(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

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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

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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.  

Following Up: A Gift and a Goof on Tariffs and Inflation

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Biden, Biden administration, Bloomberg.com, business, CBS Eye on the World with John Batchelor, China, cost of living, economics, Following Up, inflation, prices, tariffs, Trade

Commentators usually don’t get gifts like the one I received in yesterday’s Bloomberg.com report on the latest developments in the continuing Will-He-Won’t-He drama concerning President Biden’s upcoming decision on cutting or eliminating some tariffs on U.S. imports from China in order to ease raging inflation.

As I’ve repeatedly emphasized (most recently in print, here), to anyone who knows anything about business, the idea that tariff levels and consumer prices have much to do with each other is nonsensical. The reason? It assumes that businesses base what they charge their customers on the costs they pay for the goods and services for whatever they’re trying to sell.

But actually, the predominant driver of their selling prices, at least over any significant period of time, is the level of demand for their products or services. If it remains strong, businesses will keep raising their selling prices as high as they can regardless of what their input costs are. That’s a great way to increase profits. And if they want to keep growing these profits (and what business doesn’t?), they’ll keep raising these prices as long as customers will pay them – as long as that demand stays strong.

When do businesses lower selling prices? For those that want to maximize profits (and what business doesn’t?), only when demand for their products and services weaken – that is, when customers decide for whatever reason that these prices have risen too high.

So there is absolutely no reason to believe that lower prices for inputs from China independent of demand will cause businesses to lower the prices they charge their customers, and thus help bring inflation rates down. Instead, they’ll just pocket the new profits. And according to the aforementioned Bloomberg piece, we just got confirmation from the horse’s mouth – businesses themselves.

Reported the Bloomberg correspondents:

“The White House has asked retail companies for a commitment to lower prices following any duty reductions but executives rebuffed that request and told US officials it was an unrealistic expectation,” said “people familiar with the deliberations, who asked not to be identified.”

And apparently there are no plans to seek public price-reduction commitments from sectors of the economy that receive any tariff relief. Maybe because at least some administration officials finally recognize how ludicrous the tariff-inflation connection has always been?

But even as the Bloomberg reporters gave me this gift on the subject, I made a goof. During my latest radio interview on the subject on “CBS Eye on the World with John Batchelor,” I spazzed out and several times referred to businesses never cutting their “costs” when their input costs fell. I hope that most listeners understood that I was trying to say that they never cut their selling prices, but the record needs to be set straight. Here’s a link to the podcast, and apologies for any confusion.

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

Tags

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

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

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

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

                               core CPI        non-fuel goods imports      imports from China

Oct. 2021                   4.59                        5.5                                    4.38

Nov. 2021                  4.95                        6.3                                    4.48

Dec. 2021                  5.48                        6.4                                    4.76

Jan. 2022                   6.04                        6.9                                    4.84

Feb. 2022                  6.42                        7.2                                    4.83

March 2022              6.44                        7.5                                     5.01

April 2022                6.14                        7.2                                    4.89

May 2022                 6.01                        5.9                                     4.57

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

core CPI:                        30.94 percent

non-oil goods imports:    7.27 percent

China imports:                 4.34 percent

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

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

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

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

 

