(What’s Left of) Our Economy: A Doubly Bad New U.S. Inflation Report

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consumer inflation, consumers, cost of living, election 2024, Federal Reserve, inflation, PCE, personal consumption expenditures index, {What's Left of) Our Economy

Today’s third official report on U.S. inflation in April (contained in this release) was bad in no fewer than two ways. First, it confirmed the results of its two predecessors, which showed that price increases in America have begun to speed up again after months of some evidence (never terribly convincing IMO) of slowing. Second, the numbers presented in this morning’s release were those for the price index for personal consumption expenditures (PCE) – the preferred gauge of the Federal Reserve, which is Washington’s prime inflation-fighting agency.

So these discouraging statistics seem most likely to convince the Fed to continue its policy of raising interest rates high enough to weaken inflation by weakening U.S. economic growth – which risks creating a recession. Previously, the central bank was strongly hinting that it might pause in the hope that it’s already slowed economic activity enough to tame prices without producing an actual economy-wide slump (that is, engineering a “soft landing”).

Now, justifying a pause has become especially difficult because each of the four inflation measures presented in the PCE report got worse.

Headline month-to-month PCE jumped from an unrevised 0.1 percent in March to 0.4 percent and snapped a two-month string of declining sequental increases. Moreover, that April rise was the biggest since January’s 0.6 percent.

The annual headline PCE figures displayed the same trend but revealed additional bad news as well. April’s 4.4 percent result also snapped a two-month easing streak, and was the hottest annual PCE read since January’s 5.4 percent. The extra bad news? Revisions to these numbers have been slightly negative – meaning in this case that for January and February, annual headline PCE is judged to have been a bit worse than originally reported.

April also saw the end of a two-month stretch of improvement for core PCE, which strips out the results for food and energy costs because they’re volatile for reasons having little or nothing to do with the economy’s fundamental vulnerability to inflation.

The April rate of 0.4 percent was also the highest since January’s (0.6 percent), and revisions have been negative, too.

As for annual core PCE, April’s 4.7 percent pace represented an uptick from March’s 4.6 percent. But contrary to the fluctuations in the other PCE measures, annual core PCE has been stuck in the 4.6 percent-4.7 percent range for every month since last November.

By now, the main reason for all this inflation stickiness should be no mystery at all: Consumers keep spending robustly. Indeed, as always the case, today’s PCE results came along with data on personal consumption. And even when price increases are taken into account, it rebounded in April from a 0.2 percent dip in February and a flatline in March to a 0.5 percent advance.

As a result, since businesses aren’t charities, they’ll keep raising prices as long as their customers make clear their willingness to pay.

No one can doubt that the economy and therefore consumers face some important headwinds. The full effects of the Fed’s economy-slowing steps – which include both interest rate hikes and cuts in the money supply – usually take many months to appear. By all indications, the banking system weaknesses first revealed by the collapses of California-based Silicon Valley Bank and New York City’s Signature Bank are beginning to tighten the credit spigots on consumers and businesses alike. And all that money pumped into consumers’ pockets by the various government stimulus measures passed since the CCP Virus struck the nation in force are running out.

But these funds remain considerable by any realistic standard. Employment levels keep rising past their pre-pandemic peaks, so wages and salaries keep providing households with new cash flow. And even if President Biden accepts every single one of the House Republicans’ budget proposals in the current debt ceiling negotiations, federal discretionary spending (let alone outlays for entitlements like Social Security and Medicare) would continue increasing for most of the 10-year period that will be covered by a final deal. With inflation tailwinds like these blowing, too (supplemented by approaching election year pressures to keep consumers – and therefore voters – happy), I still can’t see how worrisomely high prices and price increases don’t start becoming U.S. economic features, not bugs,

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(What’s Left of) Our Economy: Signs That Inflation Might Have Stopped Cooling

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banking crisis, banking system, baseline effect, consumer price index, cost of living, CPI, election 2024, Federal Reserve, green manufacturing, inflation, infrastructure, monetary policy, PPI, Producer Price Index, semiconductors, stimulus, {What's Left of) Our Economy

This morning the Labor Department reported U.S. consumer inflation figures that investors, after an initial burst of enthusiasm, now (as of mid-day trading) seem to recognize as pretty disappointing.

