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

Tags

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.”  

 

Advertisement

(What’s Left of) Our Economy: Peak U.S. Inflation Still Tough to See in Latest U.S. Figures

Tags

Atlanta Federal Reserve Bank, core inflation, core PCE, Federal Reserve, fiscal policy, inflation, monetary policy, PCE, personal consumption expenditures index, {What's Left of) Our Economy

Even for those who don’t put much stock in using baseline comparisons, the latest official report on U.S. inflation – which covers the Federal Reserve’s preferred measure of price changes – there wasn’t much to get excited about..

The strongest evidence optimism that inflation’s peaking in this latest release on what’s called the price index for Personal Consumption Expenditures (PCE) came from the monthly results for core inflation. These strip out the food and energy results because they’re volatile for reasons supposedly having nothing to do with the economy’s fundamental prone-ness to inflation.

The latest number (for October) showed a 0.2 percent sequential rise in prices. That was one of the tamer results for the year, but it followed two straight months of 0.5 percent increases – which were among the highest results of the year. And to add a bit of insult to injury, July’s original monthly flatline figure has been revised up to 0.1 percent.

As for the monthly headline inflation result, that came to 0.3 percent in October. This increase also was one of the year’s lowest, but was the third straight month of prices rising at this rate. So a wait-and-see attitude seems to be the best that’s justified.

The annual PCE data for October was considerably less encouraging, largely because of that baseline effect. Core PCE was up five percent that month – mid-range in terms of this year’s figures. But between the previous Octobers, this inflation gauge jumped by 4.2 percent – to that point, by far the worst result of 2021.

In fact, in September of this year, when core PCE worsened by 5.2 percent, its baseline figure was just 3.7 percent.

In other words, core annual PCE inflation was getting really hot at this point a year ago. And over the course of the next year, it got hotter. And that 5.2 percent annual result for this past September has been revised up, too (from 5.1 percent).

Intriguingly, the headline annual PCE numbers reveal a very similar pattern. The bg difference: The October read of six percent matched the year’s lowest figure (from January). But the previous October annual rate was 5.1 percent – also the fastest increase that year to that point.

The September baseline figure was just 4.4 percent, and the 2022 annual headline PCE increase for that month was revised up itself – from 6.2 percent to 6.3 percent.

The bigger picture isn’t especially encouraging, either. That’s because whatever hints of inflation slowdown may be in the air surely stem from weakening momentum for the economy as a whole. (To be sure, many economists, like the Atlanta Federal Reserve’s crew, keep forecasting solid expansion continuing. But many forward-looking indicators are sending exactly the opposite message.) And as I’ve noted (e.g., here), it doesn’t take a policy genius to end inflation by tightening credit so much that growth and employment get crushed.

Further, what’s worrisome about this demand-centric approach, and continued neglect of boosting the supply of goods and services, is that when the Fed loosens monetary policy once more, or when Congress and the administration reopen the net spending spigots, or both, there will be every reason to expect strong inflation to return.

(What’s Left of) Our Economy: That New Wholesale U.S. Inflation Report was Underwhelming, Too.

Tags

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

This morning saw the release of another official report on U.S. inflation that apparently everyone except me loves. It dealt with wholesale prices – what businesses charge each other to turn out the goods and service they wind up selling to their final customers. Therefore, they tend greatly to influence consumer prices down the line. And my lack of enthusiasm stems largely from the same kind of baseline considerations that bugged me about the latest consumer inflation release that delighted so many.

Not that baseline considerations weren’t my only problem with this latest read on the Producer Price Index (PPI), which covered October.

The strongest reasons for PPI optimism came from the monthly results of core PPI – which strips out food and energy prices supposedly because they change for reasons having little or nothing to do with the economy’s underlying vulnerability to inflation. (Unlike the official consumer price figures, this measure of core inflation also excludes the numbers for a category called trade services.)

