(What’s Left of) Our Economy: More Consumer Price Pain Signalled by Hot New U.S. Wholesale Inflation Numbers

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baseline effect, consumer price index, core inflation, cost of living, CPI, inflation, PPI, Producer Price Index, {What's Left of) Our Economy

Today’s official government report on U.S. wholesale prices (for May) is a perfect example of why it’s impossible to understand inflation without taking into account the baseline effect – the distortions that can result especially in year-on-year figures from wildly different points of comparison.

Specifically, if one set of annual results for any data series is abnormal (either unusually high or unusually low) that deviation is bound to influence the rate of change for the following year, and produce readings that are easy to misinterpret.

That’s why it’s not particularly important that, on an annual basis, the rate of overall (“headine”) wholesale inflation (as measured by the Producer Price Index, or PPI) has actually slowed slightly since March, or that such slowing has been seen since last November in the core PPI rate. (As with the core Consumer Price Index, or CPI, the core PPI strips out food and energy prices – along with trade services – because they’re volatile for reasons supposedly unrelated to the economy’s underlying inflation “prone-ness”). 

In fact, given the baseline effect plus the fact that both PPIs are seen as strong indications of consumer inflation rates to come — because they measure how much businesses charge each other for the goods and services they turn into final products offered to households and individuals — today’s report almost certainly means that the cost of living will keep soaring for the foreseeable future. For the baseline effect, which for much of last year could be used as an excuse for the robust consumer and producer inflation already being seen then, has been gone for months.

After all, the latest months’ worth of annual wholesale price increases represent comparisons with their results for a stretch in 2021 when these PPIs were already growing worrisomely fast. The increases in preceding months were coming off a comparison period during which these prices were still rising unsually slowly. They were still experiencing the hangover from the brief but sharp 2020 recession induced by the CCP Virus and related lockdowns and voluntary behavior curbs. In other words, a catch-up effect had been at work.

The tables below should make these points clear, starting with the headline annual PPI results by month starting with January, 2021. The right-hand column represents the baseline figure for the left – in other words, the results that month for the previous year. So, for example, the baseline for January, 2021’s 1.60 percent headline annual PPI increase was the 1.97 percent wholesale inflation recorded between January, 2019 and January, 2020. And the baseline figures for the 2021-22 results are the corresponding figures for 2020-21.

Jan 2021: 1.59 percent                  1.97 percent

Feb 2021: 2.95 percent                 1.11 percent

March 2021: 4.06 percent             0.34 percent

April 2021: 6.43 percent              -1.44 percent

May 2021: 6.91 percent               -1.01 percent

June 2021: 7.56 percent               -0.59 percent

July 2021: 7.96 percent                -0.17 percent

Aug 2021: 8.65 percent               -0.17 percent

Sept 2021: 8.78 percent                0.34 percent

Oct 2021: 8.87 percent                 0.59 percent

Nov 2021: 9.88 percent                0.76 percent

Dec 2021: 10.18 percent              0.76 percent

Jan 2022: 10.18 percent               1.59 percent

Feb 2022: 10.52 percent              2.95 percent

March 2022: 11.55 percent          4.06 percent

April, 2022: 10.89 percent           6.43 percent

May, 2022 10.66 percent             6.91 percent

As should be clear, although the annual pace of last month’s PPI inflation (10.66 percent) was a little lower than either April’s 10.89 percent or March’s 11.55 percent, the baseline figure during that period has jumped from 4.06 percent (which historically speaking was already lofty) to 6.91 percent. So there’s obviously explaining the latest figures with the catch up effect. Indeed, using historical standards, the catch up effect ended in February.

The core PPI inflation figures shown in the table below are lower in absolute terms, but the story they tell is otherwise almost identical. As with the first table, the figure in the right-hand column represents the previous year’s comparison point for the figure in the left-hand column.

Jan 2021: 1.79 percent                  1.64 percent

Feb 2021: 2.33 percent                 1.36 percent

March 2021: 3.15 percent             1.00 percent

April 2021: 4.81 percent              -0.09 percent

May 2021: 5.25 percent               -0.18 percent

June 2021: 5.60 percent                0.09 percent

July 2021: 6.01 percent                 0.27 percent

Aug 2021: 6.19 percent                0.36 percent

Sept 2021: 6.14 percent                0.72 percent

Oct 2021: 6.26 percent                 0.90 percent

Nov 2021: 7.04 percent                0.99 percent

Dec 2021: 7.09 percent                1.17 percent

Jan 2022: 6.90 percent                 1.79 percent

Feb 2022: 6.76 percent                2.33 percent

March 2022: 7.14 percent           3.15 percent

April, 2022: 6.78 percent            4.81 percent

May, 2022: 6.74 percent             5.25 percent 

So sure, May’s 6.74 percent annual core wholesale price rises were the best such results since last October’s 6.26 percent. But that latter number came after a baseline year when there was practically no wholesale inflation (0.90 percent) at all. By contrast, the baseline number for May’s PPI increase was more than five times higher (5.25 percent).

At some point, the business cost pressures shown in the PPI will ease to acceptable rates, and consumer cost pressures will follow. But the longer elevated inflation of both kinds lasts, the likelier that beating back these price surges will require policy moves that depress consumer demand enough to produce a recession — possibly a deep one. And today’s PPI report is the latest sign that there’s still lots of momentum behind current U.S. inflation.   

(What’s Left of) Our Economy: America’s Now Definitely Inflation-Nation

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baseline effect, Biden administration, consumer price index, core inflation, CPI, energy, Federal Reserve, food, inflation, prices, recession, stimulus, Ukraine, Ukraine-Russia war, {What's Left of) Our Economy

Today’s official U.S. report on consumer inflation was so bad that even what ‘s being pitched (for example, to a limited extent by President Biden) as kind of goods news isn’t anything close. As has so often been the case in the last year, one big key is looking at the so-called baseline effect. But the new (May) results for the Consumer Price Index (CPI) also highlight a reality that I and many others have been noting – the less-than-meets-the-eye difference between the headline and “core” CPI numbers.

The bad news about inflation is clear enough from the rise in the headline number – which tracks price increases throughout the entire economy. The 0.97 percent monthly increase wasn’t as scary as the 1.24 percent jump between February and March t(he highest since July, 1980’s 1.33 percent), but it was still the biggest since June, 1982’s 1.15 percent price surge.

Similarly, on an annual basis, May’s 8.52 percent overall CPI increase was lower than March’s 8.56 percent. But for all intents and purposes, both months’ results were the worst since December, 1981’s 8.91 percent disaster.

The (modest) ray of light that supposedly shone from the new inflation report came in the core figure – which strips out food and energy prices because they’re supposedly volatile for reasons having nothing to do with the economy’s alleged fundamental vulnerability to inflation.

To be sure, the monthly numbers shouldn’t have been the source of any encouragement. The May 0.63 percent sequential increase in core inflation was the hottest number since last June’s 0.80 percent, and represented the third straight month of acceleration.

Instead, glass-half-full types were pointing to the latest annual core increase. At 6.01 percent, May’s was the lowest since December’s 5.48 percent, and represented the third straight month of deceleration.

But here’s where the glass-half-empty types gain the upper hand. First, as I and – again – many others have observed, although food and energy prices do often move (down as well as up) for reasons largely unrelated to how overheated or not the economy may be. But energy prices in particular profoundly affect the cost of everything Americans make, sell, and buy that needs to be transported. And that means pretty much everything, including services, which typically rely on goods to get to customers. So there’s often an incontrovertible link between headline and core inflation.