For when it comes to the new April results for the Consumer Price Index (CPI), there isn’t even any need to use baseline analysis – which adds crucial context to the annual numbers – to identify significant reasons for pessimism. That’s because both measures showed monthly acceleration.

Headline CPI rose in April sequentially by 0.37 percent. The rate of increase quickened for the first time in three months, and the difference between it as March’s 0.05 percent (the best such figure since last July’s 0.03 percent dip) was the greatest in absolTute terms since the 0.52 percentage point jump between last April and May.

Core CPI strips out food and energy prices because they’re volatile supposedly for reasons having little to do with the economy’s overall prone-ness to inflation. In April, it didn’t speed up over March’s pace as much as headline inflation, but it still resumed climbing faster after slowing down for the first time in four months. Plus, the 0.41 percent sequential rise was one of the higher rates lately.

The story for April’s annual CPI increases was better, but just marginally so. And using baseline analysis (which entails comparing back-to-back annual increases in order to determine whether inflation is genuinely gaining or losing momentum over these longer periods) barely brightens the picture.

April’s slowing annual headline CPI was the tenth straight, and brought the rate to 4.96 percent – it’s lowest since May, 2021’s 4.92 percent. The sequential improvement over March’s 4.99 percent annual increase was pretty skimpy, though.

And now for the baseline analyis. Both the March and April, 2021-22 annual CPI increases were well north of a torrid eight percent. So businesses feeling free to raise prices another nearly five percent on top of that indicates continued real confidence in their pricing power.

That’s especially apparent upon realizing that the baseline figure for May, 2021’s 4.92 percent annual inflation was just 0.23 percent – because it stemmed from early in during the devastating first wave of the CCP Virus pandemic, when the economy was still such deep trouble and consumer demand so weak that businesses on average had almost no pricing power.

It’s also discouraging that between this March and April, annual CPI fell less (0.03 percentage points) than it fell between last March and April (0.28 percentage points). If businesses were losing significant pricing power between last spring and this spring, we’d have been the opposite results.

No baseline analysis is needed to show how unexciting the new annual core inflation figure is. At 5.60 percent in April, it was (a bit) lower than March’s 5.60 percent. But with January and February having come in at 5.55 percent and 5.53 percent, it’s plainly stayed in the same neighborhood so far all of 2023.

As has been the case in recent months, the future of U.S. consumer inflation is still going to be determined by a free-for-all among:

>the Federal Reserve’s determination to force inflation down further, and even risk of recession, by growth-slowing monetary policy moves;

>the ongoing growth impact of Fed measures already taken;

>the countervailing effect of more cautious bank lending resulting from the turmoil in the ranks of small and mid-sized institutions;  

>the economic strength that can be expected from the amount of fuel available for consumer spending (despite higher borrowing costs) that’s coming from very high employment levels, and from remaining CCP Virus stimulus funds in households’ bank accounts; 

>major, stimulative government spending that’s starting to flow in to the economy from the impressive legislative victories won by President Biden on infrastructure, green manufacturing, and semiconductors; and

>the powerful temptation politicians facing reelection tend to feel to keep voters happy with yet more spending, or tax cuts, or some combination of both.

I’m still betting that the inflation-boosting forces win out, and that we’ll get some more evidence tomorrow when the Labor Department releases data on the prices businesses charge each other to supply their customers (the Producer Price Index or PPI). And that’s even though those monthly numbers are telling us that consumer inflation may not even be cooling anymore.   

(What’s Left of) Our Economy: Can We Please Stop with the “Greedflation” Nonsense?

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Big Oil, business, Coca Cola, consumers, cost of living, Darden Restaurants, demand, economics, gasoline prices, General Mills, Greedflation, inflation, oil prices, Procter & Gamble, productivity, stimulus, Strategic Petroleum Reserve, supply, {What's Left of) Our Economy

More evidence has just come out debunking the seemingly reviving claims (e.g., here and here) that corporate greed is largely responsible for the inflation plaguing the U.S. economy. That matters crucially because if Americans don’t understand the paramount drivers of the cost-of-living crisis, it’s unlikely it’ll ever be resolved satisfactorily, or at least not anytime soon.

To begin at the beginning, charges of “greedflation” by the business sector really took off last year, when politicians almost entirely on the left began blaming U.S. and other big global oil companies (along with Russia’s Ukraine war) for the soaring energy prices that were igniting inflation at the gas pump and throughout the economy.