October’s headline sequential core producer price increase was 0.17 percent. It was the weakest pace since July’s 0.16 percent, and revisions were big and positive for both September and August. (i.e., they went down.) Moreover, the recent monthly PPI increases are a far cry from those earlier in the year, when they peaked at 0.95 percent in March.

The story wasn’t as encouraging for the monthly headline PPI results. October’s 0.22 percent rise was only the slowest since August, when wholesale prices dipped 0.05 percent. And revisions were minimal. That means that the PPI is now up two months in a row after declining for two straight months. So where does the momentum lie? That’s not entirely clear to me.

And the year-on-year results impressed me even less because the comparisons with the previous year make clear that on this basis, producer inflation has lots of momentum.

Take core PPI. October’s annual increase of 5.38 percent was not only a nice step down from September’s downwardly revised 5.61 percent. It was the most sluggish pace since May, 2021’s 5.25 percent. But between the previous Mays, prices had actually sagged by 0.18 percent – because of the economy’s big CCP Virus-induced downturn. So the May, 2020-2021 number looked to me like nothing more than a return to normal (and in fact, such considerations convinced me for many months that recent price increases would indeed be transitory).

But the October annual PPI increase was coming off an October, 2020-21 spurt of 6.26 percent. By contrast, when annual PPI crested this year, at 7.11 percent in March, the baseline figure was just 3.15 percent – only about half as high. That tells me that businesses last month believed they still had plenty of (inflationary) pricing power despite their great success in charging their customers much more over the previous twelve months.

The headline annual results look very similar, with one notable exception. The October yearly PPI increase of 7.97 percent was both much lower than September’s downwardly revised 8.44 percent and the best such result since July, 2021’s 7.83 percent. But as with the core PPI figures, that increase was coming off a pandemic-y wholesale price decrease of 0.17 percent between the previous Julys.

And when headline annual PPI inflation topped out this year (so far) at 11.67 percent in March, that increase followed an annual rise between the previous Marchs of 4.06 percent. The latest October annual increase follows an October, 2020-21 jump of 8.90 percent – more than twice as high. So that’s another sign that businesses remain awfully confident about their pricing power – and that companies that supply consumers will be faced with major cost increases for months to come.

Moreover, as I’ve pointed out, those consumers still have lots of money to spend, and will receive more in the near-term future. So it’s likely that they’ll keep paying up for the time being however much they may grumble. Until serious signs appear that they’re getting tapped out, keep expecting inflation to stay alarmingly high, too. 

P.S. The next official U.S. inflation report comes out December 1, and it’s the Federal Reserve’s favorite measure of consumer price trends.  Stay tuned!

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

Tags

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.      

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

Tags

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

Tags

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.       

(What’s Left of) Our Economy: So What’s with U.S. Inflation Now?

Tags

baseline effect, Biden, businesses, consumer price index, consumers, core inflation, CPI, energy prices, Federal Reserve, food prices, inflation, PPI, Producer Price Index, {What's Left of) Our Economy

Just my luck! I get invited to an exciting conference in Florida last week, and two days of it took place when the latest U.S. inflation figures, covering retail and wholesale prices for August, came out.

I was able, though, to note in a tweet after perusing them quickly, I couldn’t “do my usual monthly #CPI dive. But when I do, I bet I find that the baseline effect that had somewhat misleadingly boosted 2020-21 y/y #inflation #s is starting conversely to misleadingly dampen 2021-22 annual results somewhat.”

Well, now I’ve had the chance to examine the new Consumer Price and Producer Price Indices (CPI and PPI, respectively), and it turns out I’d have won that bet. And these findings provide ample reason for skepticism that peak inflation is over for Americans.

It may not be likely to spiral up further, as President Biden suggested last night on Sixty Minutes. But the August data indicate that, on an annual basis, just as a good share of the higher increases businesses charged consumers and each other earlier during the current burst of inflation stemmed from statistical quirks that produced artificially hot numbers, the last few months’ year-on-year results are artificially tame because of that statistical quirk working in reverse.

