Like nearly everyone else anywhere close to financial markets and the economy we have dedicated a lot of space to covering inflation.

On the one hand, this is both dull and talked to death. On the other, it is difficult subject to avoid while writing a financial newsletter!

It is the very definition of a critical topic. After all, one of the reasons we were so nervous about letting inflation out of the bag in the first place is the fact that an inflationary spiral can be so all-encompassing - politically, economically, socially, even culturally - once it truly gets going.

There isn't much in todays America that unites those sitting in the boardroom and those on the local barstool but inflation is on that very short list.

Thus, it is one of the few nerdy, deep-in-the weeds financial topics that can literally leap off the table and matter not just to regular people but dominate conversations around kitchen tables and at BBQs.

The good news for the rest of 2024 is that even though inflation is still elevated today it is also far less volatile.

It is the volatility that makes it so difficult. It is one thing for prices to be high and rising. It is quite another for them to be high, rising and unpredictable. It causes great difficulty for businesses who can't reliably predict their costs and even more hardship for ordinary people just trying to balance the family finances.

This aspect often gets lost in the media coverage. It isn't so much the high prices per se but rather it is the fear of not knowing where prices are heading that causes the most damage for household budgets and also simple human psychology. Most people don't have balance sheets let alone the time to properly understand how their finances are rapidly changing and certainly don't want to start.

Today, the great news is that inflation is less volatile and so much less interesting. 3-4% annual appreciation isn't awesome but it is at least predictable. We heartily welcome this development here at Pebble HQ!

This also means there is less to talk about. Sure we will have to cover inflation here - especially if it jumps again as it very well might. But it is unlikely that we will see another inflation period like we saw in 2021-2022 for none other reason than the US central bank is now very awake to the danger.

We mention this partially because there are A LOT of online "experts" predicting horrific news about inflation the rest of the year/decade/eternity. This happens a lot in finance as well. People who missed the first trade rush in and constantly talk about how the thing they missed is going to happen again.

They might even be right! But just be careful how much weight you assign to their opinions and analysis.

There is still one phenomenon to discuss however:

The rocket vs the feather dynamic to price appreciation.

This is the - cute but somewhat reductive - way to explain an underrated part of the inflation story.

This is that prices in inflationary spirals often rip higher but then only come back to earth very slowly like a feather. Or more specifically, rising input costs are passed through to prices more quickly than falling input costs.

There are a few reasons that this is true and they don't all need to be nefarious. The biggest one is uncertainty. Companies or even individuals are simply unsure if the lower inflation they are experiencing is true or not. They also aren't sure it will stick around. Once you have experienced that volatility you are psychologically reluctant to get burned again.

"Once bitten, twice shy etc...."

There are nastier aspects as well.

One of the very worst is that businesses are understandably disinclined to give up the new and higher prices they are now setting for their goods and services. It is very difficult to voluntarily surrender higher profits (or even jsut higher revenues) if it isn't hurting your overall sales.

Furthermore, as we have written about before, some companies even prefer profits over revenues! So, they are okay with fewer sales as long as profits stay high.

The psychology of it from the company standpoint is also understandable if regrettable. Very simply, if consumers were able to pay $4 for a gallon of milk this week, they will probably pay it next week and so on....

It isn't simply that you have no choice (everyone needs milk!) but also the fact that demand for milk didn't fall off with the higher price level. No one is (yet) drinking less or opting for cheaper alternatives (you can always drink your coffee black!).

We are still learning about how strong this effect is but it was first noticed in gasoline prices and today, academics and analysts are finding it in sector after sector.

We should hurry to stress that these costs are passed through to everyone: consumers, corporations, the government, you name it. There is very little evidence that the asymmetry it itself asymmetric with who it applies to.

Economists call this phenomenon "asymmetric pass through" and others call it simply "asymmetric price transmission" but the rockets and feathers image is both more memorable and intuitive.

The long and the short of it is that it will take a long time and prices will come down only very stubbornly. Not great!

This is a challenge and not just for hard working people. It is also a political challenge. And not necessarily what you might suspect.

The feather side of the "asymmetry" fuels a large part the phenomenon we see now where inflation is down considerably (and much less volatile) and the economy is still very strong and yet most Americans are still very bummed about the state of the economy and their lives more broadly.​

Inflation has tempered + spending is high + unemployment is low and yet it is harder and harder for many Americans to answer affirmatively that they are better off today than they were 4 years ago.

This is concerning and not just for the Democrats.

The "vibescession" drives a lot of the frustration with the political system more broadly and the important independent institutions that make up our government and our regulatory state. The only thing worse than things not being great is an elite constantly telling you actually you are wrong, things are great.

That is bad for the party in power but it is also bad for the country as a whole.

The lack of trust in elites and institutions is famously already sky high and part of it increases the likelihood of more populism and, just as importantly, foolishly short term policies from both ends of the political spectrum.

And that brings us to.....

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