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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

(What’s Left of) Our Economy: No Shortage of U.S. Inflation Fuel

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CCP Virus, consumers, coronavirus, cost of living, COVID 19, debt, Federal Reserve, housing, inflation, interest rates, monetary policy, quantitative tightening, revolving credit, savings, stimulus, stock market, Wells Fargo, Wuhan virus, {What's Left of) Our Economy

As known by RealityChek regulars, I’ve repeatedly written (e.g., here) that sky-high U.S. inflation is going to remain sky high until the prices of the goods and services bought by consumers become genuinely unaffordable – and that their current towering levels make clear that we’re far from that point.

That’s why it’s so great that a team of economists from Wells Fargo bank have so clearly laid out the evidence for how much spending power remains with households – and therefore how much pricing power remains with businesses.

The two key facts entail how much in extra savings households have amassed since the CCP Virus pandemic struck in force in early 2020 and ushered in a period of both greatly reduced spending opportunities and greatly increased stimulus payments from Washington. As shown in this chart, the resulting “excess savings” zoomed up starting then and continued through mid-2021, when they peaked at about $2.5 trillion.

Source: U.S. Department of Commerce and Wells Fargo Economics

They’ve come down since – but still stood at just short of $1.3 trillion as of this past summer. Moreover, don’t forget – that number doesn’t tell us the actual level of consumer savings. It tells us how far above the pre-pandemic normal it stands.

For an idea of the actual amount of cash households have to spend, check out this second graph. It shows that even factoring in inflation, Americans’ checking and savings accounts hold a total of $13.9 trillion (the dark blue line), and that this figure is way up since the beginning of the pandemic, too.

Source: Federal Reserve Board and Wells Fargo Economics

You might have read that one big reason for worrying about the sustainability of consumer spending – and as a result, one big reason for optimism that inflation will soon peak or has already topped out – is that “Inflation is driving consumers to rack up more debt to purchase essentials.” Sounds like a sign of soaring desperation, right? Not if you look at the big picture.

Sure, credit card use has boomed over the last year (a high inflation year) in particular. Indeed, as shown in the third chart, it’s not only above pre-CCP Virus levels. It’s above its levels during the bubble years that preceded the Global Financial Crisis which ended in the worst economic downturn America had suffered to that point since the Great Depression of the 1930s. (The pandemic recession of 2020 was deeper than the Great Depression, but was much shorter.)

Source: Federal Reserve Board and Wells Fargo Economics

But that’s only one side of the credit card story, and not the most important side. The other side is how that “revolving” credit card and other consumer debt compares with consumers’ spend-able incomes. And as the chart below shows, although the “Household Financial Obligations Ratio” has worsened a lot recently, in absolute terms it’s not only considerably below its levels just before the CCP Virus’ arrival in force. It’s still at post-1990s lows – and by a wide margin.

Source: Federal Reserve Board and Wells Fargo Economic

As the Wells Fargo economists point out, this consumer spending power has to run out at some point, especially since households have been buying more than they earn, since their net worth (and therefore their ability to borrow robustly) is down some because both housing and stock prices have been sinking, and since the Federal Reserve’s inflation-fighting interest rate hikes and other tightening measures keep making such borrowing more expensive. Inflation-adjusted wages keep falling, too. 

Nevertheless, rate hikes (which only began this past March) can take up to 18-months to slow spending and the entire economy. The Fed is also reducing its balance sheet, which skyrocketed to astronomical levels as the central bank bought vast quantities of bonds during the worst of the pandemic in order to flood the economy with cheap money and keep it afloat during the worst of the CCP Virus downturn. But for what it’s worth, the consensus among economists to date is that this “quantitative tightening” isn’t severe enough depress economic activity significantly for some time, either. (See, e.g., here.)

And don’t forget – Washington keeps putting more money in consumers’ pockets directly and indirectly, most recently with an increase in Social Security payments to compensate for…high inflation, and another release from the Strategic Petroleum Reserve to dampen down oil prices.   

So it’s still true that, ultimately, the surest cure for high prices is high prices. But it’s just as true that everything known about consumer finances and the inflation fuel they represent says that these prices have a long way to go before those consumers start crying “Uncle!”

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

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

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

– President Biden, October 13, 2022

 

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

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

 

*Headline Consumer Price Index (CPI)

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

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

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

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

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

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

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

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

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

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

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

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

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

Making News: Back on National Radio Tonight Talking Ukraine Fallout, Inflation, and China

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cost of living, energy prices, food prices, inflation, Lehman moment, Making News, nuclear war, stagflation, Ukraine, Ukraine War

I’m pleased to announce that I’m scheduled to return tonight on the nationally syndicated “Market Wrap with Moe Ansari.” Our scheduled subjects: the possibility I discussed recently that the U.S.’ strong support of Ukraine could trigger the kinds of global calamities it seeks to prevent, whether America’s torrid inflation has peaked, and what’s ahead for China’s increasingly troubled economy.

“Market Wrap” airs weeknights between 8 and 9 PM EST, these segments usually begin midway through the show, and you can listen live on-line here.

As usual, if you can’t tune in, I’ll post a link to the podcast of the inteview as soon as it’s available.

And keep on checking in with RealityChek for news of upcoming media appearances and other developments.