Once gasoline prices began going down, these claims naturally became harder to justify. Did the oil companies suddenly become less greedy? Of course not. What happened mainly was that demand for energy subsided because the economy was slowing, and both developments in turn stemmed from oil prices increasing enough to become less affordable for a critical mass of consumers and businesses.

Even the role played by the Biden administration’s decision to restrain prices by through unprecedented releases of oil from the Strategic Petroleum Reserve (SPR) ssupports the argument that demand and its flip side, supply, are the predominant drivers of prices over any significant period of time. The SPR release temporarily boosted the supply of oil relative to the demand, and so prices eased as long as that effect held.

At the same time, as I’ve continually pointed out, U.S. inflation rates generally speaking have stayed far too high. I’ve argued (notably here) that the main reason is that U.S. consumer demand has stayed robust, too – that is, businesses have kept raising prices because enough American individuals and households have been able to pay and have kept retail cash registers ringing loudly. I’ve added that these inordinately (indeed, multi-decade) heated price levels have remained affordable because CCP Virus-period government stimulus packages have provided them with inordinate amounts of spending power, which has kept demand inordinately high.

And even though many consumers have already spent most of these extra resources, and consumer spending may be softening, other important supports for consumer demand have emerged, principally very low levels of unemployment and new government spending not explicitly tied to Covid stimulus – like the latest cost-of-living adjustment for Social Security recipients, expanded food stamp eligibility, and more generous veterans’ benefits. (See, e.g., this post.)

Moreover, I’ve contended (in that post linked immediately above and others) that more inflation fuel is likely, as government responds to the approach of a new presidential election cycle by opening the spending spigots wider to keep more likely voters reasonably happy, and because I’m expecting the Federal Reserve to chicken out in its fight against inflation – which has depended on slowing down economic activity (including consumer spending) by making business, individual, and household borrowing more expensive.

So what’s the new evidence that consumer demand remains vigorous and will probably stay strong enough to sustain inflation? Recent earnings reports from some of America’s biggest consumer products companies.

There’s Procter & Gamble, which has raised prices by double digits for two straight quarters, which grew its revenue largely because it not only increased prices, but also sold greater amounts of goods in its biggest market, the United States, and which maintained that the consumer “is holding up well.”

There’s Coca Cola, which – like P&G, beat estimates because of both “price hikes and higher demand,” and which also said that “consumers stayed resilient.”

There’s General Mills, whose “executives said inflation isn’t letting up, but customers are sticking with its products despite higher prices in grocery stores.”

There’s Darden Restaurants (think Olive Garden, Texas Roadhouse, Capitol Grille), which is building new establishments, and whose CEO said that (a paraphrase here) strong recent sales growth stemmed from “its strategy of pricing below inflation” (maybe a low bar nowadays?) but also that “consumers aren’t trading down.”

None of this means that strong U.S. consumer demand will continue indefinitely, or that living costs aren’t harming many Americans’ finances lately. Moreover, the relationship between demand and price isn’t the same for everything we buy. In particular, the prices of some goods and services, like necessities, tend to be what economists call “inelastic.” Their sales levels don’t change much, let alone in lockstep, when prices rise or fall. Even in these cases, however, some of the aforementioned trading down or cutting back is possible, along with some offsetting behavior changes (as with the gasoline example mentioned near the beginning here).

But keep in mind that the above companies couldn’t have become so big and successful if they weren’t good at judging the state of the American consumer and his or prospects – at least in the short and medium term. If they’re sounding confident about their customers’ wherewithal, chances are we should be, too.

And although no one should ever under-estimate corporate greed, no one should ever forget that without demand for a given product or service coming from somewhere, greed alone can’t produce it.

So despite all the efforts to blame companies for ongoing strong inflation, the best way to think of it is that timeless observation from the old “Pogo” comic strip: “We have met the enemy and he is us.” With a huge helping hand from Washington to be sure.

And the real remedy? Boosting the supply of goods and services relative to demand, either by reducing spending (and taking the short-term economic pain), increasing supply  (for example, through targeted initiatives like encouraging domestic energy production, or broader efforts like improving productivity), or some combination of these measures.      

