(What’s Left of) Our Economy: Banking Crisis or Not, More U.S. Inflation’s Ahead

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American Rescue Plan, banking system, banks, baseline effect, Biden administration, CCP Virus, consumer price index, core inflation, coronavirus, cost of living, COVID 19, CPI, election 2024, Federal Reserve, finance, gasoline prices, inflation, interest rates, monetary policy, oil prices, stimulus, {What's Left of) Our Economy

Soon Jews the world over will celebrate the Passover holiday by asking at the ceremonial dinner (seder) “Why is this night different from all other nights?” (The answer is easily Google-able.)

Today, those the world over who follow the economy should ask “Why is this morning’s U.S. consumer inflation report different from all other recent U.S. inflation reports?”

The answer? Because this morning’s report (which takes the story through February) won’t be the biggest development looked at by the Federal Reserve in its upcoming meeting when it decides where it will set the interest rates it controls.

Instead, the biggest development it considers will be the turmoil that’s been breaking out these last few days in the U.S. banking system, whose proximate cause has been the blazing pace with which the Fed has been raising the federal funds rate over the past year.

Not that the new figures for the Consumer Price Index (CPI) will be ignored. In fact, they were probably unspectacular enough (either in a good or bad way), to convince the central bank to either slow down the pace of rate hikes or to pause them altogether, for fear of igniting a devastating financial chaos. But were they really so so-so? Not the way I see it.

Indeed, the data made clear that U.S. prices remain way too high, and are rising way too fast, to please any reasonable person. And that’s true either when it comes to the headline inflation results, or to their “core” counterparts – which strip out food and energy prices supposedly because they’re volatile for reasons having almost nothing to do with the economy’s underlying vulnerability to inflation.

The monthly February headline figure came in at 0.37 percent – below the 0.52 percent recorded in February (and the worst sequential result since last June’s 1.19 percent), but still bad enough to push prices up by nearly 4.50 percent at an annual rate if it continues for a year. And price increases that strong would be more than twice the Fed’s yearly target of two percent – creating a situation that no consumers will enjoy.

Speaking of annual headline CPI, its actual rate as of February was 5.98 percent – a good deal lower January’s 6.35 percent and the best such figure since September, 2021’s 5.38 percent.

But as known by RealityChek regulars, here’s where some baseline analysis is needed. That is, it’s crucial to see whether these annual figures are following those for the previous year that were unusually low or unusually high. If the former, then a yearly inflation rate that may look lofty at first glance might just represent one-time catch up – a reversion to a long-term average from a weak anomalous read.

In fact, in my view (and that of the Fed and the Biden administration), it was catch up that generated the rapid price hikes of the early part of this current high inflation period. The main reason was a rebound from price stagnation attributable mainly to the arrival of the CCP Virus and all the havoc it wreaked on the economy generally and especially on the service sector that makes up most of it by far. So I agreed with then conventional wisdom that at that point, worrisome inflation was “transitory.” (See, e.g., here.)

After early 2021, however, circumstances changed dramatically. Of course the Russian invasion of Ukraine last February drove up gasoline prices – though they’d been rising strongly since the recovery from the devastating first coronavirus-induced economic slump and took another big leg up in late 2020. (See this chart.)

More important was the Biden administration’s continuation of emergency-type stimulus spending well after the pandemic emergency had peaked and a strong economic recovery was underway. The American Rescue Plan Act and other boosts in government spending ensured that consumers at all income levels would long be abnormally cash- and income-rich, and that their resulting spending would give businesses generally a new jolt of pricing power.

And for many months, the changes in the baselines for annual headline and core inflation have strongly supported that case that inflation has become more entrenched.

In this vein, the allegedly encouraging annual 5.98 percent inflation rate for February shouldn’t be seen in isolation. What also matters is that it followed a 2021-22 baseline figure of a scorching 7.95 percent. That’s a clear sign of business’ continued confidence in its pricing power. The baseline figure for that September, 2021 5.38 percent inflation rate was just 1.63 percent – well below the Fed target and a number that points to an economy that was still being held back largely because of a seasonal CCP Virus rebound.

Core CPI paints a bleaker picture even without examining the baseline effect. On a monthly basis, it rose for the third straight time, and the new figure of 0.45 percent was the highest since last September’s 0.57 percent.

As for the annual increase, that registered 5.53 percent. That was a tad lower than January’s 5.55 percent and the best such result since December, 2021’s 5.52 percent. But the baseline for the new February figure is 6.43 percent – considerably higher than the 6.43 percent for Januay. So that’s a powerful argument for a worsening, not improving, core CPI performance. And the case seems to be clinched that the baseline figure for that December, 2021 core inflation rate was a feeble 1.63 percent – well below the Fed headline CPI target.