That is, consumer and business prices may stop accelerating, and may even decline slightly from where they are now. But in absolute terms, goods and services will probably remain painfully expensive and keep straining household and company budgets – at least until the Federal Reserve’s inflation-fighting moves or other developments kill enough economic demand (as intended) to destroy most of the pricing power companies presently enjoy.

Sharp-eyed RealityChek regulars will understand that, of course I’m talking about the baseline effect. Specifically, late last year and early this year, much of the  scary-looking multi-decade high yearly price increases could be attributed to the fact that the previous annual inflation numbers were rock-botton low because of the sharp economic downturn and its aftermath created by the CCP Virus’ first wave in the spring of 2020. Because price increases virtually stopped then (and in some months actually fell in absolute terms), the return to the recent norm in year-on-year inflation rates resulted in deceptively high inflation figures.

As chronicled here, e.g., the baseline effect then began fading – signaling that more of the still-worrisome official inflation data coming out of Washington was due to changes in actual economic conditions, and that consequently price increases would have more staying power.

Lately, though, as the second calendar year of high inflation has dragged on, the statistical distortions may be leading to excessive complacency. The reason? What modest dips have been recorded in annual inflation rates are now coming off baseline figures that were already close to historic highs, as opposed to being stuck near zero.

So this tells me that if goods and service providers have been able to raise prices over the past year by, for example, about eight percent on top of the seven percent increases they successfully pushed through the year before, they must be pretty confident that they can keep prices at or near these towering levels until the economy tanks for whatever reason.

And my reading of the numbers bears out this thinking.

Let’s start with the so-called headline CPI figure, which showed an 8.25 percent annual increase in August. That’s the best such performance since the 8.22 percent reported for April. But this latest April year-on-year figure followed a 4.15 percent headline CPI read between the previous April’s. August’s baseline figure was considerably higher – 5.21 percent.

The so-called core CPI read for August wasn’t quite as encouraging, mainly since this measure strips out food and energy prices due to their supposedly unusual volatility. And energy prices in particular are well off their peaks ovewhelmingly because of American drivers’ unwillingness to pay those $5 per gallon gasoline prices that prevailed in late spring into early summer, and because of the major economic slowdowns being seen in China and Western Europe.

Indeed, August’s annual 6.32 percent rise was the highest since March’s 6.44 percent. But the baseline effect means that such inflation was even worse than it looks, for the March annual result followed a core CPI increase of just 1.66 percent between March, 2020 and March, 2021. The August number followed a previous annual surge of 3.96 percent – more than twice as strong.

The “reverse baseline effect” has been even more dramatic for the Producer Price Indices. August’s annual wholesale inflation mark of 8.69 percent was the best for the entire year, and decidedly lower both than July’s 9.78 percent and way weaker than the recent peak of 11.67 percent reported for March.

That torrid March pace, though, followed a 2020-21 increase of 4.06 percent. The new August inflation rate comes on the heels of an 8.58 percent PPI worsening between August, 2020 and August, 2021. Even worse, that 2020-21 percent producer prices inflation rate was a striking example of catch-up. From August, 2019 to August, 2020, wholesale prices fell in absolute terms by 0.17 percent. That can only mean that powerful momentum still lies behind these producer prices.

The same story has played out for core producer prices. This August annual result – 5.61 percent – was also the year’s best. And not only was it much better than the peak number of 7.11 percent in March. It represented the fourth straight decrease.

But that March core PPI result followed a 3.15 percent annual increase in these prices between the previous Marches. The baseline figure for this August’s result was 6.19 percent – as with the headline PPI data, nearly twice as high.

This is why the strongest argument that peak inflation has been hit comes from the month-to-month numbers. For headline CPI, prices edged up sequentially in August by just 0.12 percent. Although that’s a slightly worse performance than July’s 0.02 percent monthly decrease, it’s a veritable nosedive from this year’s highest figure – June’s 1.32 percent.