Second, both energy and food prices are also often closely related to the economy’s overall levels of demand. And nowadays, they’re bound to keep rising as long as producers can pass them on to their customers. This in turn is the case because the latter can afford to pay more thanks to the unprecedented stimulus funds they received even after the economy was recovering strongly from the 2020 CCP Virus-induced crash,.

Third, there’s that baseline effect. Especially if its monthly rate is slowing, annual core inflation in the six percent neighborhood could be reasonably applauded if the previous year’s rate (the baseline) had been unusually low, or even negative (as it was for most of 2020). But the baseline figure for the latest May annual core inflation rate was May, 2021’s 3.81 percent (according to the latest government figures). That’s nearly twice the rate considered desirable by the nation’s chief official designated inflation-fighter, the Federal Reserve.

None of the ways to reduce this inflation rate way down reasonably quickly is a mystery to anyone influencing U.S. economic policies. Raising interest rates can get rid of a lot of the bloated consumer demand that’s contributed so much to recent price rises. For those emphasizing the Ukraine war’s major role in boosting food and energy prices, there’s the option of pressing for an end to the war sooner rather than later – even if it produces a morally ugly compromise.

But dramatically reducing consumer and business spending power enough to matter inflation-wise could bring on a recession – which the Federal Reserve still apparently believes can be avoided, at least judging from the modest monetary tightening it’s approved so far. And the Biden administration seems wed to letting the shots on ending the conflict to be called by Ukraine — which is so far rejecting the idea of making territorial or any other kinds of significant concessions.

So unless these situations change, the most reasonable conclusion is that inflation will keep raging until soaring prices finally tap consumers out by themselves. As an old adage goes, the likeliest cure for high prices may simply be high prices.

(What’s Left of) Our Economy: Curb Your Enthusiasm About Those New U.S. Inflation Figures

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Atlanta Federal Reserve Bank, consumer price index, core inflation, CPI, economic growth, GDP, gross domestic product, inflation, PCE, personal consumption expenditures index, stagflation, {What's Left of) Our Economy

Don’t get me wrong – any signs that U.S. inflation is cooling are welcome, and some can be found in today’s official report containing data on the Federal Reserve’s preferred gauge of consumer price increases. At the same time, for two main reasons, I’d recommend at least curbing enthusiasm about the inflation outlook.

The first concerns the baseline effect I’ve been writing about since prices began surging early last year. The second has to do with the likely relationship between the new (April) results for the price indexes for personal consumption expenditures (PCE) and the sagging rate of American economic growth.

But let’s first examine the reasons for inflation optimism contained in the new Commerce Department numbers (which are one of two data sets on consumer price trends produced by the federal government, the other being the Labor Department’s Consumer Price Index, or CPI).

The biggest is the steep drop in the monthly overall PCE inflation rate in April. It fell last month to 0.2 percent from 0.9 percent in March. That was the weakest such figure since the 0.1 percent increase in November, 2020 – when the CCP Virus’ first winter rebound was gathering steam, and the torrid economic recovery from the pandemic’s initial arrival earlier that year was slowing dramatically.

Even more impressive, the fall-off between March and April overall PCE inflation (0.7 percentage points) was the steepest since December, 2011 and January, 2012 (0.8 percentage points).

Oddly, though, no change was recorded in the monthly rate of core PCE inflation (which, like its CPI counterpart, strips out food and energy prices because they’re supposedly volatile for reasons unrelated to the economy’s fundamental inflation prone-ness). April’s sequential rise was the same as March’s – 0.3 percent. Still, it’s down from the 0.5 percent neighborhood in which core PCE stayed from October, 2021 and this past January.

The year-on-year PCE inflation rates weren’t devoid of good news, either, but it was less impressive than the latest monthly overall PCE result precisely because of that baseline effect and because of the overall economy’s dreary recent performance.

As known by RealityChek regulars, the annual figures are followed more closely than the monthlies because they show trends over a longer period of time, and therefore are less likely to be thrown off by random short-term fluctuations. As also known by the regulars, the high annual inflation figures of all kinds for much of last year were somewhat misleading because their point of comparison – i.e., their baseline – was the set of annual figures for pandemic-depressed 2020. And these were so unusually low. For many months, therefore, even a simple return to normal price increases was bound to show up as a major jump.

But the baseline for this year’s annual figures is no longer 2020 – when inflation was practically gone and even turned into deflation for a stretch – but 2021, and its artificially high (but still high) inflation rates.

So the slowdown in last month’s annual overall PCE inflation (from 6.6 percent to 6.3 percent) shouldn’t be overlooked. But it’s crucial to keep in mind that it’s coming off an April, 2020-2021 overall PCE increase of an already elevated 3.6 percent. Moreover, that April, 2020-21 rate was not only lofty, but accelerating. It’s March counterpart was only 2.5 percent.

Ditto for the slowdown in annual core PCE inflation from 5.2 percent in May to 4.9 percent in April. It’s certainly better than a speed up! But its baseline figure is last April’s warm-ish 3.1 percent, and that figure was much warmer than March’s two percent even – a pace the Fed views as ideal.

Now for the second reason for caution in cheering the new PCE results: They’re surely coming down because the economy’s growth rate has downshifted significantly. In the fourth quarter of last year, it shot up by 6.9 percent at annual rates after inflation. In the first quarter of this year, the gross domestic product (GDP) actually shrank – by 1.5 percent annualized in real terms. And the pretty reliable forecasters of the Atlanta Federal Reserve Bank believe growth in the second quarter will rebound only to 1.9 percent by the same measure.

Students of the economy call the combination of sluggish growth and strong inflation “stagflation.” Unfortunately, I think that’s the likeliest outcome for America’s foreseeable future being signaled by the new PCE results.

(What’s Left of) Our Economy: No More Baseline Excuses for U.S. Inflation

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baseline effect, CCP Virus, China, consumer price index, core inflation, coronavirus, cost of living, COVID 19, CPI, energy, Federal Reserve, food, inflation, lockdowns, prices, sanctions, supply chains, Ukraine-Russia war, Zero Covid, {What's Left of) Our Economy

As if the new monthly and yearly numbers for March per se weren’t high enough, they were far from the only bad news, or even the worst news, in today’s Labor Department report on its inflation measure – the Consumer Price Index or CPI.

The new data also made clear that the baseline effect is definitely gone — especially for the overall CPI — which means that prices in America are no longer rising at annual rates not seen in decades partly because they were rising so slowly in the pandemic period 2020 and very early 2021.

Now their year-on-year jumps are resulting from their more recent and current momentum. And with much more in the way of surging food and energy costs coming in the next few months due to Ukraine war-related global supply disruptions and anti-Russia sanctions, that means Americans will be contending with sky-high and even hotter inflation rates for the foreseeable future.

The rise and fall of the baseline effect becomes clearest from looking at the annual overall inflation rates by month starting in January, 2021, and comparing them with their counterparts from the year before. (Starting with the January, 2022 figures, the baseline year of course is 2021.)