Even before the February CPI report, I believed that inflation would keep heating up because most consumers still have plenty of cash (and therefore, don’t forget, credit), and because a combination of slowing growth (which, to be fair, we haven’t seen yet), and an approaching election cycle would keep politicians tempted to keep spending levels high in order to prop up the economy and keep voters happy. Moreover, I’ve never bought the argument that the Fed would keep fighting inflation vigorously enough to tighten monetary policy enough to cut growth rates dramatically – much less risk a recession – going into the high political season.

Now with banking system troubles added to the mix, the idea that continued strong interest rate hikes seems completely fanciful – along with any realistic hopes that inflation will soon fall back to acceptable levels.

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(What’s Left of) Our Economy: Contra the Fed, No Disinflation’s Visible in the New Wholesale Price Figures

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consumer price index, consumer prices, cost of living, CPI, Federal Reserve, inflation, PPI, pricing power, Producer Price Index, wholesale inflation, {What's Left of) Our Economy

The U.S. government issued another inflation report today – covering wholesale prices for January – that was not only troublingly hot like yesterday’s consumer price figures, but hot in very similar ways. Specifically, it showed monthly acceleration, and a strong baseline effect (of the wrong kind) in the annual numbers.

Consequently, as with yesterday’s Consumer Price Index (CPI) results, they appear to discredit Federal Reserve Chair Jerome Powell’s belief that the beginnings of disinflation (a slowdown in the rate of price increases, as opposed to actual price decreases) have begun to appear.

As known by RealityChek regulars, the results of this Producer Price Index (PPI) often but don’t always prefigure changes in consumer prices. Of course, companies always want to pass on higher prices to consumers (or to their corporate customers), but have no interest per se in passing on savings to any customers when their costs fall. The exceptions: When they’re striving for growth or market share – at any cost.

Instead, companies’ pricing power depends most importantly on levels of demand for their goods or services. When it’s healthy, pass-through is usually possible whatever their costs are. When demand is weak, it’s much tougher. And as long as consumers in particular are able and willing to spend, PPI reports like today indicate that consumer inflation will remain higher than almost anyone wants, and could well speed up.

The monthly quickening of the PPI took place both in the headline read and its core counterpart – which strips out food, energy, and trade services prices because they’re supposedly volatile for reasons having almost nothing to do with the economy’s fundamental vulnerability to inflation. 

For the former, prices jumped by 0.66 percent on month in January. That was both the biggest increase since last June’s 0.93 percent, and the biggest absolute monthly percentage point swing (from December’s upwardly revised 0.22 percent dip) since peak pandemic-y May, 2022. Since October, these results have been preliminary, so they’ll surely change – but if form holds, not very much.

For core PPI, prices were up 0.59 percent sequentially in January – the worst such figure since last March’s 0.91 percent. It was the biggest percentage point move over December’s (upwardly revised 0.19 percent gain) since last March, too.

Also as with the CPI numbers released yesterday, baseline analysis reveals that both annual January PPI increases are coming off strong increases for the year making clear that businesses believe that they still have lots of pricing power.

On the surface, the annual headline PPI advance of 6.03 percent looks reasonably good. It’s a nice improvement from December’s 6.46 percent, and indeed the best such performance since the 4.07 percent recorded back in March, 2021.

But the January read was coming off a PPI surge between the previous Januarys of 10.18 percent. December’s increase was coming off another high baseline figure: 10.20 percent. It’s somewhat encouraging that the new annual January PPI advance was a good deal weaker than December’s even though the baseline figures remained almost unchanged.

But that March, 2021 PPI increase was coming off a March, 2019-20 increase of a negligible 0.34 percent. In other words, the annual March headline PPI increase represented catch-up from the abnormally low result for 2019-20 that was clearly produced by the sharp economy-wide downturn generated by the CCP Virus. No such catch-up has been taking place in recent months.

So unless you think that a national business community that’s raised wholesale prices by some 10 percent one year and about six percent the following year is shy about pricing power, it’s clear that, at the very least, producer and consumer inflation will remain troublingly elevated for the foreseeable future.

Almost the same trends have unfolded for annual core PPI. The January yearly increase was 4.53 percent, lower than December’s 4.70 percent and the weakest yea-on-year read since March, 2021’s 3.15 percent.

But the January increase followed a previous annual rise of 6.89 percent and the December baseline figure was a comparably torried 7.13 percent. The baseline figure for March, 2021? Minus 0.18 percent. That is, wholesale prices fell between March, 2019 and March, 2020. The CCP Virus-related catch-up effect then is as obvious as the absence of any catch-up nowadays. So is the robust pricing power businesses believe they have.

It’s conceivable, but just barely so, that this picture will change meaningfully by upcoming release of the inflation data preferred by the Fed – the Price Index for Personal Consumption Expenditures (PCE). If it doesn’t, and if a combination of low unemployment and astronomical federal spending keeps most consumers’ wallets and pocketbooks fat enough to support vigorous spending, it’s hard to see how the Fed not only keeps trying to slow the economy by raising interest rates and keeping them “higher for longer,” but steps up its campaign by hiking them faster. And the longer it takes to beat inflation, the worse the desired economic weakening is likely to be.