(What’s Left of) Our Economy: Why Even the New Great U.S. Wholesale Price Results Don’t Warrant Inflation Optimism

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

No doubt about it – the excellent official U.S. wholesale inflation numbers that came in this morning set up a fascinating and important test of what the main drivers of consumer price increases really are. This Producer Price Index (PPI) of course measures the rises and falls in how much businesses charge each other for the goods and services they pay to supply the demand of their final customers (be they other businesses or households and individuals).

If such encouraging numbers keep getting released, will they make clear that the costs companies pay for their inputs play the predominant role? Or will they demonstrate that the crown goes to levels of consumer demand itself? RealityChek regulars know that I’ve backed the second proposition, still do, and believe that inflation will revive even if major business costs keep falling. So I’ve got some reputational skin in this game, too.

If you doubt that today’s results (for March) were excellent, check them out. Headline PPI improved for the consecutive time month-to-month and decreased in absolute terms by 0.50 percent. That’s not disinflation (prices still rising, but more slowly). That’s deflation (prices actually falling). And this sequential drop was the biggest since April, 2020’s tumble of 1.19 percent.

Negative revisions were something of a fly in the ointment. But they weren’t big enough to change the bigger positive picture.

Headline PPI slowed on an annual basis in March, too, and for the ninth straight time. Further, the 2.79 percent yearly growth was the slowest since January, 2021’s 1.68 percent, and the difference with February’s downwardly revised 4.54 percent (1.75 percentage points) was the greatest of the current high inflation period. In fact, the only figure that comes close is the 1.49 percentage point drop between the January and February annual numbers. So that has to indicate powerful downward momentum for wholesale inflation.

So does baseline analysis. The new annual March headline PPI rate of 2.79 percent followed an increase between the previous Marchs of 11.59 percent. That means that between February and March this year, PPI fell considerably faster than the baseline figures for those results rose – which signals that businesses believe they have much less pricing power.

Moreover, the aforementioned 1.68 percent January, 2021 annual wholesale inflation rate followed PPI from January, 2019 to January, 2020 of 1.97 percent. So there was nothing unusual in baseline terms about the latter figure. Rather than indicate great momentum or a catch-up effect, it was a sign of wholesale inflation stability.

The core PPI results strip out prices in energy, food, and a category called transportation services – supposedly because they’re volatile for reasons having little or nothing to do with the economy’s fundamental vulnerability to major price increases (or decreases). And they were outstanding as well.

On a monthly basis, core PPI weakened in March for the second consecutive time, too, and the sequential increase of 0.07 percent was the best such result since these prices sank by 0.81 percent in April, 2020.

In annual terms, core wholesale inflation also cooled for the second straight month, and the March rise of 3.67 percent was the best such result since March, 2021’s 3.15 percent. Moreover, the 0.87 percentage point retreat between the February and March yearly results was also by far the most during the current high inflation period.

A glowing assessment of these annual core PPI figures also holds up well under the baseline analysis microscope. As with annual headline PPI, between February and March, this number’s 0.87 percentage point fall was considerably bigger than the worsening of their 2021-2022 baseline figures (0.31 percentage points, from 6.75 percent to 7.06 percent).

And as with annual headline PPI, in my view, this very rapid core PPI progress outweighs in importance the fact that the baseline figure for that March, 2021 3.15 percent wholesale inflation rate was a measly 0.10 percent. Why? Because by that baseline date of March, 2020, the economy was obviously being engulfed by the CCP Virus pandemic and lockdowns and voluntary behavioral curbs. So the year after, some catch-up was clealy taking place.

In other words, the situation was much different than that for the January, 2021 annual headline PPI result mentioned above – because that baseline figure was pre-pandemic.

Yet bringing the virus into these equations points to the big potential (and IMO, likely) downside of this PPI progress – and indeed of the less impressive consumer inflation data that came out yesterday. It also supports the case that overall levels of economic demand are the main determinants of inflation, and especially consumer inflation.

For it’s no coincidence that so many of the good PPI results spotlighted in this post date are the best since April, 2020. That month was the nadir of the deep (but thankfully brief) depression into which the pandemic threw the nation. Consumers dramatically reduced overall spending.  Therefore, companies’ orders for inputs needed to supply that consumption plummeted as well, all of which sharply reduced all business pricing power. 

Although no such scary downturn is on the horizon now, the signs keep multiplying that some kind of slump will begin before too long. (See, e.g., here.) And as long as this scenario unfolds, producer and consumer prices will surely keep easing – because of weakening demand. 