The admittedly complicated table below shows (from left to right) the originally reported annual inflation figures by month for this period, the revised results, and the same annual figure for that month from the previous, CCP Virus-ridden year. Where only one inflation rate is presented, the original figure has remained unrevised:

Jan. 2021:       from 1.37 percent to 1.36       from 2.47 percent to 2.46

Feb: 2021:      1.68 percent                            from 2.31 percent to 2.32

March 2021:  from 2.64 percent to 2.66        from 1.51 percent to 1.53

April 2021:    from 4.16 percent to 4.15        from 0.34 percent to 0.36

May 2021:     from 4.93 percent to 4.94        from 0.22 percent to 0.24

June 2021:     from 5.32 percent to 5.34        0.73 percent

July 2021:      5.28 percent                            from 1.05 percent to 1.03

Aug 2021:     from 5.20 percent to 5.21        from 1.32 percent to 1.33

Sept 2021:     from 5.38 percent to 5.39        from 1.41 percent to 1.40

Oct 2021:      6.24 percent                             from 1.19 percent to 1.18

Nov 2021:     from 6.88 percent to 6.83        1.14 percent

Dec 2021:     from 7.12 percent to 7.10        from 1.31 percent to 1.28

Jan 2022:      7.53 percent                             from 1.37 percent to 1.36

Feb 2022:     7.91 percent                             1.68 percent

March 2022: 8.56 percent                            from 2.64 percent to 2.66

The baseline effect was strongest between March and July, 2021. That year, the annual overall (or “headline”) inflation rate went from 2.64 percent to 5.28 percent. But the annual rates for those months the year before dropped from 1.51 percent to 1.05 percent. Given that the Federal Reserve’s target rate for annual inflation (which helps determine how loose or tight it will keep the supply of credit to the economy and therefore – roughly – how much growth and job creation will be generated) is two percent (albeit for the slightly different gauge it uses), you can see how weakly prices were rising in deeply recessionary spring of 2020, and how those levels distorted the annual rates for the following year, as the economy returned — choppily — to normal growth. 

But a major baseline effect also shows up between September, 2021 at least through January, 2022. During that period, the annual inflation rates rose fom 5.38 percent to 7.53 percent. Yet their counterparts from the year before dipped from a still low 1.40 percent to 1.36 percent.

Starting in February, 2022, though, signs of a baseline fade began appearing, as the that month’s annual rate increased considerably over the January figure and its 2021 predecessor worsened to its highest level since the previous February – not so coincidentally, just before the virus’ arrival in force.

And last month’s big jump in the annual inflation rate came off a March, 2021 result that was significantly higher than the Fed target, and that also pierced that level for the first time since February, 2020.

The core inflation rate, which strips out food and energy because their price levels are supposed to be unusually volatile for reasons having little to do with the economy’s underlying vulnerability to inflation, shows a similar pattern, but with a recent wrinkle. The table below follows the same format as that for overall inflation, although as you’ll see, the absolute levels generally are somewhat lower.

Jan 2021:        from 1.40 percent to 1.39        2.26 percent

Feb 2021:       from 1.28 percent to 1.29        from 2.36 percent to 2.38

March 2021:  from 1.65 percent to 1.66        from 2.10 percent to 2.12

April 2021     from 2.96 percent to 2.97        from 1.44 percent to 1.46

May 2021:     from 3.80 percent to 3.81        from 1.24 percent to 1.25

June 2021:     4.45 percent                             1.20 percent

July 2021:      from 4.24 percent to 4.20        from 1.56 percent to 1.54

Aug 2021:      from 3.98 percent to 3.96        from 1.70 percent to 1.71

Sept 2021:      4.04 percent                            1.72 percent

Oct 2021:       from 4.58 percent to 4.59       1.63 percent

Nov 2021:      from 4.96 percent to 4.95       from 1.63 percent to 1.64

Dec 2021:      from 5.49 percent to 5.48       from 1.61 percent to 1.60

Jan 2022:       6.04 percent                            1.39 percent

Feb 2022:      6.42 percent                            1.29 percent

March 2022:  6.44 percent                            1.66 percent

Again, from March through July, 2021, the annual core inflation rate increased from 1.66 percent to 4.20 percent. But the comparable figures for the year before decreased for 2.12 percent to 1.54 percent. Also as with the headline inflation numbers, the baseline effect appeared later in the year, too. But it’s lasted longer. From September, 2021 through February, 2022, the yearly core inflation rate accelerated from 4.04 percent to 6.42 percent. For the same period from the year before, however, it sank from 1.72 percent to 1.29 percent.

Yet the new March, 2022 data indicate that the core’s baseline effects are numbered, as annual inflation inched up to a still very high 6.42 percent, but March, 2021’s version rose at a much faster clip – from that 1.29 percent to 1.66 percent. Yes, that’s still well below the Fed target, but the increase was the biggest in relative terms since July, and April, 2021’s annual rate had zoomed up to 2.96 percent – nearly doubling.

A glass-half-full result from the new CPI report came from the monthly change in the core figure. Not only did it tumble all the way from 0.51 percent in February to 0.32 percent. But the sequential decrease was the second straight, and the biggest in relative terms during the entire pandemic period and the level was the lowest for a single month since August’s 0.24 percent.

Unfortunately, Ukraine-related disruptions seem likely to reverse this trend, and this regression could well be reinforced by supply chain snags generated by China’s decision to lock down several enormous cities and industrial centers by responding to a recent rebound in CCP Virus cases with a return to its Zero Covid policies.

Moreover, since energy prices in particular eventually feed into price levels for every U.S. economic actor that uses energy, the headline-core inflation distinction will surely look more academic than ever in the months ahead.

Meanwhile, the red hot monthly headline CPI increase of 1.24 percent in March was the biggest such jump since 2005, and a huge speed-up over February’s 0.80 percent. For me, the big takeaway is that the U.S. economy now clearly faces a danger not only of the Federal Reserve creating a recession by tightening monetary policy enough to bring inflation under the control, but of such tightening producing that recession while still leaving inflation far too high.

(What’s Left of) Our Economy: High Inflation’s No Longer Baseline-y But Getting No Less Puzzling

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baseline effect, consumer price index, core inflation, CPI, energy, Federal Reserve, food, inflation, Russia, stimulus, Ukraine, Ukraine-Russia war, {What's Left of) Our Economy

This morning’s final pre-Ukraine War Labor Department report on U.S. inflation (for February) contained some relief for data geeks: The “baseline effect” for headline inflation that I (and others) have been arguing has kept reported price rises higher than they’d ordinarily be, seems to have come to an end. 

So going forward, these data should stop confusing the inflation picture (which would already have been worrisome enough). That’s because on an annual basis, they’ve partly stemmed from the inflation figures from 2019-2020 and early 2020-21 being uusually low because of the CCP Virus, related lockdowns, and their depressing effect on economic activity and consumer prices.

Not that the nature of inflation will become entirely clear – or that the news on the prices front is becoming remotely good. After all, regardless of how strongly or not the U.S. economy keeps recovering from its pandemic-related ills, headline inflation appears bound to get worse going forward because of the disruptions to global oil and food supplies resulting from the Ukraine conflict – including curbs on purchases of energy from Russia. And these of course are coming on top of the supply chain snags that have pushed inflation up because of the peculiar stop-start nature of the pandemic era economy and its only gradually normalizing aftermath.

The February numbers indicate that the baseline effects are already shrinking for core inflation data, too. These strip out both energy and food costs because they’re seen as unusually volatile for reasons having nothing to do with the economy’s underlying inflation “prone-ness.”

Not that this distinction between headline and core inflation is or ever has been truly clearcut. Energy prices, in particular, strongly affect the costs of virtually everything created or provided by businesses (including food!). So the energy and food components of headline inflation clearly bleed into core inflation.

Even so, deciding the nature of inflation’s main causes matters because they heavily influence the response of the Federal Reserve – which is required by law to help maintain price stability (along with promoting employment). If the Fed judges that today’s inflation is mainly the classic type – consumer demand growing much faster than the supply of goods and services simply because Americans have too much spending power – then it will continue responding, as it has so far. That is, it will keep reducing the massive stimulus it injected into the economy during the sharp virus-induced recession.