(What’s Left of) Our Economy: Today’s Lousy U.S. Inflation Report is Worse Than You Think

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baseline effect, consumer price index, core CPI, CPI, energy prices, Federal Reserve, food prices, inflation, Jerome Powell, {What's Left of) Our Economy

The new official U.S. report on consumer inflation in January was so bad that I don’t even have to resort to my usual tack of focusing on the baseline effect to make this case. Not that I won’t mention it at all: It still strengthens the argument that precious little progress has been made in easing the nation’s cost of living crisis.

But the monthly numbers – which spotlight the very latest inflation trends – make all too clear on their own that prices are on the upswing again. And in an especially interesting twist, so does a set of special revisions incorporated into these data.

The new results show that the headline Consumer Price Index (CPI) rose by 0.52 percent sequentially in January. That’s the hottest such figure since last June’s blazing 1.32 percent. Moreover, the increase from December’s 0.13 percent was the biggest monthly jump in absolute terms since last May.

The revisions moreover, demonstrate that inflation has amassed even more momentum than previous thought. Half of the twelve monthly figures were upgraded, including those for the last five. Indeed, December’s widely hailed 0.08 dip from November’s level is now pegged as the 0.13 percent increase mentioned above.

Very similar monthly developments mark the so-called core CPI data, which strip out energy and food prices supposedly because they’re volatile for reasons basically unrelated to the economy’s underlying prone-ness to inflation.

These prices increased by 0.41 percent on month in January – the worst such reading since September’s 0.57 percent and the second consecutive increase. The revisions picture was a litte better than for headline CPI, with the results for only four months getting upgrades, six getting downgrades, and two months staying unrevised. But three of those upward revisions were for the last three months.

The annual figures, of course, are where we see the baseline effect most clearly – how these results stack up against the previous year’s numbers. If that latter figure – the baseline figure – was unusually low, a strong price increase during the following year could well indicate simply that inflation was returning to a long-run normal rate. As I saw it (e.g. here), that was the case early during the recent surge in CPI (and other official inflation measures); hence my belief that it was mainly transitory (as Federal Reserve Chair Jerome Powell famously said during that period).

But if the baseline is relatively high, heated inflation the following-year could well indicate that price rises will be longer lasting – in particular because it could signal that businesses believe they have pricing power. And as I see it, that’s where we’ve stood with inflation more recently – including this morning’s findings.

So it’s true that annual January headline CPI of 6.35 percent was the lowest since October, 2021’s 6.24 percent, and cooler than December’s 6.44 percent. But the baseline for December was a blazing 7.10 percent, and for January, a blazing-er 7.59 percent. Further, the October, 2021 baseline was just 1.17 percent between the previous October’s – an abnormally low rate (and much less than the Fed’s target of two percent) that surely supported the argument for a transitory return to normal to that point in 021. The last two readings reveal prices jumping on top of already troubling increases.

To add insult to injury, revisions pushed the annual headline CPI results for the previous four months

January’s core consumer inflation rate of 5.55 percent was the lowest since December, 2021’s 5.52 percent and better than last December’s 5.70 percent. But the baseline for that latest CPI number was 6.09 percent. For December, 2022 it was that aforementioned 5.52 percent. So the gap between the baseline change was much bigger than the most recent annual improvement. As for the baseline for December, 2021? It was just 1.63 percent – again, below the Fed target.

And the November and December annual core CPI rises have both been revised up, too.

These discouraging inflation results should surprise exactly no one with any knowledge of how the economy works. Economic growth is apparently continuing. Unemployment is low. Wages are falling in inflation-adjusted terms, but massive past stimulus from Washington and continued sky high federal outlays keep filling whatever gaps are emerging in consumers’ personal finances. And as long as Americans act like they’ve got plenty of money to spend, businesses will keep jacking up prices.

(What’s Left of) Our Economy: Why the U.S. Inflation Outlook Just Got Even Cloudier

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CCP Virus, China, consumer price index, consumers, core CPI, coronavirus, cost of living, COVID 19, CPI, energy prices, Federal Reserve, food prices, inflation, Jerome Powell, prices, recession, stagflation, stimulus, supply chains, Ukraine War, Wuhan virus, {What's Left of) Our Economy

If the big U.S. stock indices didn’t react enthusiastically to yesterday’s official American inflation figures (which were insensitively released the very day I had a minor medical procedure), that’s because they were too mixed to signal that consumer prices were finally being brought under control.