But here’s where the test I’m anticipating comes in. As explained most recently in yesterday’s consumer inflation update, I don’t expect prices to disinflating or even stabilizing for much longer because a presidential (and Congressional) election is approaching. Consequently, politicians seeking to keep voters happy will soon start working overtime to make sure that consumers will have a decent amount of money to spend – thereby propping demand back up again.

This buoyed demand is likely to restore whatever business pricing power confidence may have been ebbing recently.  Consequently, I predict that companies will start raising prices vigorously again even as their own cost pressures (especially on the labor and supply chain fronts) continue easing. Therefore, prices will gain new momentum simply because companies can increase them, not because of any changes in what they’re paying for goods and services.

Skeptics should think of it this way: If consumers keep on paying higher prices, why would businesses not keep charging them?   

As just indicated, this re-inflationary process will take some time to play out.  But I promise to vigilantly monitor how well my predictions hold up. And you should feel free to hold my feet to the fire, too.          

(What’s Left of) Our Economy: Why the New Figures Show That U.S. Inflation’s Still Strong

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{What's Left of) Our Economy, inflation, recession, Federal Reserve, interest rates, monetary policy, PCE, personal consumption expenditures index, core inflation, cost of living, banking system

I know everyone is supposed to be pleased or at least relieved by today’s official report on the inflation gauge watched most closely by the Federal Reserve – the price index for personal consumption expenditures (PCE). Why am I not? It has to do with the baseline analysis that should by now be familiar to RealityChek regulars. This method, which is most useful for evaluating the annual inflation results, continues showing that American businesses generally believe they have plenty of pricing power – and are acting like it.

The optimism (e.g., here) generated by the new PCE data (for February) stems from the new monthly figures. According to today’s report, headline PCE slowed sequentially, from 0.6 percent in January (which was really bad) to 0.3 percent. Core PCE – which strips out energy and food prices supposedly because they’re volatile for reasons having little to do with the economy’s fundamental vulnerability to worrisome price hikes – decelerated from January’s downwardly revised 0.5 percent to 0.3 percent.

To me, neither result is anything special, because both February figures are in line with both measures’ recent average monthly inflation rates. But reasonable people can disagree over that proposition.

What’s less reasonable is drawing encouragement from the annual statistics.

The optimists have observed that for headline PCE, February’s yearly rise of five percent was the lowest since the 4.4 percent recorded in September, 2021, and that the core PCE increase of 4.6 percent was the best such read since October, 2021’s 4.2 percent.

But the headline strong PCE five percent advance between February 2022 and 2023 followed a counterpart rate for February 2021-22 of an even stronger 6.3 percent. September, 2021’s yearly headline PCE inflation of 4.4 percent followed a September 2019-20 increase of just 1.5 percent.

The baseline framework reveals that in September, 2021, business pricing practices on a year-to-year bass were catching up from their unusually weak pricing power during the previous year – which stemmed from the economy’s still-incomplete recovery from CCP Virus-induced lockdowns and voluntary behavior curbs.

That’s why during this period, I agreed with the Federal Reserve and the Biden administration that inflation was a temporary phenomenon, and would subside greatly as the economy returned to normal.

More recently, however – and including February, businesses believed that after charging customers 6.3 percent more for their goods and services between February, 2021 and 2022, price hikes nearly as big (five percent) were eminently feasible.

That’s largely why more recently I changed my mind, and became convinced that robust inflation would last a lot longer.

For core PCE, the story is almost identical. This February’s annual inflation rate of 4.6 percent came on the heels of price increases between the previous Februarys of 5.3 percent – making clear that pricing power confidence remained high. Back in October, 2021, however, the 4.2 percent yearly inflation rate followed price increases between the previous October of just 1.4 percent. So catch-up mode was apparent here, too.

As I wrote two weeks ago in examining the latest Consumer Price Index data, the recent outbreak of banking turmoil is likely to keep inflation worrisomely high by persuading the Federal Reserve at least to ease off the interest rate hikes meant to slow price increases by weakening economic activity. For staying determinedly on the tightening monetary policy path plus the lending pullback that banking system fixes will almost surely bring on would turn the economic “soft landing” that the central bank still hopes to engineer into significant downturn.

