bernard Hickey explains why he's still a paid up Team Transitory member
transitory?

For more than a year ‘Team Transitory’ – i.e those like me who see the long term trend of ever-lower (or at least low) interest rates and inflation – have been in retreat under a constant barrage of inflation surprises and central bank rate hikes.

But this week the tide turned, at least for a week, including:

  • commodity prices fell sharply towards their pre-Ukraine war levels of late February on signs the spikes in March, April, May and June had created ‘demand destruction’ and were likely to cause recessions in the United States and Europe later this year or early next year;

  • US inflationary expectations for the next five years continued dropping below 2.5% and the US 10 year Treasury yield dropped solidly 3% for much of the week, albeit it closed above 3% on Friday night

  • US 30 year mortgage rates, which drive a lot of activity in the world’s largest economy, fell to 5.3% from 5.7%; and,

  • ANZ, BNZ and Westpac and finally ASB cut their two year mortgage rates around 30 basis points to around 5.4% after NZ’s wholesale interest rates followed the global trends and fell 50-80 basis points over the last three weeks.

In my view, it’s probably too early for ‘Team Transitory’ to declare victory, but some faith is being restored in my long term view that low inflation and interest rates will reassert themselves after the Covid and Ukraine war shocks because of fundamental global macroeconomic forces that include;

  • ongoing globalisation of manufactured goods supply chains, which is still largely intact despite the exit from Russia and fears about China;

  • the evaporation of services industries globally into AI-driven and jobless clouds;

  • the continued weakness of labour negotiating power with increasingly large (and monopsonistic) companies; and,

  • the widening of the gap between the extremely rich and the ever-poorer poor in developed countries is continuing to generate growth-sapping wealth gluts and restraining productivity growth as the poor’s kids get sicker and less productive as adults.

Really?

Falling inflation and interest rates again put upward pressure on asset prices and rentier incomes, creating a feedback loop that worsens inequality and adds to the political pressures eroding democracies and undercutting efforts to fight climate change. New social contracts and political change to redistribute income and wealth are needed to reverse these awful and perverse feedback loops, in my view.

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79 Comments

Hmm it does feel like the fed and the rbnz may overshoot again on fighting inflation as they did on monetary support during COVID.

it does seem like what used to take 18 months to play out traditionally, now takes 4 months. 
 Is the ocr too much of a slow reaction tool for these times? Is there a better tool?

 

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The system is too complex to measure and react to in real time.

Central banks can see more data than the "money printer go brrrrr" crowd which is why theyve been reluctant.

End of the day it's likely impossible to have a central bank and government that can save us from every eventuality.

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Yep the old saying that they arrive too late to the party and then stay too long (or however it goes). If the RBNZ raise rates again at the next meeting then I think they are risking staying too long yet again. 

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I don't see that at all, if anything inflation has proven surprisingly sticky so far. Once Reserve Banks see inflation start to come down consistently they'll probably pause.

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Yes I am still seeing inflation and activity in the economy (you can see it on the roads in Auckland) and people are still spending. It all comes down to inflation, the central banks will not allow 5% plus inflation, end of. Oil will play a big part in this. You can tell by the volitility in the bond markets and range of economists views that no one knows. 

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Commodities have stabilised somewhat now, all be it at a higher price levels. You are seeing demand weakness across many low income countries are they run out of headroom to subsidise fuel even as in developed economies demand remains strong.

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Great comment Jamin!

BTW did your dad used yohave an old Merc SL?

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?? Yvil Might need to explain this?

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Jamin is not a common name, I bought my first building from an agent Dean (I won't mention his last name) about 25 years ago in Christchurch, he has a son called Jamin and we have mutual friends, is that you?

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Hi. Sorry that’s not me. Jamin is just a nick name I get called sometimes. 

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I am very much part of Team Transitory. Inflation will be close to goneburger within 9 months.

Interest rates no more than 4.5% by end of 2023, and potentially quite a lot lower than that.

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Anyone involved in producing anything should be able to identify how much supply side inflationary pressure has been in the economy over the past 24 months. Hell, anyone going to a supermarket or Kmart or ordering anything online should have noticed a substantive difference in product availability and delivery times.

Whether it's "transitory" or a "transition", only time will tell, if it's the latter a lot of people are going to be awfully sad the problem wasn't just resolved by upping rates.

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Time will indeed tell.

Time is a very wise thing.

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Does it matter whether it’s transitory or transition? Even if it is permanent supply shortages it should only lead to a one off increase in prices shouldn’t it?