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

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

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

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

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

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

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

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

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

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

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

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

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

And once again, energy prices were the big driver.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Those Stubborn Facts: U.S. Inflation Has Wiped Out Stimulus Gains – & Then Some

Tags

cost of living, inflation, stimulus, Those Stubborn Facts, wages Covid relief

Combined total of individuals’ COVID stimulus checks passed during the Trump and Biden administrations: $3,200

Total wage loss from inflation for the average worker between June, 2021 and June, 2022: $3,400

 

(“Inflation Has Now Devoured All Biden’s Covid ‘Rescue ‘ Checks,” unsigned editorial, Issues & Insights, July 18, 2022, Inflation Has Now Devoured All Biden’s COVID ‘Rescue’ Checks – Issues & Insights (issuesinsights.com))

(What’s Left of) Our Economy: New Figures Show Biden’s Inflation Optimism is Premature – At Best

Tags

baseline effect, Biden, consumer price index, core inflation, cost of living, CPI, energy, Federal Reserve, food, inflation, interest rates, monetary policy, PPI, Producer Price Index, {What's Left of) Our Economy

I guess it’s nice that President Biden is taking some comfort from this morning’s monthly inflation report (for June) from the Labor Department. I’m sure not. Nor should you be.

The President does acknowledge that the increase in the headline Consumer Price Index (CPI) is “unacceptably high.” But he also insists that it’s

“out-of-date. Energy alone comprised nearly half of the monthly increase in inflation. Today’s data does not reflect the full impact of nearly 30 days of decreases in gas prices, that have reduced the price at the pump by about 40 cents since mid-June. Those savings are providing important breathing room for American families. And, other commodities like wheat have fallen sharply since this report.”

The overarching problem is that these improvements undoubtedly stem from an economy that’s not only slowing dramatically, but that already may have entered a recession. Partly that’s because the Federal Reserve is raising interest rates (which makes borrowing costs more expensive for individals and companies) and partly that’s because inflation is finally showing signs of making many goods and services literally unaffordable at their current prices.

And when growth slows (or of course slips into reverse), the condition of most households and businesses worsens. Overall buying goes down, overall selling goes down, the employment picture darkens (either in the form of weaker hiring, smaller wage gains and even decreases, and often both), and the the typical American family’s well-being either stagnates or deteriorates.

This may be the medicine the nation needs to take to cure “unacceptable” inflation. But as I observed two weeks ago, let’s not view these kinds of results, even if the alleged inflation progress continues, as any great triumph of economic policymaking.

And how much inflation progress really is revealed in today’s report?

On a monthly basis, the overall CPI jumped by 1.32 percent in June. That’s the biggest such surge since July, 1980’s 1.33 percent. It’s also a substantial increase from May’s 0.97 percent.

As known by RealityChek regulars, year-on-year figures are usually more valuable than month-on-month results, since they show trends over a longer time frame and therefore are less prone to often random fluctuations.

Since June, 2021, headline CPI has advanced by nine percent. That’s the worst upswing since November, 1981’s 12.63 percent, and also a robust increase since May’s 8.52 percent. It’s also the greatest monthly acceleration in the annual overall inflation rate (5.63 percent) since March’s 8.22 percent.

To be sure, Mr. Biden based his take on inflation not only on the assumption that energy prices will keep falling. He also noted that “what economists call annual ‘core inflation’ came down for the third month in a row, and is the first month since last year where the annual ‘core’ inflation rate is below six percent.”

This measure of inflation strips out food and energy prices because they’re supposedly volatile for reasons having little do with the economy’s fundamental vulnerability to inflation (like the problems in these sectors created by the Ukraine War). And the President is correct about the most recent yearly results.

But even assuming that food and energy prices don’t regularly bleed into and affect headline inflation (not a remotely realistic assumption IMO), President Biden has forgotten about the baseline effect – which can distort results over any time period if the relevant comparison figure is out of line either to the upside or downside.

RealityChek regulars know that this statistical phenomenon has been throwing off all the inflation figures for most of the time since the CCP Virus’ arrival in force in early spring, 2020 – which sent price increases way below their trend rates. As a result, once the economy started recovering, business’ ability to regain their normal levels of pricing power produced yearly inflation totals that were above normal.

But this baseline effect has vanished for core inflation. As recently as this past January, that month’s annual core inflation number of 6.04 percent could be partly explained by the fact that between January, 2020 and January, 2021 (the baseline number) the core rate climbed by just 1.52 percent – well below the two percent overall rate considered a sign of economic health by the Federal Reserve, which is regarded as the federal government’s lead inflation-fighting agency.

The baseline figure for this June? It’s 4.45 percent – more than twice as high as the Fed target. And the baseline figure for last December – the last month, as Mr. Biden correctly noted, when annual core inflation fell short of six percent? It was just 1.60 percent. So if anything, the new June annual core CPI reading is signaling that this kind of inflation has acquired a life of its own.

Further strengthening this argument: On a monthly basis, core inflation rate has sped up since March. Indeed, it’s more than doubled, from that month’s 0.32 percent.

The next set of official inflation data comes out tomorrow, and is especially important because it measures changes in wholesale prices as opposed to the CPI, which tracks consumer inflation, and because whenever these wholesale prices go up (as they did strongly last month), you can bet consumer prices will follow closely behind. These Producer Price Index (PPI) numbers will also indicate whether the President’s confidence that core inflation is indeed slowing meaningfully, and that the headline numbers are out of date, are reality-based or not.