Lately, good news on inflation-fighting has been seen as good news for stock investors because it indicates that the Federal Reserve may at least pause its campaign to hike interest rates in order to slow economic growth significantly– and even trigger a recession. That’s because a weaker economy means consumers will have less money to spend and that businesses therefore will find it much harder to keep raising prices, and even to maintain prices at currently lofty levels. And all else equal, companies’ profits would take a hit.

So already softening inflation could convince the central bank that its efforts to date have been good enough, and that its goal of restoring price stability can be achieved without encouraging further belt tightening – and more downward pressure on business bottom lines.

Of course, stock investors aren’t always right about economic data. But their take on yesterday’s figures for the Consumer Price Index (CPI), which cover December. seems on target.

The data definitely contained encouraging news. Principally, on a monthly basis, the overall (“headline”) CPI number showed that prices actually fell in December – by 0.08 percent. That’s not much, but this result marks the first such drop since July’s 0.02 percent, and the biggest sequential decline since the 0.92 percent plunge recorded in April, 2020, when the economy was literally cratering during the CCP Virus’ devastating first wave. Further, this latest decrease followed a very modest 0.10 percent monthly increase in November.

So maybe inflation is showing some genuine signs of faltering momentum? Maybe. But maybe not. For example, that CPI sequential slip in July was followed by three straight monthly increases that ended with a heated 0.44 percent in October.

Moreover, core CPI accelerated month-to-month in December. That’s the inflation gauge that strips out food and energy prices because they’re supposedly volatile for reasons having little or nothing to do with the economy’s underlying inflation prone-ness.

December’s sequential core CPI rise was 0.30 percent – one of the more sluggish figures of the calendar year, but a rate faster than a November number of 0.27 percent that was revised up from 0.20 percent. Therefore, these last two results could signal more inflation momentum, not less.

In addition, as always, the annual headline and core CPI numbers need to be viewed in light of the baseline effect – the extent to which statistical results reflect abnormally low or high numbers for the previous comparable period that may simply stem from a catch-up trend that’s restoring a long-term norm.

Many of the multi-decade strong year-to-year headline and core inflation rates of 2021 came after the unusually weak yearly results that stemmed from the short but devastating downturn caused by that first CCP Virus wave. Consequently, I was among those (including the Fed) believing that such price rises were “transitory,” and that they would fade away as that particular baseline effect disappeared.

But as I’ve posted (e.g., last month), that fade has been underway for months, and annual inflation remains powerful and indeed way above the Fed’s two percent target. The main explanations as I see it? The still enormous spending power enjoyed by consumers due to all the pandemic relief and economic stimulus approved in recent years, and other continued and even new major government outlays that have put more money into their pockets (as listed toward the end of this column).

(A big hiring rebound since the economy’s pandemic-induced nadir and rock-bottom recent headline unemployment rates have helped, too. But as I’ll explain in an upcoming post, the effects are getting more credit than they deserve.)

And when you look at the baselines for the new headline and core CPI annual increases, it should become clear that after having caught up from the CCP Virus-induced slump, businesses still believe they have plenty of pricing power left, which suggests at the least that inflation will stay high.

Again, here the inflation story is better for the annual headline figure than for the core figure. In December, the former fell from November’s 7.12 percent to 6.42 percent – the best such number since the 6.24 percent of October, 2021, and the sixth straight weakening. The baseline 2020-2021 headline inflation rate for December was higher than that for November (6.83 percent versus 7.10 percent), and had sped up for four consecutive months. But that November-December 2020-2021 increase was more modest than the latest November-December 2021-2022 decrease, which indicates some progress here.

At the same time, don’t forget that the 6.24 percent annual headline CPI inflation of October, 2020-2021 had a 2019-2020 baseline of just 1.18 percent. Hence my argument that businesses today remain confident about their pricing power even though they’ve made up for their pandemic year weakness in spades.

In December, annual core inflation came down from 5.96 percent to 5.69 percent. That was the most sluggish pace since December, 2020-2021’s 5.48 percent, but just the third straight weakening. But the increase in the baseline number from November to December, 2021 was from 4.59 percent to that 5.48 percent – bigger than the latest November-December decrease. In other words, this trend for core CPI is now running opposite it encouraging counterpart for headline CPI.

Finally, as far as baseline arguments go, that 5.48 percent December, 2021 annual core CPI increase followed a baseline figure the previous year of a mere 1.28 percent. Since the new annual December rate of 5.69 percent comes on top of a rate more than four times higher, that’s another sign of continued business pricing confidence.

But the inflation forecast is still dominated by the question of how much economic growth will sink, and how the Fed in particular will react. And the future looks more confusing than ever.

The evidence for considerably feebler expansion, and even an impending recession, is being widely cited. Indeed, as this Forbes poster has reported, “The Federal Reserve Bank of Philadelphia’s Survey of Professional Forecasters indicates the highest probability of a recession over the next 12 months in the survey’s 55-year history.”