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Throwing eggs at Battery Chickens isn't going to do much, the farmer just collects more eggs.

Throwing money at Battery Tenants isn't going to do much, the landlord just collects more rent.

The RBNZ is NOT taking inflation seriously and the Labour Government has cooked the housing market, true story.

NZ might be toast.

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100% agree. 

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Oh for a world where you can just create baddies and protagonists with which to pin blame and solution on.

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I was more going with Kiwis need to get back to being free-range citizens and away from the nanny state. I rent and quite like my landlords. 

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We've got a fairly complex system and society, that requires a certain level of oversight and bureaucracy to function in a way that makes most people feel safe and comfortable.

Turns out that's either too much, or not enough, for most citizens.

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“Those that give up freedom for safety deserve neither.”

~Benjamin Franklin~

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"no man is an island"

Some dude.

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It's probably getting difficult for some in the real-estate/rental industry.

Best to cut loses where practical and play to ones' strengths. If industry players work hard and do well the market will reward them, otherwise victimhood waits at the door.

I don't have a horse in the real estate race, so I try hard to look at things from multiple perspectives.

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If the RBNZ is behind our inflationary issues, and the current government caused our recent house price increases, then I suppose abolishing or reducing them would seem like a possible solution to those two issues.

Probably a perspective that'd need a bit more information. And ironically a good case for individuals being problematic arbiters of larger problems.

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Painter,

John Donne-English poet

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Like nine years of neglect? Now followed by five years of failure and soon to be followed by six years of stagnation. 

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Hard to say where we are going from here, but I think are just getting started honestly.

We have just had too much monetary stimulus for too long. We still have too many overinflated frothy asset bubbles worldwide.
 

Inflation is feeling pretty ingrained right now all through the economy. War in Ukraine still has a long way to go. I can’t see inflation falling back lower for awhile.

 

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Agreed, sadly. The party is over and we’ll be hungover for a few more years 

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totally agree -    for all the talk about rates peaking, overshoots and commodity prices --  the inflationary pressure in goods and services have a huge way to go -  most businesses have not fully priced in all their extra costs for a start -  and will continue to lift prices

The impact of the war on grain, oil and other products has yet to really be felt -- and its not just this years crops -which are being burnt or not harvested -- its the following years that won't even make it into the ground -  

Then there is he cost of climate change - that will also grow expoentially as its impact is felt more and more --  and i doubt even the greens have truly estimated what this will be --   but thats going to add to inflation for the next 20 years at least 

Does anyone seriously believe that councils, utility companies shops anbd businesses are gogint o be reducing prices in the next 3 years ??? Yeah but Nah!! 

 

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"The long run is a misleading guide to current affairs. In the long run we are all dead. Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is past the ocean is flat again."

Keynes

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People are jumping the gun it's not over. Also don't we need to push so prices start actually falling again and not just leveling off ? It's going to take a while for this to flow through and I wouldn't get excited about a trend unless it has lasted 6 months.

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All depends on how comfortable the RBNZ is with a further devaluing of the NZ Dollar.

Such a devaluing would of course tighten inflation's grip.  

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There are two things you can take from the above article that few commenters are understanding. 

1. High Oil prices cause demand destruction. Demand destruction kills growth and inflation.

2. Interest rates are set in the international bond market. If the international bond market decides there is demand destruction then interest rates will fall everywhere in the world.

If interest rates fall everywhere in the world, asset prices will go back up.

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If interest rates fall everywhere in the world, asset prices will go back up.

Not when the vast majority are tapped out and the shadow banks move in to acquire it all.

     

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If there was one thing the COVID area has shown us, lower interest rates and the vast majority will not be tapping out. 

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And in this scenario it makes no sense for Kiwis to be funding society mostly through taxes on their productive work, instead of a balance of land value and earned income. It's just an invitation to be exploited.

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Surely interest rates increase when demand is uncertain… business risk increases and requires higher return on investment..

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The 5 bidders on this place in Papatoetoe must think rates are on their way down again. More than 50% over reserve! https://www.oneroof.co.nz/news/41806

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The investor and speculator market is coming back as long-term owners are selling

Neato.

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Bought by neighbour and developer. If you own nextdoor and want the greater density that greater road frontage gives you, then you pay more. No great story here.