As I’ve also written, the approach of the next presidential election will increasingly tempt politicians to keep throwing government money at voters to prop up incomes and keep them happy. 

So maybe the new PCE inflation figures justify some relief after all – because they could well be among the best we’ll be getting for a long time.  

(What’s Left of) Our Economy: Better Wholesale U.S. Inflation but Consumers May Never Notice

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consumer inflation, core PPI, cost of living, CPI, Federal Reserve, inflation, interest rates, monetary policy, PPI, Producer Price Index, producer prices, wholesale inflation, wholesale prices, {What's Left of) Our Economy

Today’s official report on U.S. producer price inflation could teach an important lesson on why prices move up and down in various circumstances.

Because the Producer Price Index (PPI) measures the costs of various inputs businesses sell to other business customers, it can often signal where consumer prices are going – especially when these costs go up. After all, when the goods and services bought by businesses go up, they feel understandable pressure to compensate by raising the prices they charge their customers – including individuals and households.

But as RealityChek regulars know, businesses can’t always pass on higher costs to their final customers. That’s because these customers don’t always feel that they can afford to pay higher prices (except, to a great extent, for essentials). So if demand isn’t strong enough, higher producer, or wholesale, prices don’t always translate into higher consumer prices, and the businesses serving consumers often need to suffer lower revenues and/or profits.

To complicate matters further, when business’ costs go down, there’s no inherent reason for businesses to lower the prices they charge their final customers – especially if demand remains strong enough. Unless they’re chasing market share? Or unless anyone thinks that they regularly, or even ever, like to give their customers price breaks just for the heck of it?

So since consumer demand remains strong – as made clear just yesterday by the official U.S. consumer inflation report for February – my sense is that the new PPI data don’t have much predictive power when it comes to living costs.

That’s a shame, since those wholesale prices results are pretty good in and of themselves. Headline PPI actually fell on month in February, by 0.15 percent – the best such result since last July’s 0.28 percent dip. Moreover, January’s torrid initially reported increase of 0.66 percent (the worst such result since last June’s 0.91 percent jump) has been revised down to a rise of 0.34 percent.

The unusually good monthly number for February could simply reflect some mean reversion from January. (That downward revised figure is still the highest since last June.) Indeed, that terrible June result was followed by the July 0.28 percent decrease. But let’s stay glass-half-full types for now.

Core producer price inflation cooled nicely on month in February, too. This measure (which strips out food, energy, and trade services prices supposedly because they’re volatile for reasons having little to do with the economy’s fundamental inflation prone-ness), pegged sequential wholesale price increases at 0.21 percent.

That figure was well off January’s 0.50 percent – the worst since last March’s 0.91 percent. And it in turn was revised down from the initially reported 0.59 percent. Some mean reversion could be at work here, too, but since last June (as has not been the case for headline PPI), core PPI has been pretty range-bound between 0.20 and 0.29 percent.

Not even taking baseline effects into account undermine the February wholesale inflation results fatally. On an annual basis, headline PPI in February climbed by 4.59 percent. That was the best such result since March, 2021’s 4.08 percent, and a big decrease from January’s data (which were revised down from 6.03 percent to 5.71 percent.

In addition, the February figure comes off headline PPI of 10.56 percent between the two previous Februarys. Those back-to-back results still indicate that businesses that sell mainly to other businesses still believe they have plenty of pricing power – especially given that the baseline figure for March, 2021 was a rock bottom 0.34 percent due to the steep CCP Virus-induced economic downturn. But the big difference between the sets of January and February, 2023 numbers also signal that this confidence has been dented.

Even better, January’s 5.71 percent headline wholesale price inflation followed a 10.18 percent increase during the previous Januarys. A decrease in the 2023 figures considerably bigger than the increase in the 2022 figures also points to wholesale inflation losing not trivial steam.

The annual core PPI story isn’t quite so good, but contains some encouraging news. The February advance of 4.44 percent was only a bit down from January’s 4.45 percent. But it was the lowest such rate since March, 2021’s 3.15 percent, and the January figure was revised down from 4.53 percent.

Baseline analysis, however, shows that pricing power in the economy’s core sectors remains ample. The January and February annual core PPI results followed previous annual increases of 6.89 percent and 6.75 percent, respectively. So they didn’t duplicate the heartening headline PPI pattern of 2023 annual PPI falling faster than its 2022 counterparts.