If they’re right, inflation may keep cooling modestly for a time but still remain worrisomely warm. And the Fed may react either by keeping interest rates lofty for longer than expected – as Chair Jerome Powell has already said – or even raise them faster. 

Nonetheless, although the recession that did take place during the first and second quarters of last year convinced numerous observers that worse was yet to come, the third quarter saw a nice bounceback and the fourth quarter could be even better. So if a downturn is coming, it will mean that economic activity will need to shrink very abruptly. Hardly impossible, but hardly a sure thing.

And if some form of economic nosedive does occur, it could prompt the Fed to hold off or even reverse course to some extent, even if price increases remain non-trivial. A major worsening of the economy may also lead Congress and the Biden administration to join the fray and approve still more stimulus to cushion the blow.

Complicating matters all the while – the kind of monetary stimulus added or taken away by the central bank takes months to ripple through the economy, as the Fed keeps emphasizing.  Some of the kinds of fiscal stimulus, like the pandemic-era checks, work faster, but others, like the infrastructure bill and the huge new subsidies for domestic semiconductor manufacturing will take much longer.

Additionally, some of the big drivers of the recent inflation are even less controllable by Washington and more unpredictable than the immense U.S. economy – like the Ukraine War’s impact on the prices of energy and other commodities, including foodstuffs, and the wild recent swings of a range of Chinese government policies that keep roiling global and domestic supply chains. 

My own outlook? It’s for a pretty shallow, short recession followed by a comparably moderate recovery and all accompanied by price levels with which most Americans will keep struggling. Back in the 1970s, it was called “stagflation,” I’m old enough to remember that’s an outcome that no one should welcome, and it will mean that the country remains as far from achieving robust, non-inflationary growth as ever.  

(What’s Left of) Our Economy: Why Today’s Best Recent U.S. Inflation Report Isn’t Nearly Good Enough

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Biden, consumer price index, core inflation, CPI, energy prices, Federal Reserve, food prices, inflation, Labor Department, {What's Left of) Our Economy

Today the U.S. government delivered the best report on consumer inflation Americans have seen since this past summer. That said, that’s a pretty low bar, and the Consumer Price Index (CPI) figures released by the Labor Department (for November) still leave some big questions unanswered.

The biggest: Do the signs of improvement mainly stem from a major slowdown in the economy? Even assuming (as I do), that bringing price increases way down from current levels must be the nation’s top economic priority, (as I’ve written before, e.g. here) slashing inflation rates by tightening credit enough to kneecap consumer spending (through a combination of stagnant growth, higher borrowing costs, and mounting joblessness) takes no special expertise. And it certainly deserves no particular applause.

As I’ve also written, if that’s the case, then in principle, all else equal, inflation will rise again as soon as growth and all its benefits return to acceptable levels.

But first, the good news, which came in the data on core inflation. Those are the price advances that leave out energy and food, because they’re supposedly volatile for reasons having nothing to do with the economy’s underlying vulnerability to inflation.

Core prices climbed just 0.20 percent sequentially in November – the weakest such result since February, 2021’s 0.15 percent. Moreover, this new core CPI figure marks the first time since the stretch between last December and this past March that this monthly number has improved – which could signal that this measure of living costs is losing significant momentum.

Of course, after this past March, monthly core inflation popped right back up – until it hit 0.71 percent in June. Core inflation rebounded after February, 2021, too. So unless the economy’s current expansion really is winding down, as they also say on Wall Street, this kind of past performance doesn’t guarantee future results.

The headline CPI results weren’t as noteworthy, but the 0.10 percent sequential advance in November did break a three-month streak of accelerating consumer inflation. Even so, it was only the best result since this past July – when these consumer prices actually dipped in absolute terms by 0.12 percent. But right afterwards, the three-month losing streak began, so that’s another reason for holding the applause.

As for the annual results, they continue to be distorted by that baseline effect that should be so familiar to RealityChek regulars. In other words, for both headline and core CPI, November’s yearly increases (like all yearly increases) need to be compared with those of the previous twelve months. If the latter were unusually low, then chances are an encouraging-looking rise could simply represent a reversion to the mean trend. But if they were unusually high, then chances are they’re revealing continuing strong momentum, along with how much more progress is needed before any cost of living crisis can be considered over.

And the comparisons show that for both headine and core consumer inflation, the baseline figures were unusually high. Therefore, although the November annual headline CPI increase of 7.12 percent was better than October’s 7.76 percent, and indeed the best such 2022 result since January’s 7.52 percent, the October figure followed a rise between the previous Octobers of 5.39 percent. The November baseline figure was an even higher 6.83 percent. In fact, that was the fastest increase for the first eleven months of last year. Even more striking, the January 7.52 percent increase was coming off a headline consumer inflation rate of just 1.36 percent – the lowest figure for 2020-21.

