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US core inflation is headed to 3%…

Anthropologists have got the whole thing wrong. In the early 21st century there was no such species as homo sapiens. Archaeological evidence suggests two distinct hominoid species: homo cyclicus and homo differenticus.

Homo cyclicus appears to have been an elegant being, swift of mind and not a believer in fortune tellers. Rather, she appears to have learned from experience, watching the seasons and looking to exploit regular cyclical patterns that could be observed in nature and in the world of man. Homo cyclicus looked for patterns and was keen to use them in a repeatable investment processes.

Homo differenticus is believed to have been a doltish lumbering being, unwilling to see regularity in nature, economics or anything pertaining to finance. Like a goldfish circling a bowl, everything differenticus saw was happening for the first time and the past provided no clue to the future. Guided by goat entrails and story-telling differenticus believed the future could be seen and invested according to the omens — whichever told the best story.

A good example of the distinction between homo cyclicus and homo differenticus can be seen in the historical record of US inflation in the early 21st century. Aided by their seers, homo differenticus believed that the inflation process had changed. 3D printing, block-chain, self-drive cars and all manner of wondrous new inventions had changed the way inflation works, ensuring that inflation will remain low for many seasons.

This is what the bulk of the historical record shows. However, the following chart was recently found by archaeologists on the wall of a cave just outside the ancient city of New York. It is believed to be the work of a homo cyclicus working in the second decade of the 21st century. Experts are awaiting carbon dating of coffee stains on the original but the time scale suggests our dating is correct.

If the inflation process ‘aint broke, don’t fix it

The chart appears to depict an ancient relationship: that between the economic cycle – the acceleration and deceleration of economic growth – and the change in core inflation. The economic cycle is measured here by the two-year change in the US ISM Index, an ancient tool used to measure economic growth. This measure is lagged by 21 months, suggesting that changes in the growth rate cause changes in core inflation after a lag.

Now, as I have said, at the time this chart was drawn most historical record suggests a belief that the relationship between the economic cycle and inflation had significantly and permanently changed. Curiously, this chart shows no such break. The relationship looks to have been very much intact at the time the chart was drawn. It would have led the ancient scholar to believe that core inflation was headed towards 3% by late 2019.

Sadly, it appears that this view never saw light of day because the homo cyclicus was found buried in the cave along with his art and an abacus. He was found strangled by goat intestines, a common method of homicide by homo differenticus at the time.

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