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

Tags

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

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

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

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

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

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

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

Jan 2021: 1.59 percent                  1.97 percent

Feb 2021: 2.95 percent                 1.11 percent

March 2021: 4.06 percent             0.34 percent

April 2021: 6.43 percent              -1.44 percent

May 2021: 6.91 percent               -1.01 percent

June 2021: 7.56 percent               -0.59 percent

July 2021: 7.96 percent                -0.17 percent

Aug 2021: 8.65 percent               -0.17 percent

Sept 2021: 8.78 percent                0.34 percent

Oct 2021: 8.87 percent                 0.59 percent

Nov 2021: 9.88 percent                0.76 percent

Dec 2021: 10.18 percent              0.76 percent

Jan 2022: 10.18 percent               1.59 percent

Feb 2022: 10.52 percent              2.95 percent

March 2022: 11.55 percent          4.06 percent

April, 2022: 10.89 percent           6.43 percent

May, 2022 10.66 percent             6.91 percent

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

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

Jan 2021: 1.79 percent                  1.64 percent

Feb 2021: 2.33 percent                 1.36 percent

March 2021: 3.15 percent             1.00 percent

April 2021: 4.81 percent              -0.09 percent

May 2021: 5.25 percent               -0.18 percent

June 2021: 5.60 percent                0.09 percent

July 2021: 6.01 percent                 0.27 percent

Aug 2021: 6.19 percent                0.36 percent

Sept 2021: 6.14 percent                0.72 percent

Oct 2021: 6.26 percent                 0.90 percent

Nov 2021: 7.04 percent                0.99 percent

Dec 2021: 7.09 percent                1.17 percent

Jan 2022: 6.90 percent                 1.79 percent

Feb 2022: 6.76 percent                2.33 percent

March 2022: 7.14 percent           3.15 percent

April, 2022: 6.78 percent            4.81 percent

May, 2022: 6.74 percent             5.25 percent 

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

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

(What’s Left of) Our Economy: The Latest Sign That Inflation is Here to Stay

Tags

baseline effect, consumer price index, cost of living, CPI, Federal Reserve, inflation, monetary policy, PPI, Producer Price Index, recession, supply chains, wholesale inflation, wholesale prices, {What's Left of) Our Economy

If you follow the news about the U.S. economy, you know by now that the federal government’s Producer Price Index (PPI – its measure of wholesale price inflation), rose at a slightly slower annual rate in April (11.03 percent) than in March (11.18 percent).

Ditto for the core PPI, which omits not only food and energy but trade services – since supposedly they’re volatile for reasons having nothing to do with the economy’s fundamental vulnerability to out-of-the-ordinary price changes (decreases as well as increases).

Both PPIs measure how much businesses charge each other for the goods and services they turn into final products and sell to households and individuals. That’s why they’re naturally seen as precursors of future consumer inflation rates (measured by the Consumer Price Index, or CPI).

After all, as long as the economy’s overall demand levels (reflecting overall growth levels) remain healthy, these businesses mostly will be able to pass these cost increases on to customers and actually will. Higher consumer inflation follows. So anything like the opposite is happening, and if producer prices are easing at all (even from historic highs), that’s got to be encouraging news on the consumer and overall inflation fronts.

But did the April yearly rate of increase really slow down? Maybe not. That’s because it’s a preliminary reading and, as shown by the left-hand column in the table below, since last September, every revision of that first estimate went up.

Jan 2021: 1.60 percent now 1.59                                1.97 percent

Feb 2021: 2.96 percent now 2.95                               1.11 percent

March 2021: 4.15 percent now 4.06                           0.34 percent

April 2021: 6.51 percent now 6.43                  -1.52 percent now -1.44

May 2021: 6.99 percent now 6.91                   -1.10 percent now -1.01

June 2021: 7.56 percent now 7.49                   -0.68 percent now -0.59

July 2021: 7.96 percent now 7.83                    -0.25 percent now -0.17

Aug 2021: 8.65 percent now 8.58                    -0.25 percent now -0.17

Sept 2021: 8.78 percent now 8.82                             0.34 percent

Oct 2021:  8.87 percent now 8.90                             0.59 percent

Nov 2021: 9.88 percent now 9.94                     0.85 percent now 0.76

Dec 2021: 9.99 percent now 10.58                   0.84 percent now 0.76

Jan 2022: 10.08 percent now 10.17                  1.60 percent now 1.59

Feb 2022: 10.27 percent now 10.51                 2.96 percent now 2.95

March 2022: 11.18 percent now 11.54             4.15 percent now 4.06

April, 2022: 11.03 percent                                       6.43 percent

Sure, the April revision could be a downgrade – like those between January and August, 2021. But the odds of an upgrade look pretty good.