The trends in annual core CPI are only slightly different. The November core rate of 5.96 percent was the lowest of this year and a clear improvement over October’s 6.31 percent. But the baseline figure for October was 4.95 percent – a good deal lower than the November counterpart of 4.95 percent that not so coincidentally was the highest for 2020-21. And back in January, the 2022 annual headline CPI rate was coming off a 2020-21 figure of just 1.39 percent – the second lowest for 2020-21.

But maybe the strongest evidence for greeting today’s inflation report cautiously came from President Biden. Although he’s rarely shy about talking up the economy during his administration, he made clear that “he hopes prices will return to normal by the end of next year, if not sooner. But he stressed he cannot make that prediction.”  

 

(What’s Left of) Our Economy: Too Much Irrational Exuberance Today on U.S. Inflation

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consumer price index, core CPI, CPI, Federal Reserve, inflation, interest rates, monetary policy, personal consumption expenditures index, Producer Price Index, {What's Left of) Our Economy

Wall Street is ecstatic about today’s official report on two measures of consumer inflation, and President Biden is pretty pleased, too. Both see improvement in the October results for both overall (headline) inflation, and for core inflation (which strips out food and energy prices supposedly for reasons that have nothing to do with the economy’s underlying inflation prone-ness).

And both evidently believe that this improvement means that the Federal Reserve will start easing off on the interest rate hikes it’s both approved so far and promised in order to bring price increases down from their recent multi-decade-worsts. In other words, if inflation is moderating, the Fed might not have to slow down economic growth and job creation as much as feared in order to restore price stability.

Here’s why I think both are wrong – or at the very least prematurely optimistic. They’re ignoring that baseline effect. If you look at the data in context, you see that the annual increases in both the headline and core readings for the Consumer Price Index (CPI) are both coming off prices rises that were highs for the previous year, and that heated up considerably between September and October.

Specifically, although the year-on-year rise of headline CPI did slow to its weakest rate (7.76 percent) since January, the previous year’s annual October overall consumer price increase was that year’s fastest (6.24 percent). The new yearly annual CPI increase was indeed cooler than September’s (8.22 percent). But that figure was coming off a 2020-2021 rise of just 5.39 percent.

Core inflation displayed a similar pattern. In October, prices of goods and services excluding food and energy rose by 6.31 percent at an annual rate – down from a September increase of 6.66 percent that was the worst such figure since August, 1982 (7.06 percent). But the previous September, core annual inflation was 4.04 percent. The previous October, it was a considerably higher 4.59 percent.

The best interpretation, as I see it? Businesses still have plenty of pricing power, which will keep inflation dangerously high, because consumers still have plenty of spending power.

Such inflation pessimism (especially if the Fed does ease off its tightening policy) is also supported by the monthly headline CPI numbers. Overall prices climbed sequentially by 0.44 percent in October. That was way off the high for this year (March’s 1.24 percent). But it represented the third straight speed up.

The news was much better for core monthly CPI. The October rise of 0.27 percent was the year’s slowest, and down greatly from September’s 0.58 percent.

But that core performance bears careful watching, too, because energy prices in particular tend to influence consumer prices eventually, since energy is a key cost for virtually every good and service produced in America. In fact, month-to-month, energy prices were up 1.8 percent in October after falling 2.1 percent in September.

In that vein, another clue about future inflation rates is coming next Tuesday, with the release of the new producer price report. That measures what companies charge each other for the purchases needed to turn out whatever they provide to consumers and to each other (if businesses are their final market). And don’t forget: The CPI isn’t the Fed’s favorite gauge of inflation. It looks more closely at the price indices for “Personal Consumption Expenditures,” and these October results come out December 1.

These clues, however, even if taken all together, won’t be all that big for inflation-watchers, as they’ll cover just a single month.  As Fed Chair Jerome Powell stated earlier this month, the central bank is going to need to see “a series of down monthly readings,” and much other evidence, before concluding that inflation is “coming down decisively.”  Although he really was behind the curve is foreseeing how prices would shoot up, waiting for the trends over time to start appearing seems like by far the best inflation-fighting approach now.  And why the markets’ reaction to today’s data seems like what one of Powell’s predecessors called  “irrational exuberance.” 

(What’s Left of) Our Economy: New Official Figures Show Continued Blazing U.S. Inflation

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consumer price index, core inflation, cost of living, Federal Reserve, inflation, PCE, personal consumption expenditures index, Producer Price Index, recession, {What's Left of) Our Economy

Today’s new release covering September makes it two straight lousy official reports on the Federal Reserve’s preferred measure of U.S. inflation – the price index for Personal Consumption Expenditures (PCE). At least as bad: The new figures come on top of lousy September reports on the Consumer Price Index and on price increases at the wholesale level (the Producer Price Index).