Moreover, back in March, 2021, when annual core PPI was running at 3.15 percent, the baseline figure for the previous March’s was just 0.10 percent. That is, there was almost no core PPI inflation – because of the sharp CCP Virus-induced slump. So it’s obviously too soon to declare victory over this kind of price increase.

But although this fairly good PPI report may tell us little or even nothing about future inflation, it will affect the nation’s cost of living in one significant if indirect way:  Like yesterday’s consumer price report, it was probably good enough to enable the Federal Reserve to slow or pause its anti-inflation interest rate hikes and other monetary policy moves in order to contain the new banking crisis while claiming that such chickening out won’t send price increases spiraling still higher.  At least not yet right away.   

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

(What’s Left of) Our Economy: Worker Pay Keeps Lagging, Not Leading, U.S. Inflation

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benefits, core services, cost of living, ECI, Employment Cost Index, Federal Reserve, inflation, Jerome Powell, Labor Department, private sector, services, stimulus, wages, workers, {What's Left of) Our Economy

The Federal Reserve, the agency with the U.S. government’s main inflation-fighting responsibilities, has made clear that it’s paying special attention to worker pay to figure out whether it’s getting living costs under control or not, and that its favored measure of pay is the Labor Department’s Employment Cost Index (ECI).

Therefore, it’s genuinely important that the new ECI (for the fourth quarter of last year) came out this morning. Even more important, the results undercut the widespread beliefs (especially by Fed leaders) both that worker compensation has been a driving force behind the inflation America has experienced so far, and/or has great potential to keep it raging.

Consequently, the new numbers seem likely to influence greatly the big choice before the Fed. Will it keep trying to raise the cost of borrowing for consumers and businesses alike in the hope of slowing spending enough to cool inflation even at the risk of producing a recession? Or will it decide that it’s made enough inflation progress already, and can tolerate current levels of economic growth – which the latest data tell us are pretty good) rather than stepping on the brakes harder.

The central bank likes the ECI better than the hourly and weekly also put out by Labor for two main reasons. First, it measures salaries and non-cash benefits, too. And second, it takes into account what economists call compositional effects.

That is, the standard wage figures report hourly and weekly pay for specific sectors of the economy, but they don’t say anything about labor costs for businesses for the same jobs over time. The ECI tries to achieve this aim by stripping out the way that the makeup of employment between industries can change, and the way that the makeup of jobs within industries can change (e.g., from a majority of lower wage occupations to one of higher wage occupations).

According to the new ECI report, when you adjust for the cost of living, “private wages and salaries declined 1.2 percent for the 12 months ending December 2022” and “ Inflation-adjusted benefit costs in the private sector declined 1.5 percent over that same period.”

So for the last year, total compensation has risen more slowly, rather than faster, than inflation, That’s not the kind of fuel I’d want in my vehicle or home. (As known by RealityChek regulars, private sector trends are the ones that count because compensation levels there are set largely by market forces, rather than mainly by politicians’ decisions, as is the case for public sector workers.)

Blame-the-workers (or their bosses) types can argue that since late 2021, compensation has caught up some with inflation rates. Specifically, from December, 2020 through December, 2021, it had fallen in after-inflation terms by 2.5 percent. Between the next two Decembers, it had dropped by less than half that rate – 1.2 percent.

But it was still down – and this during a period when private business claimed it was frantic trying to fill unprecedented numbers of job openings in absolute terms.

Moreover, the new ECI release contained signs that even this modest compensation catch up could soon reverse itself. Between the first quarter of last year and the fourth, in pre-inflation terms, the total compensation increase weakened from 1.4 percent to one percent even. And for what it’s worth, both economists and CEOs still judge that the odds of a recession this year are well over 50 percent.

Fed Chair Jerome Powell has also expressed concerns about wage trends in what he calls the core service sector, because, as he put it at the end of last November:

“This is the largest of our three categories, constituting more than half of the core PCE index.[the Fed’s preferred gauge of prices]. Thus, this may be the most important category for understanding the future evolution of core inflation. Because wages make up the largest cost in delivering these services, the labor market holds the key to understanding inflation in this category.”