If you believe, with fall and winter just around the corner and the Ukraine War still disrupting global oil and gas trade and supplies that the energy prices paid by U.S. consumers will keep falling at the August monthly rate of five percent, you’ll be optimistic about core CPI. If you have your doubts…not so much.

The monthly core CPI increases have fluctuated less than the headline, and generally have been lower in absolute terms. But August’s 0.57 percent sequential increase was actually stronger than July’s 0.31 percent, and not much slowing is evident this year in this inflation measure.

The monthly PPI figures look more peak inflation-y – especially since when businesses have to pay higher prices for the goods and services their operations need, they do their darndest to pass these higher costs on to consumers. At the same time, as I’ve noted in posts on tariffs and inflation, the converse can’t be counted on. Businesses generally won’t give consumers a price break even when their own costs decrease unless demand slacks off, too.

All the same, even though energy is mainly responsible, it’s important that in August, headline PPI weakened sequentially for the second straight month – sinking by 0.13 percent. As with core CPI, core PPI rose faster on month in August (0.23 percent) than in July (0.14 percent). But these last two figures were two of the year’s best.

Still, in line with my oft-stated position that data over longer time periods is more reliable than data over shorter time periods, I’m putting more stock in the annual figures – again, until and unless the economy slows significantly or tips into recession.  And they’re making clear that the nation faces a near-term future f historically and troublingly high prices, if not continually soaring prices,    

(What’s Left of) Our Economy: Are High Prices Starting to Cure Wholesale Inflation, Too?

Tags

consumer inflation, consumer price index, consumer prices, core inflation, core PPI, cost of living, CPI, energy, energy prices, inflation, living standards, PPI, Producer Price Index, productivity, recession, wholesale inflation, wholesale prices, {What's Left of) Our Economy

In Wednesday’s post, I wrote that I was somewhat surprised about the new (and somewhat encouraging) official U.S. data for consumer inflation in July because June’s figures for what’s often called wholesale inflation were so bad. Because when the prices businesses charge each other to turn out the goods and services they sell, they typically compensate by passing these higher costs on to consumers.

But I actually shouldn’t have found those latest Consumer Price Index (CPI) numbers so unexpected. As I’ve pointed out before (e.g., here) such higher costs can be passed along only if consumers go along. So I should have recognized the better (but still far from good) CPI results as a sign that consumers are starting to balk – by cutting back their spending to some extent.

And significantly, yesterday’s official Producer Price Index (PPI) results for July suggest that businesses themselves began protesting higher prices and cutting back on purchases of their own inputs. That is, they may represent another example backing the adage that the best cure for high prices is high prices. 

In fact, in all the important ways, the new figures for both “headline” producer inflation and its “core” counterpart (which strips out energy and food prices supposedly because they’re volatile for reasons having little at best to do with the economy’s fundamental vulnerability to inflation) strongly resembled those for consumer inflation.

Both the headline and core PPI indices barely rose sequentially (reflecting a bit of “price rebellion,” and worsened on annual bases at a pace that was the slowest in many months, but still alarmingly high in absolute terms. Further, as with the CPI, the big reason for this improvement was the drop in energy prices. And both annual CPI and PPI rates remain worrisome because they’re coming off results for the previous year that were also historically torrid.

One prime indicator of how dramatically energy has affected these results comes from the month-to-month headline PPI numbers.

By this measure, producer prices sank by 0.50 percent (yes, “sank” – didn’t just “rise more slowly”) in July– the first such drop since April, 2020 (1.27 percent) when the first wave of the CCP Virus was wreaking its maximum damage on the economy. And this milestone followed a June monthly increase of 1.01 percent. The percentage-point swing between these two figures (1.51) was the greatest on record (though to be fair, this data series only goes back to late 2009).

The evidence for energy’s leading role? The July sequential fall-off of 8.96 percent (the first such decline since last December’s 1.42 percent and the biggest since since the 16.85 percent nosedive in peak pandemic-y April, 2020) came on the heels of June’s 9.41 percent increase – the biggest since June, 2020’s 9.99 percent, as the economy was recovering rapidly from that first virus wave, related lockdowns and other mandated restrictions, and voluntarily reduced activity. In addition, the percentage-point swing of 18.37 was the biggest since the 18.40 shift between the April, 2020 energy price crash and the May, 2020 rebound.