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It was an auction though so someone else was prepared to pay $1000 less. Unless that was the other neighbor

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Large section good for redevelopment. $1.2 mill isn’t too much for a site that large with very good redevelopment potential.

with the new planning rules coming through will probably get 9 townhouses out of that site, that’s a pretty low land value per townhouse.

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So a place selling for just over its Jun 2021 CV now warrants tears of joy and a OneRoof article?! How times have changed.

The only news here is that vendor was willing to accept $750K for a house with a $1.2M CV. Good on the vendor for selling now, rather than hoping prices will somehow rocket upwards again in the next few months.

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The news is that people are still prepared to pay $1.2 mil for either an average looking house or 800m2 of land in Papatoetoe. The market is still so far from affordable it’s insane yet people are confident enough to pay these prices regardless.

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If you look at REINZ prices, houses in Manukau had to fall 13% from their November peak to be back at their Jun 2021 CV. Nice to see this kind of fall being celebrated. 

On the other hand, this house's CV looks insanely high so one can see why that is an unexpected outcome - or was that a realistic price for land in Papatoetoe in 2021? Anyway, even more amusing is the agent's blatant attempt on homes.co.nz to push up the houses' value (haha, as house price gets referred to in NZ) to 1.4 million: https://homes.co.nz/address/auckland/papatoetoe/173-portage-road/rg4g  

Mind-boggling.

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people are confident enough to pay these prices
 

Or stupid enough.

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Inflation might retreat due to base effect but the global labour market should tell you inflation will require ongoing management. For the first time in two decades we are actually experiencing a competitive labour market that's starting to meaningfully push up wages.

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Try going food shopping. Inflation is still high even if it is staying stable, petrol still over $100, NZD under .62 against USD this will keep inflation high. I don’t think FED will go back to money printing as US debt over 30 trillion they will probably run with hot inflation for number of years as good way for them to lessen debt burden. Rates will as stay around 3% in US for a number of years. Going back to low rates would just be end for USD a reserve currency.

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You are talking about past inflation, which in my mind is irrelevant. The RBNZ would be stupid to cause a recession to try and tame some inflation that occurred in the past. 

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Exactly!

Prices are high right now, they are the product of high inflation over the past 12-18 months. They could remain high, even increase a bit further over the next 12 months, but inflation from here could be low-moderate.

That's my pick - prices won't go down for most things, they will go up a bit more, but not much more. 

Let's unpack this a bit more:

Rents - likely to be flat

Construction costs - unlikely to rise much more, it can't be sustained and construction likely to slump

Food - moderating 

Fuel costs - moderating  

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Fuel costs are on a one way ticket up up up up. Along with the cost of us all converting away from ice's

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Plus we haven't seen much wage inflation yet.  Probably because we're only 12 months or so into increased inflation, with the first 2 quarters being below 5%.  

Depending on how big the brain drain is, and how many migrants we bring in, will likely determine what wages do in the next 12 months.  If we cant fill the holes, then wage price spiral?  

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Inflation is like at large ship you can try and stop it but it just keeps going, lots of people saying it was transitory we’re wrong hard to believe some people still believe it’s transitory. The FED admitted it was wrong about inflation now playing catch-up no way are they going to lower rates for a number of years even if we hit a recession.

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Wait until Wall Street throws the toys out of the cot and rates will go back down.

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Yes I think if rates do come down in 18 months it will be to OCR of about 2. I get the impression that some people think the OCR will go back below 1 again, this is very unlikely. The Covid emergency rates were a 1 in 50 years event and should not be expected to be within the normal range of rates. The discussion should be 'what will the OCR be between 1.75 and 4. A stable OCR of at least 2 would help avoid asset bubbles happening again.

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I think the OCR will fall back to 1.5 by late 2023, if the recession is really bad it might go lower.

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I agree with John Bolton's view of 2 weeks ago, that we're not at peak interest rates yet, but getting close to it. He's a smart man, a smart person would pay attention to him rather than make fun of him. 

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One would also be wise to consider his line of business and incentives. 

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Yes his line of business gives him insights few of us have, and his educational background allows him to interpret these, better than most of us.

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Let's not forget that Bolton said in January that all the future OCR rises were already "priced in" to mortgage rates.

I know people with big mortgages who believed him and relied on his "expertise".    It's like asking the fox how to keep the hen-house safe.

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Can anyone come up with the name of someone with more of a vested interest than John Bolton? Perhaps he is smart enough to make you believe what he would like you to believe.

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I'd call it a tie between JB, the banks with big mortgage books, and anyone at REINZ. 