Such monetary “tightening” would slow growth (and cool off prices), and even risk another recession. But so far, the Fed seems convinced that’s a risk worth taking in order to bring inflation under control.

But if the central bank changes its mind and assigns much more blame for inflation to serious price shocks in energy and commodities due to the Ukraine conflict, then it will probably keep monetary policy extremely loose, or tighten less and even more gradually than originally planned.

Adequate growth, therefore, could be maintained, but prices could spiral to genuinely dangerous degrees, and inflation’s momentum could strengthen further because both producers and consumers will start behaving as if they expect prices to keep surging.

That headline figure for the Labor Department’s inflation gauge (called the Consumer Price Index, or CPI) – the gauge that includes food and energy prices – saw its biggest relative monthly jump (23.08 percent, from 0.65 percent to 0.80 percent) since October (when it more than doubled). Further, its level in absolute terms was the highest since October’s 0.87 percent.

Core inflation, however, actually slowed down in February – from January’s 0.58 percent increase to 0.51 percent. And the deceleration (12.07 percent) was the biggest since November’s (13.33 percent).

As for the baseline effect, a February fade becomes clear upon examining the latest monthly annual changes in headline inflation with those that came the year before. Let’s start with the March through December, 2021 period, with the 2020-21 monthy figure on the right and the 2019-20 figure on the far right . (March is chosen because that’s the month in 2020 when the virus’ first major economic effects were felt.)

March:    2.66 percent     1.53 percent

April:     4.15 percent      0.36 percent

May:      4.94 percent      0.24 percent

June:      5.34 percent      0.73 percent

July:       5.28 percent      1.03 percent

Aug:      5.21 percent      1.33 percent

Sept:      5.39 percent      1.40 percent

Oct:       6.24 percent      1.18 percent

Nov:      6.83 percent      1.14 percent

Dec:      7.10 percent      1.28 percent

Given that the Fed’s recent annual inflation target has been two percent, you can see how weakly headline prices rose in 2019-20, and why the economy’s return to normal the following year created a catch up effect for prices.

The two monthly figures below show the annual 2021-22 changes in the monthly inflation rates for the first two months of the year (on the right) and for 2020-21 (on the far right).

Jan:       7.53 percent      1.36 percent

Feb:      7.88 percent      1.68 percent

To me, the end of the baseline effect is augured by the newest, February numbers because the 2020-21 headine inflation rate made its closest approach to the two percent target in more than a year, and at the same time, a strong speed up took place in the 2021-22 annual headline rate. And in March, 2021, the annual headline inflation rate blew past the target – reaching 2.66 percent. So the next CPI report (covering March) should make clear that the baseline effect is completely gone.

By contrast, the annual core inflation figures still look pretty baseline-y. In fact, they’re looking increasingly baseline-y. Here’s how the recent annual results by month compare with those for the year before for March through December, 2021. Again, the 2020-21 results are on the right, and their 2019-20 counterparts on the far right:

March:    1.66 percent     2.12 percent

April:      2.97 percent      1.42 percent

May:       3.81 percent      1.25 percent

June:       4.45 percent      1.20 percent

July:        4.20 percent      1.54 percent

Aug:        3.96 percent      1.71 percent

Sept:        4.04 percent      1.72 percent

Oct:         4.59 percent      1.63 percent

Nov:        4.95 percent      1.64 percent

Dec:         5.48 percent      1.60 percent

The pattern here is somewhat different from that of headline inflation, in that the 2019-20 figures generally stayed and moved closer to the Fed’s two percent target through September. But then, they began a retreat, even as 2021-22 rates quickened. And the baseline effect became much more conspicuous in January and February, as the 2020-21 annual rates slowed dramatically while the 2021-22 rates increased markedly.

Jan:           6.04 percent     1.39 percent

Feb:          6.42 percent     1.29 percent

As shown above, annual core inflation bounced back to 1.66 percent in March, 2021. That’s still below the Fed target, but if next month’s CPI report shows a continued speed-up in the annual rate, that would be pretty strong evidence that this baseline effect is gone, too.

Unfortunately, unprecedented baseline-induced inflation confusion seems sure to turn into major energy and other commodity shock inflation confusion – making the Fed’s judgements about why prices keep rising so strongly more important than ever.

(What’s Left of) Our Economy: Those Baseline Effects Keep Distorting the U.S. Inflation Picture

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baseline effect, consumer price index, core inflation, CPI, Federal Reserve, inflation, PCE, personal consumption expenditures index, stimulus, {What's Left of) Our Economy

Earlier this month, my examination of one of the two main official U.S. measures of inflation concluded that even though it showed a recent month-to-month acceleration (especially in January), it was still too early to declare that it was close to spinning out of control, or even being sure to stay at current excessive levels. That was because, as I read these Consumer Price Index (CPI) data, the most important results (the annual figures) were being distorted by a “baseline effect.”

Specifically, the previous year’s inflation rate was so abnormally low (due to the depressing effect on the entire economy of the CCP Virus’ arrival and the lockdowns and behavioral changes it spurred) that any economic return to normality was bound to produce annual inflation rates that were abnormally high in comparison. Moreover, those 2019-2020 inflation rates made clear to me that the baseline effect would be with us through the February figures (which will come out next month).

Today, Washington released the other main set of inflation figures – the price indexes for Personal Consumption Expenditures (PCE). They’re of special interest because they’re the gauge preferred by the Federal Reserve, and the Fed’s reaction to inflation greatly influences how fast or slow the economy grows. 

And even more interesting: The PCE numbers also reveal a continuing baseline effect that’s got another month to run.

Let’s start, as always, with the monthly percentage changes in the overall PCE inflation rate going back to January, 2021:

Jan.             0.3

Feb.            0.3

March         0.6

April           0.6

May            0.5

June            0.5

July            0.4

Aug.           0.4

Sept.           0.3

Oct.            0.6 

Nov.           0.6

Dec.           0.5

Jan.            0.6

The acceleration in this inflation measure is obvious from looking at the first four months of last year. But then it stops. It’s true that some momentum was regained after summer and autumn slowdown, but since October, it’s remained steady. Moreover, recent revisions (downward for October, upward for December) have cancelled each other out.

Since a prime reason inflation is viewed with such alarm is its tendency to feed on itself, a leveling off in the rate of increase indicates that the worst isn’t in store (although it’s crucial to remember that this doesn’t mean that prices have stopped rising – only that they’ve stopped rising at ever faster rates).