Moreover, the right-hand column in the table shows that the baseline effect, which was cause for some optimism that inflation might peak before too long, is more over than ever.

As known by RealityChek regulars, the unusually high and robustly rising annual CPI and PPI figures for last year stemmed largely from the change they represented from unusually low inflation rates the year before – which were driven down by the arrival of the CCP Virus and the sharp recession it induced by prompting on-and-off lockdowns of huge chunks of the economy, and major behavioral caution by businesses and individuals alike.

What that right-hand column shows is that these effects – even with the slightly better revisions displayed above – were profound enough to result in actual PPI annual decreases from April, 2019-2020 through August, 2019-2020. (The right-hand column also brings the story up to 2020-2021 for January through April – the baseline comparison year for the first four data months of 2021-2022.)

That is to say, the table reveals that the economy’s recovery in 2021 from virus-ridden and downturn-y 2020 amounted to a great catching up process that largely explains the bloated PPI figures. (The other major factor was supply chain disruption resulting from the stop-and-start nature of some of the virus waves and lockdowns, and therefore of the recovery itself.)

But the above table also shows that the baseline effect began fading significantly this past February. That month, the annual PPI rise of 10.27 percent came off a February, 2020-2021 increase of 2.95 percent. The similar January annual increase of 10.08 percent, by contrast, came off a 2020-2021 rise of a much lower 1.59 percent.

And just look at April! That 11.03 percent annual PPI jump has followed a 6.43 percent increase between the previous Aprils.

Moreover, the same kind of trend (at lower absolute levels) is evident from the core PPI data, as shown below. Again, the left-hand column displays the annual increases by month starting in January, 2021. The right-hand column shows the annual changes by month for the year before – the baseline. The only possible significant difference is that I haven’t tracked the revision record for this core PPI series, so I don’t know if the latest April result is likely to be upgraded or downgraded, or unrevised.

Jan 2021: 1.79 percent                                                    1.64 percent

Feb 2021: 2.33 percent                                                   1.36 percent

March 2021: 3.15 percent                                               1.00 percent

April 2021: 4.81 percent                                                -0.09 percent

May 2021: 5.25 percent                                                 -0.18 percent

June 2021: 5.60 percent                                                  0.09 percent

July 2021: 6.01 percent                                                   0.27 percent

Aug 2021: 6.19 percent                                                   0.36 percent

Sept 2021: 6.14 percent                                                  0.72 percent

Oct 2021: 6.26 percent                                                    0.90 percent

Nov 2021: 7.04 percent                                                   0.99 percent

Dec 2021: 7.18 percent                                                    1.17 percent

Jan 2022: 6.91 percent                                                     1.79 percent

Feb 2022: 6.76 percent                                                    2.33 percent

March 2022: 7.10 percent                                               3.15 percent

April, 2022: 6.92 percent                                                4.81 percent

The big takeaway here: Even more than yesterday’s April Consumer Price Index report, today’s release on the Producer Price Index is saying that alarmingly high inflation is here to stay for Americans for the forseeable future. It’s possible that the Federal Reserve, the U.S. government agency mainly responsible for handling inflation, can tighten monetary policy (to reduce that aforementioned consumer demand and in turn growth) skillfully enough to engineer a “soft landing” for the economy – i.e., bring price increases back to much less damaging levels while avoiding a recession. But keep in mind that the next time the central bank achieves this goal starting from inflation rates this hot will be the first.

(What’s Left of) Our Economy: The Baseline Effect’s Gone and U.S. Inflation is Settling In

Tags

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

Sorry to be the bearer of bad news on the U.S. inflation front, especially considering even the modest cheers (at least in early Wall Street trading) that greeted this morning’s official data on rising prices. But I see the new figures confirming that inflation has entered a worrisome new phase, and mainly because they show that annual living costs are no longer soaring largely because they increased so feebly the year before. Instead, that “baseline effect” is unmistakably gone, and inflation has acquired its own momentum.