As for core producer prices, they crept up by just 0.15 percent on month in July. That’s the smallest such increase since last December’s 0.17 percent increase. And they displayed little volatility, as the 15 percentage-point difference between June’s rise of 0.32 percent and July’s was exactly the same as that between the June advance and May’s of 0.47 percent.

The annual PPIs tell a similar story of energy price dominance.

Headline producer inflation was up 9.69 percent on a year-on-year basis in July – the lowest such increase since last October’s 8.90 percent. And percentage-point difference between the July annual decrease and June’s of 11.25 percent (1.56) was the biggest since producer prices strengthened by 0.36 percent on an annual basis in March, 2020, as the virus arrived in the United States in force, and then weakened by 1.44 percent in April (a 1.76 percentage point difference).

And once again, energy prices were the big driver.

In July, they jumped 27.59 percent year-on-year. But even that blazing pace was dwarfed by June’s 53.54 percent annual surge – the biggest on record (again, going back only to late 2009), and well ahead of the previous all-time high of 47.71 percent in April, 2021 (a figure strongly bolstered by the baseline effect, since in peak pandemic-y April, 2020, annual energy prices crashed by 30.20 percent.

The percentage-point gap between the June and July results were the widest ever, too – 25.95. The previous record was the 24.56 percentage point difference between that record 47.71 percent annual spurt increase in April, 2020 and the previous month’s rise of a relatively modest 23.15 percent. 

Since it doesn’t include energy prices, annual core PPI’s ups and downs – like those of monthly wholesale inflation – have been pretty tame in comparison.

The July increase of 5.75 percent was the best such performance since June, 2021’s 5.60 percent. And the annual rate of increase has now slowed for four straight months.

July’s annual core PPI rise was also an impressive 0.82 percentage points less than the June figure of 6.38 ercent. But that gap was only the biggest since May, 2020’s 0.62 percentage-point difference over the April results.

This relatively gradual drop in core PPI on a yearly basis (which RealityChek regulars know is a more reliable gauge of the trends in the monthly numbers because the longer timespan measured smooths out inevitably random short-term fluctuations) is the most compelling evidence that headline producer and consumer prices will remain worrisomely high for the foreseeable future.

This scenario isn’t inevitable. Maybe Americans can count on energy prices continuing to decline month-to-month long enough to bring annual inflation rates down in absolute terms. And maybe even they don’t, high energy prices won’t start boosting prices throughout the rest of the economy. But those developments can only be reasonably expected if consumer and business spending weakens enough to produce sluggish overall economic growth and even a recession.

Such a downturn is probably the price the nation has to pay to extinguish inflationary fires. The big problem is that, without a serious focus on reversing the long and possibly worsening U.S. slump in productivity growth, other than relief from the current cost of living crisis, the public – and especially the poorest Americans – probably won’t receive any major and solidly grounded living standards payoff from such a victory.

(What’s Left of) Our Economy: U.S. Inflation Just Got a Bit Better – But it’s Far From Good

Tags

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! 

 

(What’s Left of) Our Economy: Another Dreadful U.S. Consumer Inflation Report

Tags

Commerce Department, consumer price index, consumers, core inflation, cost of living, CPI, demand, energy, Federal Reserve, food, inflation, Labor Department, monetary policy, PCE, personal consumption expenditures index, prices, supply chains, Ukraine War, Zero Covid, {What's Left of) Our Economy

Optimism about U.S. inflation took another blow yesterday morning – though it shouldn’t have been unexpected – with the release of the latest data on the Federal Reserve’s favorite measure of price changes. I said “shouldn’t have been unexpected” because, as Fed Chair Jerome Powell and others have noted, this gauge and the higher profile Consumer Price Index (CPI) put out by the Labor Department normally track each other pretty closely over the long run, and those CPI results were deeply discouraging.