Looking even more stable lately have been the “core” PCE monthly inflation rates. These strip out food and energy data because prices in those sectors are considered volatile for reasons supposedly having little or nothing to do with the economy’s fundamental vulnerability to inflation (like weather events, or the policies of foreign cartels). In fact, as shown below, they’ve shown no monthly speed up at all since October, and only the same modest acceleration from an equally modest summer slowdown:

Jan.             0.2

Feb.            0.1

March        0.4

April          0.6

May           0.6

June           0.5

July            0.3

Aug.           0.3

Sept.           0.2

Oct.            0.5

Nov.           0.5

Dec.           0.5

Jan.            0.5

The annual percentage changes by month in the headine PCE inflation rate do show genuine and continued acceleration throughout the year:

Jan.            1.4

Feb.           1.6

March        2.5

April          3.6

May           4.0

June           4.0

July            4.1

Aug.           4.2

Sept.           4.4

Oct.            5.1

Nov.           5.6

Dec.           5.8

Jan.            6.1

But as has been the case for the entire year, the comparable annual PCE rate for the previous year was rock-bottom, as the below 2019-2020 (and for January, 2021, the January, 2020-21 year) statistics show. How do we know they were uusually low? Chiefly because they fell short of even (historically modest) two percent annual increases that the Federal Reserve has long viewed as a desirable inflation rate. The misses, moreover, were substantial:

Jan.            1.8

Feb.           1.8

March       1.3

April         0.6

May          0.5

June          0.9

July          1.0

Aug.         1.2

Sept.         1.4

Oct.          1.2

Nov.         1.2

Dec.         1.3

Jan. 20-21            1.4

Further, as noted above, the previous year’s inflation rate didn’t top two percent until March, 2021, and a further big spurt, which understandably started igniting inflation fears, only came in April. Here are those numbers:

Feb. 20-21          1.6

March 20-21       2.5

April 20-21         3.6

So that’s why I’m arguing that we’ll be seeing an important and distorting baseline effect for at least a month more, and that if the March numbers show no meaningful moderation in the annual inflation rate, that’s a sign of trouble. And this conclusion goes double for April.

The same analysis is warranted by the core inflation data, IMO. Here are those annual percentage changes going back to January, 2021, and extending through last month:

Jan.            1.5

Feb.           1.5

March        2.0

April          3.1

May           3.5

June           3.5

July            3.6

Aug.          3.6

Sept.          3.7

Oct.           4.2

Nov.          4.7

Dec.          4.9

Jan. 20-21           5.2

Again, taken in isolation, the picture they paint looks like worrisome inflation acceleration. But the previous year’s annual figures reveal a considerable baseline effect, too:

Jan.            1.7

Feb.           1.9

March       1.7

April         0.9

May         1.0

June         1.1

July          1.3

Aug.        1.4

Sept.       1.5

Oct.        1.4

Nov.       1.3

Dec.       1.4

Jan 20-21           1.4

As shown below, core PCE inflation began picking up at an annual rate more slowly last year than overall PCE. So in this case, the telltale month looks much more like April than March

Feb. 20-21          1.5

March 20-21      2.0

April 20-21        3.1

The baseline effect clearly isn’t responsible for all America’s recent inflation. The long-time stop-start nature of the CCP Virus-era economy (whose effects are still with us) and related supply chain snags and bottlenecks deserve much blame, too, along with the massive stimulus provided both by super-easy Federal Reserve monetary policies and generous pandemic relief provided by Congress and both the Trump and Biden administrations. But inflation’s failure to keep accelerating even as these approaches continued for much of last year is a major reason for keeping the baseline effect very much in mind – for at least a little while longer

(What’s Left of) Our Economy: U.S. Inflation Still Looks Transitory and Baseline-y – For Now

Tags

baseline effect, CCP Virus, consumer price index, core inflation, coronavirus, COVID 19, CPI, Federal Reserve, inflation, monetary policy, PCE, personal consumption expenditures index, semiconductors, shortages, stagflation, stimulus, supply chain, Wuhan virus, {What's Left of) Our Economy

Earlier this month, we learned from the latest official U.S. jobs report how dramatically revisions can change the picture of the economy’s performance. Today’s official inflation numbers – presenting the Consumer Price Index (CPI) – contained some interesting revisions, too, and they’re enough to keep me in the “transitory” camp on the future of price increases at least a month more – and specifically, as long as the ”baseline effect” will remain in place.

In plain English, this means that I still believe that inflation nowadays– which is unmistakably high by historic standards and painful for so many Americans – results mainly from major distortions in the economy created by the CCP Virus and related regulatory and behavioral curbs. Also affecting inflation’s annual rates of change throughout 2021 and into early 2022: the fact that the previous year’s inflation – the baseline – was so abnormally low. In fact, one of the key revelations of the revisions is that the baseline effect for “headline inflation” (the figure that tries to cover everything) has increased some in recent months, and therefore has played a moderately larger role in pushing up the latest numbers.

First, though, let’s look at the monthly changes in the overall inflation rate going back to January, 2021, along with the revisions (the number furthest to the right):

Dec-Jan:                          0.26 percent  now 0.24 percent

Jan-Feb:                          0.35 percent  now 0.44 percent

Feb-March:                     0.62 percent   now 0.64 percent

March-April:                  0.77 percent   now 0.64 percent

April-May:                     0.64 percent   now 0.70 percent

May-June:                      0.90 percent   now 0.88 percent

June-July:                      0.47 percent    now 0.45 percent

July-Aug:                      0.27 percent    now 0.33 percent

Aug-Sept:                      0.41 percent   unrevised

Sept-Oct:                       0.94 percent    now 0.87 percent

Oct-Nov:                       0.78 percent    now 0.69 percent

Nov-Dec:                      0.47 percent     now 0.58 percent

Dec-Jan:                        0.65 percent

There’s no doubt that a sequential speed-up took place between December and January. But even with the revisions, decelerations took place between October and November, and November and December. In fact, October remains the peak month for sequential inflation.

It’s important to note that these slowdowns in the inflation rate don’t mean that prices are actually falling. Instead, they mean that they’re not rising as quickly. And although that may sound like a pretty weak reason for encouragement, it counts for more because a major reason that inflation is considered so dangerous is that it tends to feed on itself – and actually grow at increasing rates.

So slowdowns are good news, even if they’re not good enough news. Moreover, the revisions for two of the last three months have been downgrades; in other words, since October, on net, headline inflation has been weaker than originally estimated.

Revisions haven’t had the same effect on so-called “core inflation” (which strips out food and energy prices because they’re viewed as unusually volatile for reasons having little or nothing to do with the economy’s supposed susceptability to inflation). But the absolute rates have been lower than those of headline inflation, and the rates of change have fallen on net since October, too.

Dec-Jan:                        0.03 percent   now 0.05 percent

Jan-Feb:                        0.10 percent    now 0.15 percent

Feb-March:                   0.34 percent    now 0.30 percent

March-April:                 0.92 percent    now 0.86 percent

April-May:                    0.74 percent    now 0.75 percent

May-June:                     0.88 percent    now 0.80 percent

June-July:                     0.33 percent     now 0.31 percent

July-Aug:                      0.10 percent    now 0.18 percent

Aug-Sept:                     0.24 percent     now 0.25 percent

Sept-Oct:                      0.60 percent     unrevised

Oct-Nov:                      0.53 percent     now 0.52 percent

Nov-Dec:                     0.55 percent     now 0.56 percent

Dec.-Jan:                     0.58 percent

But the real importance of those baseline effects and revisions come through in the annual inflation data. The table below shows the annual rates of change by month starting again in January, 2021. The left and center columns show the previous estimates and the revisions, and the right column shows the revisions of these rates for the last few months of baseline year 2019-2020:

Jan:                             1.37 percent    now 1.36 percent

Feb:                            1.68 percent    unrevised

March:                       2.64 percent     now 2.66 percent

April:                        4.16 percent      now 4.15 percent

May:                         4.93 percent      now 4.94 percent

June:                        5.32 percent       now 5.34 percent

July:                         5.28 percent      unrevised

Aug:                        5.20 percent       now 5.21 percent

Sept:                        5.38 percent      now 5.39 percent

Oct:                         6.24 percent      unrevised               2019-20 from 1.19 to 1.18

Nov:                        6.88 percent      now 6.83 percent  2019-20 still 1.14

Dec:                        7.12 percent      now 7.10 percent   2019-20 from 1.31 to 1.28

Jan:                         7.53 percent                                     2019-20 from 1.37 to 1.36

The big takeaway: The November and December annual inflation rates were both revised down by non-trivial degrees, and the baseline effects for October, December, and January have gotten bigger (because the annual inflation rates for 2019-2020 for these months have been revised down, too.