He may well be a smart guy, but that's independent of the vested interest. 

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Tony Alexander is a smart guy too but vested interest has definitely clouded his judgement.

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Yes, he certainly is vested in more ways than one

I would say the 'rates have peaked' narrative is something he HAS to peddle now - especially to the "scores" of FHB that are 95% in debt thanks to Squirrel 

I would imagine that all of these FHB's that are refinancing are facing some very hard debt affordability decisions and wondering how the let themselves get into this mess

https://www.stuff.co.nz/business/126088195/house-price-drop-may-test-ho… 

'Squirrel’s chief executive John Bolton says he is unconcerned about how a potential house price drop could affect first-home buyers who have taken up his company’s offer of loans with 5 per cent deposit.

Mortgage broking firm Squirrel launched Launchpad in April, aimed at first-home buyers with good incomes but small deposits. It said this week it had helped “scores” of people on to the property ladder so far.

Loans are split into two parts – a 15 per cent loan financed by Squirrel’s peer-to-peer lending platform at a rate of 9.95 per cent, and an 80 per cent loan from non-bank lender Resimac at anything from 2.99 per cent to 3.39 per cent. The larger loan is kept interest-only at first to allow borrowers to pay off the more expensive loan first.'

 

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Yes the 2nd tier lenders will be the most worried. The big banks might would actually like to see some of their opposition fall over.......

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I know him personally, he is honest enough to tell it how it is, but you lot who condemn everyone with different views, will of course never give him the benefit of the doubt.

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What a sad mentality really, everyone with a different view gets shot down, accused of vested interests and discredited in any form.  

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Yvil - you're a commercial guy, so would you let your FHB child sign up to a Squirrel launchpad loan in a market that is now consistently falling?

5% deposit (from their Kiwisaver)
15% @ 9.95%
80% at choice of:

Floating: 5.09%p.a.
1 year fixed: 6.54%p.a.
2 year fixed: 6.44%p.a.
3 year fixed: 6.98%p.a.

The 80% is interest only for 5 years - so what have they achieved after 5 years of debt servitude? 

He maybe an honest guy and doing nothing illegal but don't you think this is going to seriously end in tears?

He may have been able to claim last year that he didn't believe house prices would fall but to be still doing these loans is not responsible lending.

Why's he still doing it? Because he makes $$$k+ in commission each time.
​​​​​​​

 

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I'm not accusing Bolton of dishonesty, Yvil. He is probably really smart and I'm glad to hear that you can vouch for his integrity.

The issue is that we all believe what we want to believe and hear what we want to hear. That is why understanding someone's vested interests are so important as it heavily influences his/her 'truth'.

 

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No way 

Deglobilization is building 

AI solves nothing & is largely an ass

Job growth remains strong in the US hence the FED will continue to tighten

The geopolitical situation is woeful with Russia & China combined in an offensive against the west 

If the above doesn't undermine the western economy then the earth's increasing methane retention will

 

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It's not the methane that causes a problem. Monkey poks are.

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Agree… headlines tell us manufacturing is returning home.. supply chain woes continue, it’s like the globe has been smacked out of orbit.

the low wage economy is flattened. 

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Doesn't matter what you call the inflation. The point is western governments need heaps of it, to get us out of the mesh they put us in. 2nd quarter will come with shocker %. 

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Tell us what you really think Bernard

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Inflation is embedded. And growing. More rate rises will he required to get it back under 3%. But really the interest rates in the US will set the pace. 

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I think it's time to put a timeline on what describes a "transitory" inflation.

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There is no such thing as transitory inflation if the prices don't then come way back down to where they started from. If anything above the target band gets baked in then it wasn't transitory. I just cannot see prices dropping again at the end of this and is the end even in sight yet ?

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If the price of everything (including wages) increases by 10% for a year, and then the inflation rate drops back to 2%, then that is transitory.  It refers to the rate of inflation.  

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Well it's not. I'm used to a transient in electronics terms and that's a spike and a return to normal. If you get 10% inflation and the band is 2 to 3% then you going on need inflation back to 1% to 2% for a hell of a long time to kill what damage that's done or else prices will remain permanent and that's not transitory. It's a bullshit metric in the economy so you can say after massive price increases its now okay because it's down to 3% again so it's all good now ? Bullshit.

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What if our high inflation is a return to normal, where the last 10 - 15 years has been the transient period below the trend line?  We need to have a few years of 7 to 10% inflation to revert to the mean.

 

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