The latter, of course, usually feeds future inflation at the consumer/retail level as long as businesses retain pricing power – which is clearly still the case because of all the cash households still have to spend due to humongous stimulus legislation and the Fed’s own historically off-the-charts efforts to juice the economy during the CCP Virus era.

The worst result from today’s PCE report came in the annual core numbers. They leave out food and energy prices, (supposedly because they’re volatile for reasons having little or nothing to do with the economy’s fundamental inflation prone-ness), and rose for the second straight month, from 4.9 percent to 5.1 percent. That’s the fastest increase since March’s 5.2 percent.

The best thing that can be said about the other September numbers is that they didn’t rise above multi-decade highs.

Headline PCE inflation stayed at the 6.2 percent it registered for August. It’s down from June’s peak of seven percent, but still way above the Fed’s target rate of two percent.

On a monthly basis, headline PCE increased by 0.3 percent in September and core PCEn by 0.5 percent. Both matched the August rates, too. The overall PCE advance was much better than its peak of one percent (also hit in June). But as recently as July, headline PCE dipped by 0.1 percent. So that actual deflation looks like a mere blip now.

Core PCE reveals a similar pattern. Month-to-month its high came in June as well, at 0.6 percent. In July, it flat-lined but has since rebounded strongly.

At this point, moreover, the only reasonable forecast for the foreseeable future is more towering inflation – and not just because most consumers’ finances are in very good shape. There are also all the new federal boosts to demand in the form of student loan forgiveness, the annual Social Security cost-of-living increase (justified, of course, by high inflation), and now the prospect that the Federal Reserve will indeed chicken out on the inflation-fighting front for fear of tipping the economy into recession. (For the record, I’m surprised at how far down the interest rate hike road the central bank has gone.)

In other words, consumer spending power looks certain to remain strong, and government could well back off from biting the bullet and taming inflation by choking off growth in order to limit that spending. (Serious efforts to employ the other fundamental inflation-fighting tactic, boosting production and therefore the supply of goods and services to close the gap with demand, appear off the table for now as well.) The only big uncertainty that’s left continues to be how long this party can last.      

Glad I Didn’t Say That! Biden Was Wrong From the Start on Inflation

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Biden, consumer price index, cost of living, economy, Glad I Didn't Say That!, inflation

“Americans are squeezed by the cost of living: that’s been true for years, and they didn’t need today’s report to tell them that.  It’s a key reason I ran for President.”

– President Biden, October 13, 2022

 

Annual U.S. inflation rate* the month President Biden declared his candidacy for the White House (April, 2019): 1.88 percent

Latest annual U.S. inflation rate*: 8.22 percent

 

*Headline Consumer Price Index (CPI)

(Source: “Statement by President Joe Biden on the September Consumer Price Index Report,” Briefing Room, Statements and releases, The White House, October 13, 2022, Statement by President Joe Biden on the September Consumer Price Index Report | The White House; Seasonally Adjusted, CPI for All Urban Consumers (CPI-U), Multi-Screen, Data Retrieval Tools, Data Tools, Bureau of Labor Statistics, U.S. Department of Labor, https://data.bls.gov/cgi-bin/dsrv?cu; and “Joe Biden Announces 2020 Run for President, After Months of Hesitation,” by Alexander Burns and Jonathan Martin, The New York Times, Apil 25, 2019, Joe Biden Announces 2020 Run for President, After Months of Hesitation – The New York Times (nytimes.com))

(What’s Left of) Our Economy: Yet Another 40-Year Worst for U.S. Inflation

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Biden administration, Congress, consumer price index, core CPI, core inflation, cost of living, CPI, energy prices, Federal Reserve, inflation, monetary policy, oil prices, OPEC, Social Security, {What's Left of) Our Economy

For a change, the real headline development in my opinion revealed by today’s official report on U.S. consumer inflation (for September) wasn’t in the headline number (the figure that measures prices increases throughout the entire economy).

Instead, it was in the core consumer inflation number – the one that strips out food and energy prices supposedly because they’re volatile for reasons having nothing do with the economy’s fundamental inflation prone-ness.

Last month, the core Consumer Price Index (CPI) rose by 6.66 percent year-to-year. That wasn’t only the second month of speed up in these annual data. It was the worst such result since August, 1982’s 7.06 percent.

But even had this near-forty-year high not been recorded, the new CPI report would have been full of bad news. Contrary to recent claims that America’s cost-of-living crisis has peaked, headline inflation on a monthly basis acclerated for a second straight time, and the 0.39 percent number was the highest since June’s 1.32 percent.

On that same sequential basis, core CPI quickened for the second consecutive month, too, and the 0.58 percent result was also the worst since June (0.71 percent).

There was one bright spot on the consumer price front: Annual headline inflation declerated in September – to 8.22 percent. The slowdown was the third straight, and the best such number since June’s nine percent, but it’s tough to see this trend continuing much longer.