As with their monthly counterparts, the absolute annual core inflation rates are lower, the baseline effects aren’t quite as great, but they’re present anyway:

Jan:                        1.40 percent      now 1.39 percent

Feb:                       1.28 percent       now 1.29 percent

March:                   1.65 percent      now 1.66 percent

April:                     2.96 percent      now 2.97 percent

May:                      3.80 percent      now 3.81 percent

June:                      4.45 percent      unrevised

July:                       4.24 percent      now 4.20 percent

Aug:                      3.98 percent      now 3.96 percent

Sept:                      4.04 percent      unrevised

Oct:                       4.58 percent      now 4.59 percent

Nov:                      4.96 percent      now 4.95 percent    2019-20 from 1.63 to 1.64

Dec:                      5.49 percent      now 5.48 percent     2019-20 from 1.61 to 1.60

Jan:                       6.04 percent                                       2019-20 from 1.40 to 1.39

The baseline effect distortion of both sets of inflation figures should end when the February statistics come out (next month). Unless new revisions change the picture? But there are several other reasons inflation may moderate further going forward.

The economy’s widely predicted growth rate for the first quarter of this year is predicted to be wheezing and even negligible. As long as it lasts, much more sluggish economic activity should undercut price increases. (At the same time, what may be in store is stagflation – a punishing combination of weak growth and strong inflation.) The new CPI figures may well persuade the Federal Reserve to tighten monetary policy earlier and more vigorously than currently expected, which should also slow growth. (The Fed’s preferred measure of inflation, called the Personal Consumption Expenditures index, or PCE, will be updated later this month. It usually tracks the CPI pretty closely.) And rising prices seem to have put further economic stimulus off the table in Congress. 

Another (and maybe final?) V-shaped pandemic recovery, prompted by the fading of the Omicron CCP Virus variant, could always overcome all these growth obstacles. So could continuing supply chain snags and shortages – especially in industries like semiconductors, whose products are used in so many products. Or all these uncertainties and wildcards could keep the economy and inflation in a turbulent state, and keep complicating policymakers’ challenges in simultaneously fostering adequate growth and acceptable inflation.       

(What’s Left of) Our Economy: The Transitory Inflation Story Endures

Tags

CCP Virus, consumer price index, core inflation, coronavirus, COVID 19, CPI, energy prices, Federal Reserve, food prices, inflation, Jay Bhattacharya, Jerome Powell, lockdowns, mandates, shortages, stimulus, supply chains, vaccine mandates, Wuhan virus, {What's Left of) Our Economy

Rather than presenting a good news/bad news story, today’s official U.S. figures on one key measure of inflation (bringing the story through December) put into pretty clear focus an important old news/new news story. And its main implication is that the current version of lofty inflation looks considerably different from the standard versions that have hit the nation previously. Therefore, it’s looking more “transitory” (at least in terms of stemming mainly from developments specific to the CCP Virus epidemic) than ever.

This distinction of course matters because evaluating the nature of today’s inflation will greatly influence how American policymakers (especially the Federal Reserve) respond, and how they should respond. If today’s price increases stem from standard sources, then a standard response – tighter monetary policy, less government spending – make sense. If current inflation is distinctive, more austere economic policies stil may be needed for any number of reasons, but inflation-fighting won’t be a strong one.

The new news? The U.S. government tracks two main measures of inflation: Overall price increases, and price increases for “core” goods and services. The latter gauge strips out food and energy prices – because ordinarily they’re supposed to be extraordinarily volatile for reasons mainly unrelated to the economy’s underlying inflation prone-ness.

But today’s inflation data (for what’s called the Consumer Price Index, or CPI), demonstrates that during the virus era, the core price increases have been more volatile than their overall counterparts.

Let me make clear two crucial points right at the outset, though: First, as I’ve written previously, “transitory” (a term used for months but “retired” recently by the Federal Reserve) doesn’t necessarily mean “short-lived.” That’s because the virus itself and its effects may well not be short-lived. Indeed, because of the unusually rapid spread of the Omicron variant, pandemic-related and inflation-fueling economic disruptions could well last for months more.

Second, viewing today’s inflation as transitory doesn’t mean that the Biden administration and Congress may not have made a serious mistake in supporting a major round of economic stimulus earlier this year – and therefore greatly boosting Americans’ spending power while the amount of goods and services remained limited for all sorts of (CCP Virus-related and other) reasons.

At the same time, precisely because the last stimulus bill was explicitly linked to the the pandemic’s effects, because the infusion of new money has been running out, and because President Biden’s Build Back Better bill looks pretty dead in Congress, this fiscal policy mistake’s effects are looking transitory, too.

Don’t forget, moreover, the immense monetary policy support for the economy provided by the Fed. It’s virus-related, too, and yesterday, Chair Jerome Powell made clearer than ever his view that the case for such emergency assistance no longer holds, and that the central bank’s decision to start withdrawing it is firmly on track.

In addition, some of the old news (at least for RealityChek readers) about today’s inflation still holds – and further reenforces the case for “transitory-ness.” And this old news concerns the baseline effects phenomenon – by which unusual results recorded at the beginning of a period of time in which comparisons are made exercise powerful, but intrinsically, misleading results at the end of that period. In this instance, the unusually low annual inflation numbers of 2019-2020 have been bound to play a significant role in generating abnormally strong increases for 2020-2021. (BTW, savvy investors take these baseline effects into account when evaluating stock performance, too. Just Google “easy comps.”)

Nevetheless, even this old news now reflects some of the new news. Meaning that for overall inflation, the baseline effect is fading and will continue to fade for the next two data months. For the core, however, the baseline effect will stay strong through March.

The month-by-month and year-by-year figures for both overall and core CPI illustrate all of these points nicely. First, let’s review the monthly changes in overall CPI for this calendar year:

Dec-Jan:                          0.26 percent

Jan-Feb:                          0.35 percent

Feb-March:                     0.62 percent

March-April:                  0.77 percent

April-May:                     0.64 percent

May-June:                      0.90 percent

June-July:                      0.47 percent

July-Aug:                      0.27 percent

Aug-Sept:                      0.41 percent

Sept-Oct:                      0.94 percent

Oct-Nov:                       0.78 percent

Nov-Dec:                      0.47 percent

That new December figure represents both the smallest such increase since July, and a big slowdown from November. So that’s a noteworthy sign of transitory-ness right there.

Yet on a monthly basis, as shown below, core inflation actually quickened a bit in December:

Dec-Jan:                      0.03 percent

Jan-Feb:                       0.10 percent

Feb-March:                  0.34 percent

March-April:                0.92 percent

April-May:                   0.74 percent

May-June:                    0.88 percent

June-July:                     0.33 percent

July-Aug:                     0.10 percent

Aug-Sept:                    0.24 percent

Sept-Oct:                     0.60 percent

Oct-Nov:                     0.53 percent

Nov-Dec:                    0.55 percent

A closer look, however, shows that the core’s ups and downs have been greater than that for overall inflation, and that was especially true early in the pandemic. From January through April, it skyrocketed from 0.03 percent to 0.92 percent, whereas overall price increases went up more slowly (though still impressively), from 0.26 percent to 0.74 percent.