Nonetheless, latest results from the Price Indexes for Personal Consumption Expenditures (PCE) monitored by the Commerce Department matter because they strongly confirmed the latest CPI figures – which were pretty awful – starting with the month-to-month changes for the entire economy.

In June, headline PCE inflation shot up sequentially by a full one percent – much faster than May’s 0.6 percent and indeed the fastest rate not only throughout this latest high-inflation period, but the fastest since it increased by one percent in September, 2005.

But another observation should make even clearer how unusual that monthly headline increase was. The Commerce Department has been keeping these data since February, 1959. That’s 749 months worth of results through last month. How many times has monthly headline PCE inflation been one percent or higher? Twelve. And the all-time record is just 1.2 percent, hit in March, 1980, and February and March, 1974.

The annual figures were no better, and RealityChek regulars know that they’re more reliable than the monthlies because they measure changes over a longer time period, and therefore smooth out short-term fluctations.

June’s 6.8 percent rise was the strongest of the current high inflation era, and a significant pickup from May’s 6.3 percent. And it looks even worse when the fading baseline effect is taken into account. The June yearly jump in headline PCE came off a June, 2020-21 increase of four percent. So that year’s June PCE rate was already twice the Federal Reserve’s two percent annual inflation target.

By comparison, headline PCE this March was only a little lower than the June result – 6.6 percent. But the baseline figure for the previous March was only 2.5 percent. That rate was still higher than the Fed target, but not by much. So arguably unlike the price advances of June, this March’s inflation reflected some catching up from price increases that were still somewhat subdued due to the economy’s stop-go recovery from earlier during the pandemic.

Core PCE was lower by both measures, because it strips out the food and particularly energy prices that have spearheaded much headline inflation, and that are excluded supposedly because they’re volatile for reasons having little to do with the economy’s fundamental vulnerability to inflation. But here the monthly figures revealed new momentum, with the June seqential increase of 0.6 percent twice that of May’s 0.3 percent, and the highest such number since May and June of 2021.

Before then, however, core inflation hadn’t seen a monthly handle in the 0.6 percent neighborhood since September and October of 2001, which registered gains of 0.6 and 0.7percent, respectively.

On an annual basis, June’s core PCE increase of 4.8 percent was slightly higher than May’s 4.7 percent, but well below the recent peak of 5.3 percent in February. But the baseline effect should dispel any notions of progess being made. For June-to-June inflation for the previous year was 3.5 percent – meaningfully above the Fed’s two percent target. Core annual PCE inflation for the previous Februarys was just 1.5 percent – meaningfully below the Fed target.

As with most measures of U.S. economic perfomance, an unprecedented number of wild cards that can affect both PCE and CPI inflation has rendered most crystal balls (including mine) pretty unreliable. To cite just a few examples: Will China’s Zero Covid policy keep upending global supply chains and thus the prices of Chinese exports? Will the ongoing Ukraine War have similar impacts on many raw materials, especially energy? Will the Federal Reserve’s tightening of U.S. credit conditions per se bring inflation down significantly in the foreseeable future by dramatically slowing the nation’s growth? Will high and still soaring prices, coupled with vanishing savings rates, achieve the same objective if the Fed’s inflation-fighting zeal wanes? Or will the still huge amounts of money in most consumers’ bank accounts along with continuing robust job creation keep the demand for goods and services elevated for the time being whatever the Fed does?

Here’s what seems pretty certain to me: As long as that consumer demand remains strong, and as long as producer prices keep jumping, businesses will pass these rising costs on to their customers and keep consumer inflation worrisomely high. That seemed to be precisely the case in the last two months, with a torrid May read on producer prices being followed by the equally torrid June consumer inflation reports. So unless this wholesale inflation cooled a great deal this month, I’d expect at least another month of red hot consumer inflation. That producer price report is due out August 11.