The ECI releases don’t contain figures for this group, but if you look at total compensation for private service sector workers, it’s tough to see how they’ve been en fuego lately, either. Between the first and fourth quarter of last year, their rate of increase dropped by the exact same rate as that for the private sector overall. And although most economic growth forecasts lately have been far too pessimistic, almost no one seems to expect the current expansion to strengthen.

And if workers haven’t been able to reap a major inflation-adjusted compensation bonanza in the conditions that have prevailed for the last few months, or during earlier strong growth bursts since the CCP Virus struck the United States in force, when will they?

I remain concerned that living costs could remain worrisomely high – though not that they’ll rocket up again – because consumers still have lots of spending power, which will keep giving businesses lots of pricing power. But that’s not because Americans’ pay has exploded. It’s because government stimulus has been so mammoth in recent years, and could well stay unnaturally high.

Further, since such government spending is politically popular – and will remain more tempting for politicians to approve as the next election cycle approaches – my foreseeable-future forecast for the U.S. economy remains stagflation.  In other words, growth will be rather stagnant, and inflation will stay way too high.  And as the new ECI release suggests, workers could be left further behind the living cost eight ball than ever.       

(What’s Left of) Our Economy: The U.S. Inflation Outlook Keeps Getting Curious-er and Curious-er

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baseline effect, core PCE, cost of living, energy prices, Federal Reserve, food prices, inflation, PCE, {What's Left of) Our Economy

Today’s official report on the measure for U.S. consumer inflation preferred by the Federal Reserve (covering December) looks awfully similar to the higher profile Consumer Price Index (CPI) figures released about two weeks ago. Both create portraits of price increases that keep clouding the inflation outlook.

These new results for the price index for Personal Consumption Expenditures (PCE) warrant great attention because the Fed is the government agency with the prime responsibility for controlling living costs. And of course, if the nation’s central bankers believe that prices are rising too fast, they’ll keep acting to slow economic growth to reduce the rate – and could even generate a recession if need be in their eyes.

The problem for them –and the rest of us: Although the figures revealing the most about what economists consider the economy’s underlying inflation rate are down on a year-on-year basis, they’re up on a monthly basis.

Such “core inflation” numbers strip out the prices of food and energy, because they’re supposedly volatile for reasons unrelated to the economy’s fundamental vulnerability to inflation.

The good news is that their increase between December, 2021 and December, 2022 (4.4 percent) was weaker than that between November, 2021 and November, 2022 (4.7 percent).

The bad news is that their monthly increase in December (0.3 percent) was faster than that in November (0.2 percent). So although annual core prices have been steadily and significantly decelerating (from a peak of 5.3 percent last February), their monthly counterparts may be picking up steam – although they’re still just half the rate they were worsening at their peak (0.6 percent) in June and August.

Compounding the bad news: The baseline effect for core annual PCE is still pretty strong. That is, its yearly increases are no longer reflecting much of a catch-up effect following a period when inflation was unusually weak. Instead, they’re coming on top of inflation for the previous year that was unusually strong.

Specifically, that 4.7 percent annual core PCE inflation rate in November was coming off an identical result between the previous Novembers that was that year’s hottest to that point. But December’s 4.4 percent annual core PCE increase followed a rise for the previous Decembers that was even worse – 4.9 percent.

Monthly December headline PCE inflation (which includes the food and energy prices) stayed at the same 0.1 percent pace as in November. Since they’re among the lower numbers for the year, they do signal that price increases are cooling. In fact, if this trend continues, or if monthly 0.1 percent headline PCE inflation continues, the annual rate would become 1.2 percent – well below the Fed’s two percent target. Therefore, if the central bank focuses here, it could well soon conclude that its economy-slowing moves so far are working, and that more won’t be needed.

The headline annual PCE story isn’t quite so encouraging, but does add modestly to evidence of waning inflation. The five percent yearly increase is significantly lower than the peak of seven percent hit in June. But the June baseline rate was only four percent. December’s was 5.8 percent.

Better news comes from the comparison between November and December. Between those two months this year, annual headline PCE inflation fell from 5.5 percent to five percent. The baseline figure rose – but not by as much (just 5.6 percent to 5.8 percent).

Because for the trends, anyway, these PCE inflation figures so closely resemble their CPI counterparts, my outlook for future price increases has remained the same as when I posted most recently on the latter:  a shallow recession followed by a (possibly long) period of 1970s-style stagflation (with twenty-first century characteristics, as the Chinese might say, to be sure).