Similar increase patterns are revealed in the annual overall and core inflation increases, but the volatility trends are somewhat different. First, the overall data:

Jan:                             1.37 percent

Feb:                            1.68 percent

March:                       2.64 percent

April:                         4.16 percent

May:                          4.93 percent

June:                          5.32 percent

July:                           5.28 percent

Aug:                           5.20 percent

Sept:                          5.38 percent

Oct:                            6.24 percent

Nov:                           6.88 percent

Dec:                           7.12 percent

Here the nation has experienced not only accelerating annual inflation, but a fourth straight month of acceleration.

Ditto for annual core inflation:

Jan:                            1.40 percent

Feb:                            1.28 percent

March:                       1.65 percent

April:                         2.96 percent

May:                          3.80 percent

June:                          4.45 percent

July:                          4.24 percent

Aug:                          3.98 percent

Sept:                          4.04 percent

Oct:                           4.58 percent

Nov:                          4.96 percent

Dec:                           5.49 percent

But rather than being more volatile early in the pandemic period, these prices sung the most between last June and September, and during December. Still, if the volatility of overall and core inflation have been in the same ballpark lately, that’s an indication that this most recent burst of inflation has broken the mold.

The baseline effects are also signaling the recent outsized volatility of core inflation. Since it was so unusually depressed early in the first pandemic year 2020, these effects, as mentioned above, will stay prominent in January and February, too. But the baseline effect for regular inflation is already fading and will continue on that path. 

As has been the case for nearly two years now, however, the wild card remains the CCP Virus and now its Omicron variant and even more particularly, government reactions to its stunning transmissability. Moreover, it’s not just the Biden administration that may contribute to inflation-boosting supply chain bottlenecks and shortages due to vaccine mandates, other curbs, and their impact on individual fears and behavior. China’s ongoing Zero Covid policy looms as a major threat, too.     

All of which brings up a point made by Stanford University medical school professor Jay Bhattacharya, a leading public health authority. He’s repeatedly written that “The end of the pandemic is primarily a social and political decision” because although “we have no technology to eradicate the virus,”`the knowhow and strategies for reopening safely and sustainably are already available. If, as I believe, he’s right, then ending virus-induced inflation and making it truly transitory is well within reach, too.  

 

(What’s Left of) Our Economy: U.S. Inflation Still Looking High & (Yes) Transitory

Tags

consumer price index, core inflation, CPI, Federal Reserve, inflation, PCE, personal consumption expenditures index, transitory, {What's Left of) Our Economy

Nearly two weeks ago, in posting about the latest results for the U.S. Consumer Price Index (CPI), I wrote that the new data left the case for viewing current high inflation as “transitory” (to use a word now “retired” by the Federal Reserve) reasonably intact.

The main reason? What statisticians call “baseline effects.” That is, this year’s year-on-year inflation rates are so high at least partly because last year’s CCP Virus-induced inflation rates (the baseline for measuring this year’s prices and their annual changes) were unusually low. Therefore, as the economy has rebounded (however raggedly) from its steep pandemic-caused slump, demand for goods and services and therefore their prices, have been playing catch up.

Today, the U.S. government released the latest figures for another measure of inflation, the price indexes for Personal Consumption Expenditures (PCE). Even though this is the inflation gauge preferred by the Fed (whose monetary policy decisions greatly affect inflation rates), it oddly attracts less attention than the CPI.

But the big takeaway from the new numbers is that they strongly reenforce the baseline effect argument, and the conclusion that today’s strong price increases will end sooner rather than later.

As with the CPI statistics, as of last month, the sequential changes in overall PCE inflation contain some good news, too. Specifically, they show some signs of easing, or at least plateauing. That’s comforting in and of itself since one reason inflation prompts such fear is its potential for feeding on itself and greatly worsening over time. Here are those monthly percentage increases for this calendar year so far.

Jan.             0.3

Feb.            0.3

March         0.6

April           0.6

May            0.5

June            0.5

July            0.4

Aug.           0.4

Sept.           0.3

Oct.            0.7

Nov.           0.6

These figures incorporate two revisions that cancel each other out (September’s initially reported 0.4 percent monthly increase is now judged to have been 0.3 percent, and October’s is now pegged at 0.7 percent instead of 0.6 percent.) But since March, there’s been no net minimal speed-up so far.

The picture looks similar with the so-called core PCE. Like the core CPI, it strips out food and energy costs because they supposedly can be volatile for reasons having little or nothing to do with the economy’s overall inflation prone-ness. Here are its monthly changes for 2020 to date:

Feb.           0.1

March       0.4

April         0.6

May          0.6

June          0.5

July           0.3

Aug.          0.3

Sept.          0.2

Oct.           0.5

Nov.          0.5

October saw an upward revision here, too – from 0.4 percent. But otherwise we see a plateauing – at most – since April.

Now for the annual percentage change figures – the ones that make clear that baseline effect. Here they are, by month, for the current year so far:

Jan.           1.4

Feb.          1.6

March       2.5

April         3.6

May          4.0

June          4.0

July           4.1

Aug.          4.2

Sept.          4.4

Oct.           5.1

Nov.          5.7

Both the October and November numbers represent major acceleration following a slower speed-up since April. And to add (a little) insult to injury, the October annual overall PCE increase was revised up from five percent.

But before deciding that a strong inflationary spiral has now kicked in, take a look at the annual overall inflation percentage changes by month for 2019-2020:

Jan.           1.90

Feb.          1.87

March      1.34

April        0.41

May         0.51

June         0.91

July         1.04

Aug.        1.30

Sept.        1.38

Oct.         1.17

Nov.        1.11

What sticks out to me is that not only did these annual inflation rates crater starting in March (because of the virus-induced downturn). But after reviving (weakly) in the summer and early fall, they sagged again in…October and November! So this year’s strong annual increases for those months surely result at least to some significant extent from that comparison.

And as with the overall CPI annual increases from 2019-2020, these overall annual PCE percentage changes stayed pretty feeble in November and, as shown below, for one and arguably two months afterwards. Therefore, it’s not until March – when, not so coincidentally, the monthly increase finally exceeded the pre-virus rates of January and February, 2021 – that the baseline distortion will be gone.

Dec.          1.29

Jan.           1.40

Feb.          1.63

March      2.45

April        3.58

When it comes to the core PCE, the 2019-2020 absolute numbers are higher, and the October and November sags less pronounced. In fact, the annual rate bounced back up some in November. But it fell again in December, and even further in January, 2021, and stayed at only about half the rate of the previous January until March and especially April.

Jan.           2.71

Feb.          1.91

March      1.70

April        0.91

May        1.00

June        1.13

July        1.30

Aug.       1.50

Sept.       1.57

Oct.        1.42

Nov.       1.65

And just as with the overall CPI, as shown below, the pre-pandemic January and February, 2020 annual inflation rates weren’t topped again till this past March and April. As a result, the baseline distortion could continue here, too, for the next few months: 

Dec.       1.48

Jan.        1.27

Feb.       1.49

March    1.97

April      3.08

As I’ve written previously, indications that inflation has peaked are rightly no comfort to Americans suffering from burgeoning prices, and don’t mean that the cost of living won’t be rising excessively for many more months. But if inflation isn’t actually out of control, and may return to normal by, say, late next year or thereabouts, then the wisdom of the faster tightening of monetary policy announced by the Fed, and of government spending cuts generally speaking, come into question – at least if policymakers are determined to prop up short-term growth.

