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3/6 After China joined the WTO in 2001 (red), core GOODS inflation went DEFLATIONARY, at -0.50% for 18 years. Since the end of COVID (blue), core goods inflation averaged 1.82% over the last 6 years. An increase of 2.3%. The deflation pull lower from goods is now over. https://t.co/JFo57fzaZN 4/6 We live in a post-COVID era of deglobalization, strong borders, wars (disrupting supply chains), tariffs, and populism. Result, importing goods deflation has reversed. Ending Russia-Ukraine or the Iran-US wars does not change this chart. https://t.co/rmar71C226 5/6 At the same time, SERVICES inflation has ALWAYS been a problem. Even during the China WTO-era (red) services inflation averaged 2.50% ... ABOVE the Fed’s 2% target. Post-COVID (blue) it is worse! Services inflation is now averaging nearly 4% and remains above 3% range. https://t.co/5Jcs5TqTaZ 6/6 Don’t Mistake Brains for a China Trade Deal There’s an old Wall Street adage: don’t mistake brains for a bull market. Central banks made the same mistake with China. They believed two decades of WTO driven GOODS deflation reflected their own skill. The inability of services inflation to get below their 2% target should have been their warning. They missed it. Now that goods deflation is over, and services inflation is heading toward 4%, they cannot reach their 2% inflation target (unless a recession kills demand). This means 3.5% to 3.75% funds rate is stimulative and only going to add already intolerable inflation (ask the "bottom of the K" if inflation is tolerable). This is what the market has been signaling for two years, as we detailed yesterday. https://t.co/hfHKieHI6F