Reuters recently published a panoramic view of inflation over the past several years.

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While the article titled “What Republicans won’t say and Democrats don’t like to discuss about US inflation” has political overtones, I took interest in the many charts as a fascinating inflation story. I recommend everyone give it a read. In the meantime, here is a bulleted summary of the article’s points on inflation:

• Food prices increased around 20% from 2021 through 2023 and have changed little since. This applies both to the cereal and bakery products index and the food at home index.
• After soaring as much as 40% in the wake of the pandemic, the price of used cars and trucks have declined since late 2022.
• In the last few months new cars also dropped into negative inflation territory.
• Inflation for durable and non-durable goods has cooled significantly since the 2022 peak with durable goods in negative territory since 2023.
• In all states across the country, the change in median income required to buy a home soared from 2019 – 2023 usually in multiples of the change from 2014 – 2018. California of course tops the list: 2% from 2014 to 2018 vs 18.8% from 2019 to 2023.
• Overall hourly wages have lagged inflation since 2021.

The article also presents some stark economic realities starting with this contrast between how people feel about their own economic circumstances versus that of the country as a whole: “In the Fed’s 2023 Survey of Household Economics and Decision Making, the share of those saying they were doing ‘at least okay’ remained over 70%, lower than the 78% peak hit in 2021, but roughly where it was before the pandemic. By contrast, a dismal 22% rated the national economy ‘good’ or ‘excellent’.”

Additionally, there are important shifts in measurements of well-being:

• There is unsurprisingly a direct inverse correlation between income and the share of households self-reporting difficulty in meeting expenses. However, this share has trended upward since late 2020 for households making at least $100,000. Households below that income level have generally self-reported small improvements in the past three and a half years.
• Through the end of 2023, inflation-adjusted net wealth of Black households has fallen below levels from the start of 2019.

These data paint a picture of an economy where inflation still weighs on the minds of Americans even as certain inflation pain points have come under control. Given this environment, it is no surprise that the Fed has slow-rolled expectations for rate cuts. However, with the market now pricing in near certainty for a rate cut in September, the Fed may finally be forced to take the plunge and test out inflation expectations.

A Trade on TLT

Since 2021, the core CPI (the consumer price index) has taken the escalator up and the stairs down. Seemingly in expectation of little additional improvement in inflation, long-term bond yields seem to be settling into rangebound trading. Accordingly, I drew new presumed trendlines for the iShares 20+ Year Treasury Bond ETF (TLT) to adjust my trading rules for fading TLT.

Prior to the June 3rd breakout for TLT, I could consistently fade TLT from the top of a downward trading channel (the dashed blue line). After the breakout, I faded TLT rallies with an expectation of tests of the previous downward channel as support. The soft CPI print for June that drove September rate cut expectations makes me think a new sideways trend is unfolding. The chart below has horizontal black lines that represent the tension and tug and pull between a slow cooling in inflation and the potential stimulative impact of a rate cut cycle ahead of any significant economic weakness.

I used the top of the trading range to twice fade TLT with put options. However, I was not patient enough to see TLT below its 20-day moving average (the black dashed line above). Thus, it is possible I will eventually move the bottom of the trading higher.

Be careful out there!

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