The trouble, as I suggested in the last CPI post, is that such supports could keep the economy addicted to artificial stimulus and further from genuinely healthy growth based on economic fundamentals than ever – a story that I continue believing ends badly, however surprised I remain that this high-wire act has lasted as long as it has.

(What’s Left of) Our Economy: The Case for Inflation Optimism Survives!

Tags

consumer price index, core inflation, CPI, Federal Reserve, inflation, inflation-adjusted wages, Jerome Powell, Labor Department, real wages, stimulus, transitory, {What's Left of) Our Economy

Call me a cockeyed optimist, but today’s official U.S inflation figures (for November) still leave me uncertain as to how lasting recent strong price increases are going to be. One obvious (at least to me) reason: Whereas the release of the October Consumer Price Index (CPI) figures showed major month-to-month acceleration of inflation, the November results show some easing.

That’s the case, moreover, both for the overall inflation numbers and for so-called core inflation, which strips out food and energy prices supposedly because they can be volatile for reasons unrelated to the economy’s overal prone-ness to inflation (like bad weather or the policies of foreign cartels).

Acceleration was still displayed by the annual results for both inflation gauges. But the speedup between October and November was somewhat slower than that between September and October. And here we get to the second reason for my continued (though tempered) optimism: This year-on-year pickup still looks partly due to baseline effects created by the unusually weak price increases of last year, when the CCP Virus pandemic was holding back economic activity more than this year. In other words, inflation may still be playing catch-up, and even more frustrating, this kind of distortion could affect the inflation figures for a few more months.

So let’s take a look at the data to see the basis for my arguments. First, this year’s monthly increases in overall inflation:

Dec-Jan:                          0.26 percent

Jan-Feb:                          0.35 percent

Feb-March:                     0.62 percent

March-April:                  0.77 percent

April-May:                     0.64 percent

May-June:                      0.90 percent

June-July:                      0.47 percent

July-Aug:                      0.27 percent

Aug-Sept:                     0.41 percent

Sept-Oct:                      0.94 percent

Oct.-Nov:                     0.78 percent

As is clear, the November rise is still high, but it’s down not trivially from October’s rate – which was the fastest since June, 2008’s 1.05 percent.

The same pattern is apparent for core inflation:

Dec-Jan:                       0.03 percent

Jan-Feb:                       0.10 percent

Feb-March:                  0.34 percent

March-April:                0.92 percent

April-May:                   0.74 percent

May-June:                    0.88 percent

June-July:                     0.33 percent

July-Aug:                     0.10 percent

Aug-Sept:                    0.24 percent

Sept-Oct:                     0.60 percent

Oct-Nov:                     0.53 percent

As mentioned, the year-on-year overall CPI continues to accelerate, though November’s speedup was smaller than October’s. Here are those statistics:

Jan:                             1.37 percent

Feb:                            1.68 percent

March:                       2.64 percent

April:                         4.16 percent

May:                          4.93 percent

June:                          5.32 percent

July:                           5.28 percent

Aug:                           5.20 percent

Sept:                          5.38 percent

Oct:                            6.24 percent

Nov:                           6.88 percent

Ditto for annual core inflation:

Jan:                            1.40 percent

Feb:                            1.28 percent

March:                       1.65 percent

April:                         2.96 percent

May:                          3.80 percent

June:                          4.45 percent

July:                          4.24 percent

Aug:                          3.98 percent

Sept:                          4.04 percent

Oct:                           4.58 percent

Nov:                          4.96 percent

But for me, those baseline effects make both annual inflation rates look a good deal less alarming. Here are the monthly year-on-year overall CPI inflation rates for 2019-2020:

Jan:                            2.47 percent

Feb:                            2.31 percent

March:                       1.51 percent

April:                         0.34 percent

May:                          0.22 percent

June:                          0.73 percent

July:                          1.05 percent

Aug:                          1.32 percent

Sept:                         1.41 percent

Oct:                          1.19 percent

Nov:                         1.14 percent

November’s read was the lowest since August, and represents the third straight month of slowdown that year. And as I wrote last month, percentages with “ones” in front of them had last been seen in the summer of 2017, and these were well above 1.50 percent. So yes, the total annual inflation figures for this year have been rising each month, but these percentage change continue to result partly from 2019 rates that were abnormally low.

And those previous annual rates remained abnormally low in December (1.30 percent) and even into January (1.37 percent). So the baseline effect will start fading, but won’t be reduced to insignificance until March (because by then the previous annual rate had hit 2.64 percent).

The same baseline argument holds for core inflation. Here are its 2019-2020 annual rates of change for each month:

Jan:                           2.26 percent

Feb:                          2.36 percent

March:                      2.10 percent

April:                        1.44 percent

May:                         1.24 percent

June:                         1.20 percent

July:                         1.56 percent

Aug:                         1.70 percent

Sept:                        1.72 percent

Oct:                          1.63 percent

Nov:                         1.63 percent

Most of the absolute numbers are higher, but you see the same very low figures starting in April. And if you still doubt that they’ve been out of the ordinary, as also noted last month, these increases had stayed above two percent since March, 2018. Moreover, similar to the overall CPI, the annual baseline for the core won’t pierce that level until spring (in this case, in Apri. Indeed, before then, this baseline’s set to drop even furtherthrough Febuary, as shown here:

Dec:                         1.61 percent

Jan:                          1.40 percent

Feb:                         1.28 percent

March:                    1.65 percent

April:                      2.96 percent

Please don’t get the idea that I’m slighting the seriousness of recent inflation. There are plenty of reasons for Americans to be angry. The particularly high levels of overall CPI indicate that inflationary pressures are concentrated significantly in food and energy – categories that are not only highly visible to consumers, but essential.

In addition, the cumulation effect has to be kept in mind. Whether it comes to monthly or annual inflation rates, when they come down, that doesn’t mean that prices are actually falling in absolute terms. It simply means that they’re rising more slowly – and for most of this year from levels that are high by recent standards. For example, if prices are up one percent sequentially one month and half a percent the next, they’ve risen a total of 1.505 percent in a two-month span alone. That can really add up over time.

Finally, due to the fall in real wages, the typical American is seeing his and her purchasing power and living standards drop. In fact, in addition to issuing the CPI figures, the Labor Department also came out with the inflation-adjusted wage numbers. In November, they declined by 0.45 percent for all private sector workers, and by 0.41 percent for production and non-supervisory workers. (As known by RealityChek regulars, the Labor Department doesn’t monitor wage data for government workers because their pay is set largely by politicians’ decisions, not by economic fundamentals.)

And since January, real wages for the entire private sector are down 2.45 percent, and for latter, down 1.93 percent.

Warnings that inflation tends to feed on itself certainly shouldn’t be discounted. But even though today’s inflation has stayed higher for longer than many leading economists and analysts (like Federal Reserve Chairman Jerome Powell) have expected, the November numbers increase my confidence that the economy is moving closer to its ebbing.  And this progress should be reenforced by the end of stimulus payments individuals and families, signs that the supply chain crisis is (slowly, to be sure) coming to an end, the diminishing likelihood that Congress will pass President Biden’s Build Back Better spending bill, and the Fed’s own decision to reduce the stimulus it’s long been injecting into the economy in the form of bond buying. 

Further, as noted just above, the much-feared wage-price spiral, which fueled damaging inflation most recently in the 1970s, hasn’t taken off.

But a waning of inflation could well be accompanied by some genuinely bad news – involving a waning of growth. And sustaining an economic expansion strong enough to keep employment and wages at healthy levels but that doesn’t depend heavily on artificial government crutches is a test that U.S. leaders haven’t passed in decades.