The Fed did not raise interest rates yesterday and opted for a pause to collect more data before making a decision however it did suggest there would be two more rate hikes coming at some point in the future.
In order to help the Fed out and give them our view of where we think inflation is headed we decided to go back in time to 1970s.
Boomers are those people born between 1946 thru 1964 and in the early 70s the oldest baby boomers were in their 20s. A boomer born in 1946 turned 28 in 1974 and a boomer born in 1956 turned 18.
These age groups put a tremendous amount of pressure on the economy to provide more housing, energy and other goods and services (e.g. college) as boomers turned into primary family formation age. There we two waves because boomers were a huge group consisting of 70 million people.
You’ll note that Gen X isn’t listed on the graph because that group was subsequently smaller and businesses continued to build and expand in an assumption that the next demographic wave would continue to increase consumption but that didn’t happen, instead inflation continued to drop right up until 2020.
Many people think covid disruptions caused massive inflation and while it did play a role, we think demographics had more of an impact because the same thing that occured in 1970s with boomers has been happening with the millenial and gen z demographic group.
The youngest millenials born in 1981 turned 30 in 2011 and this is the age that now serves as the family formation age rather than 20 as in 1970s. The problem is exacerbated with the Gen Z group turning 20 something in the late 2010s and both of these groups are twice as large as the boomer generation at 140 million people.
The problems don’t stop there though because we now have those 60 million boomers retiring and going on social security where in essence, they will receive “free” money and healthcare and put demand on goods and services while not contributing to the labor force.
We think the Fed knows all of this and simply paused rate hikes because they know that inflation is here to stay and they will need leeway and flexibility to continue to raise rates for about the same time inflation exploded in the 1970s which took 6 years to correct.
The only way to find out if we are correct is to stay tuned, stay profitable and stay solvent…