After all, as mentioned in yesterday’s post about the latest official wholesale inflation figures (which in and of themselves signaled renewed price increases that businesses could easily pass on to consumers), there’s no shortage of reasons for thinking that the consumer purchasing power to support such continued business pricing power will remain strong.

Moreover, on top of the aforementioned expansion of food stamp, Obamacare, and veterans’ benefits, and some possible version of student loan relief (pending legal challenges), we just learned today that Social Security recipients will get their biggest (8.7 percent) annual cost of living increase since 1981. All these actions arguably are worthy, but they all add to consumer demand without increasing the nation’s supply of goods and services – a proven recipe for stoking inflation.

And don’t forget that the global oil cartel decided last week to cut production substantially, which can only boost upward pressure on energy prices.

This lastest lousy inflation report underscores what a stunning change has taken place on the cost-of-living front – and how miserably both the monetary policy makers at the Federal Reserve and the fiscal policy makers in the Biden administration and Congress have failed. Not so long ago, Americans were debating how quickly raging inflation would end. Now the big question is how deeply it’s been embedded in the economy.

(What’s Left of) Our Economy: U.S. Inflation Just Rebounded on the Wholesale Level, Too

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Biden administration, consumer price index, core inflation, CPI, Federal Reserve, food stamps, inflation, interest rates, monetary policy, Obamacare, PPI, Producer Price Index, Social Security, student loans, veterans, wholesale inflation, {What's Left of) Our Economy

After today’s official report on producer price inflation in the United States, it’s hard to see how anyone could still genuinely believe that the worst of the recent, decades-high price increases afflicting Americans is past.

In the first place, both versions of the Producer Price Index (PPI) worsened sequentially in September) for the second straight month. And in the second place, these results are likely to generate acceleration in consumer prices (those September figures come out tomorrow) because these “final demand” producer price (also called wholesale price) numbers tell us what businesses charge for the goods and services they buy to create what they sell to consumers.

It’s true that, at some point, U.S. businesses will lose this pricing power because their customers simply can’t afford to keep buying as much. But continuing strong inflation at all levels by definition makes clear that this development isn’t imminent. (Otherwise, price increases would have cooled much faster.)

Moreover, the Federal Reserve’s tighter monetary policy, which makes credit more expensive, isn’t likely for at least several months to slow economic activity enough to moderate inflation. And the Biden administration keeps putting more money in people’s pockets (e.g., in the form of a – scaled back – student loan forgiveness program, a major expansion of food stamp eligibility and Obamacare benefits, and higher spending on veterans benefits). Further, tomorrow Washington could announce the biggest increase in Social Security payments (which are indexed to inflation) in decades.

Overall producer prices rose sequentially by 0.38 percent in September. The monthly increase was the first since June, but keep in mind that it followed a July drop of 0.41 percent and a smaller August decline of 0.18 percent (hence my claim above of two consecutive months of discouraging results).

As with the consumer price index (CPI), the government also releases “core” producer price figures that strip out food and energy prices supposedly because their volatility has nothing to with the economy’s fundamental vulnerability to inflation. And quickening inflation was apparent here, too, with September’s monthly increase of 0.36 percent following an August rise of 0.25 percent and a July bump up of 0.13 percent.

The headline year-on-year PPI increase looked a little better – but only if you forget the baseline effect, which can produce misleadingly high or low results if the preceding year’s readings (in this case) were abnormal in either direction.

The September annual rise of 8.55 percent represented the third straight month of deceleration, and the lowest such number since July, 2021’s 7.83 percent.

But it’s coming off an annual increase the previous September of 8.82 percent. By contrast, this year’s highest annual PPI increase (March’s 11.67 percent number) came off a yearly rise of only 4.06 percent the previous March. That’s less than half as high. Therefore, it’s entirely reasonable to see plenty of still worrisome producer price momentum in that most recent annual data.

As for core PPI, September actually saw an acceleration in the annual pace – from August’s 5.60 percent to 5.66 percent. And although the latest figure is still the year’s second lowest, it’s coming off a September, 2020-21 increase of 6.17 percent. The highest annual PPI result for this year (March’s 7.11 percent), that increase followed one between the previous March’s of a mere 3.15 percent – roughly only half as high.

Between these new wholesale price results and the rapid consumer prices increases revealed in last month’s official report on the consumer inflation measure preferred by the Fed, the case for peak inflation looks weaker than it has for months. And here’s one more reason for doubting that the cost of living crisis will abate much any time soon:  the unlikelihood, at least as I see it, that the Fed will keep tightening monetary policy much longer and risk being charged with throwing the economy into a recession with a presidential election coming up.

Of course, the central bank is supposed to be immune from political pressures (including public opinion). But of course, nothing in Washington is. I’ve actually been surprised that the Fed has persisted in its hawkish stance this long. But the real test of its convictions is still months away.