(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.  

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(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: 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 Got a Bit Better – But it’s Far From Good

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consumer price index, core CPI, core inflation, CPI, energy prices, food prices, gasoline, inflation, PPI, Producer Price Index, recession, {What's Left of) Our Economy

Finally! Some good news about U.S. inflation! Not that it’s incredibly good news. But today’s July results for the Consumer Price Index (CPI) were sure better than June’s awful read.

The news was also somewhat surprising, at least to me, because the official June figures for wholesale inflation – the prices businesses charge each for the goods and services needed to turn out what they sell to consumers – had accelerated some since May. And that type of development in the Producer Price Index (PPI) is usually a sign that these businesses will pass these prices on commensurately to their final customers.

Still, there were two big flies in this mildly encouraging ointment.

First: Yes, overall, or “headline” CPI actually fell on a monthly basis and rose more slowly in July on an annual basis. And yes, “core” inflation (which strips out food and energy prices because supposedly they’re volatile for reasons have little to do with the economy’s fundamental inflation-proneness) rose less than half as fast month-to-month than in June. But on an annual basis the latter stayed at its alarming levels.

Second, the main reason that inflation generally speaking has been slower lately is because the economy is slowing – and may even be in recession. As I’ve explained several times (e.g., here and here), it’s anything but difficult for the Federal Reserve and the rest of the federal government to cool price increases by dampening the ability of consumers and businesses to buy goods and services. And just how loudly should we cheer the lower living standards resulting from those growth-slowing steps?

With these caveats in mind, today’s CPI report showed that headline inflation dipped sequentially in July by 0.02 percent. That’s the first monthly decrease in absolute terms since the 0.06 percent decline in May, 2020 – when the economy was just starting to recover from the first wave of the CCP Virus and the deep lockdowns-induced downturn it triggered. And the July figure was light years better than June’s 1.32 percent increase – the biggest monthly jump since July, 1980’s 1.33 percent.

This progress owes entirely (at least when we’re talking about the major categories of goods and services) to a 4.56 percent monthly drop in energy prices – the first such decline since April’s 2.70 percent and the biggest since the 10.31 percent plunge in April, 2020, while that virus-induced was still with us.

And energy prices weakened in turn largely because the recent sky-high prices for gasoline have led Americans to cut way back on their summertime driving – which has fallen below even pandemic-y 2020 levels, when so many CCP Virus-related travel restrictions remained in place. Indeed, gasoline prices on month sank by 7.71 percent – their biggest such tumble since the 20.80 percent crash dive also in pandemic-y April, 2020. (Don’t forget, though, that global energy prices are also off their recent peaks because growth in the rest of the world is down considerably, too.)

As for core inflation, progress was registered on a monthly basis, too, with these prices rising sequentially in July by just 0.31 percent – much lower than July’s 0.71 percent and the best such performance since last September’s 0.25 percent.

Yet on an annual basis, as indicated above, July core inflation stayed exactly where is was in June: 5.91 percent. And although this pace was the slowest since last December’s 5.48 percent, it also means that progress according to this measure has stopped for the time being.

Can falling energy prices continue, and keep dragging down the headline CPI? The U.S. Energy Department has just weighed in here:

“The August Short-Term Energy Outlook (STEO) is subject to heightened uncertainty resulting from Russia’s full-scale invasion of Ukraine, how sanctions affect Russia’s oil production, the production decisions of OPEC+, the rate at which U.S. oil and natural gas production rises, and other contributing factors. Less robust economic activity in our forecast could result in lower-than-forecast energy consumption.”

In brief, “Search us.”

Will big elements of core inflation, like housing and new vehicles and used vehicles and healthcare, keep stabilizing at current (still historically high) rates or even moderating some? And can this progress continue while a recession is avoided? Those are the questions that need to be answered to get some visibility on future inflation, and figure out how satisifed we’ll be with the results.

In the meantime, look out for the next official release on wholesale prices – which is released tomorrow! 

 

Following Up: Biden’s Belief that Cutting China Tariffs Can Cool Inflation is Doofier Than Ever

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Biden, Biden administration, China, consumer price index, core CPI, cost of living, CPI, Following Up, import prices, inflation, tariffs

More than a month has passed since RealityChek last looked at the question of whether the Biden administration is right in claiming that cutting or eliminating some of the current U.S. tariffs on imports from China can help cool torrid inflation Now some new data releases from the federal government it’s running make clear that this belief has never looked more fact-free.

Those releases – both bringing their stories up to May – are the new figures on U.S. inflation, and the latest statistics on the prices of imports. And they continue to show that, throughout the recent period of super-high inflation, the prices of products Americans have been buying from China have risen much more slowly than the inflation rate both for the set of goods most closely approximating the nature of the nation’s purchases from the People’s Republic (the core rate that excludes food and energy prices), and for the overall imports that most closely approximate those Chinese imports (non-fuel imports).

Here are yearly percentage price increase figures by month for all three of these figures between the month when the annual core CPI began speeding up notably and May.

                               core CPI        non-fuel goods imports      imports from China

Oct. 2021                   4.59                        5.5                                    4.38

Nov. 2021                  4.95                        6.3                                    4.48

Dec. 2021                  5.48                        6.4                                    4.76

Jan. 2022                   6.04                        6.9                                    4.84

Feb. 2022                  6.42                        7.2                                    4.83

March 2022              6.44                        7.5                                     5.01

April 2022                6.14                        7.2                                    4.89

May 2022                 6.01                        5.9                                     4.57

For good measure, here’s how much these three inflation rates have increased altogether since October, 2021:

core CPI:                        30.94 percent

non-oil goods imports:    7.27 percent

China imports:                 4.34 percent

In other words, for the last eight data months, the inflation rate for imports from China has risen by less than half the rate of that for comparable imports from the entire world, and more than seven times more slowly than the core CPI.

Truth to tell, as I’ve written (in the above linked and other posts), the idea that the China tariffs have fueled U.S. inflation at all was always nonsensical even by the degraded standards of the last few years. After all, they represented a one-time cost increase – so they can’t possibly explain why American prices have been rising uusually strongly for months. These one-time increases were imposed in phases between 2018 and 2019 – years before U.S. inflation hit multi-decade highs and began speeding up ever faster from there. And many of the Made in China goods that the Biden administration calls “non-strategic” and for which tariffs therefore are supposedly expendable were never were tariffed to begin with.

In addition, the idea that, given China’s recent behavior, any steps should be taken that would help the economy of the People’s Republic, and in exchange for exactly nothing, is just whacko — at best. 

For many months, most Americans have been telling pollsters they have grave doubts about President Biden’s fitness for office. (Here’s the latest example.) Imagine what they’d think of abilities if it was widely reported that he’s keen on a policy move based on ideas about China tariffs and inflation that are utterly detached from reality.