The yearly inflation figures by month are the strongest evidence. As noted last month, the baseline effect was most prominent from March through July of last year. During that stretch, the annual headline growth in the overall (or “headline”) Consumer Price Index (CPI) sped up from 2.64 percent to 5.28 percent. But this acceleration owed much to the fast (but choppy) economic recovery from the deep CCP Virus-induced recession of mid-2020, when the annual inflation rate actually fell fom 1.51 percent to 1.05 percent. That’s considerably below the two percent inflation target set by the Federal Reserve, the U.S. government agency with the greatest responsibility for keeping prices stable.

Moreover, from September, 2021 at least through January, 2022, the baseline effect made a major comeback. During those months, the annual inflation rates increased from 5.38 percent to 7.53 percent. Yet their counterparts from the year before dipped from a still low 1.40 percent to 1.36 percent – still below the Fed target.

As I also wrote in March, the February CPI report contained signs that the baseline effect was fading, and today’s April numbers leave no doubt that it’s gone. Headline CPI that month worsened on year much faster than the comparable January rate, and its 2021 predecessor worsened to its highest level since the previous February – not so coincidentally, just before the virus’ arrival in force.

And last month’s big jump in the annual inflation rate came off a March, 2021 annual increase in prices that was significantly higher than the Fed target.

It’s true that April’s 8.22 annual overall inflation rate was a little slower than that March figure of 8.56 percent. But the March cost surge came off a 2.66 percent annual increase for March, 2021. The April result is coming off an April, 2020-2021 jump of 4.15 percent. That was more than twice the Fed target.

In other words, inflation was already hitting disturbing levels last year, and now it’s advancing nearly twice as fast.

Much the same story emerges from the so-called core inflation rate, which strips out food and energy prices supposedly because they’re volatile for reasons having nothing to do with the economy’s underlying vulnerability to high inflation. Since energy prices in particular affect the cost of everything whose production requires energy (i.e., everything) the distinction tends to become pretty artificial after a while. But even playing along with this claim reveals grounds for concern.

As with the headline rate, April’s annual core CPI inflation of 6.13 percent was a moderation from March’s 6.44 percent. But the March result was coming off a March, 2020-2021 period when core inflation rose by 1.66 percent – again, well below the Fed’s two percent target. April’s number followed annual core inflation for the previous April of 2.97 percent – again, much higher than the Fed target.

Meanwhile, the month-to-month CPI data released today don’t bolster the case for inflation optimism emphatically, either. Glass-half-full types will correctly point out that the 0.33 percent sequential rise in the headline April CPI was the lowest since last August, and shrank dramatically from March’s 1.24 percent.

But in April, core CPI advanced on-month by 0.57 percent, a noteworthy increase from March’s 0.32 percent. And the recent rise in gasoline prices will surely push the May headline CPI back up.

Tomorrow, Washington will provide another clue on inflation’s future – the report for the Producer Price Index (PPI) for April.  Unlike the CPI, which measures the prices of what businesses sell to consumers, the PPI tracks what businesses themselves pay for the goods and services they need in order to turn out their whatever they sell to consumers.  Think of it as gauging wholesale inflation versus measuring retail inflation.

The March PPI hit a new record high, and since in a U.S. economy like this one, where consumer demand remains strong, businesses generally can pass on rising costs to consumers, this result made today’s hot CPI almost inevitable.  Unless tomorrow’s April PPI comes way down (which may happen soon since growth looks to be decelerating markedly — ironically because some indications of consumer inflation fatigue are appearing), the CPI will stay far too strong in May  And that news would surely boost the odds that the Fed sees no choice but to tame inflation by crippling demand further — possibly enough to induce a recession.     

(What’s Left of) Our Economy: New Signs that High U.S. Inflation is Here to Stay

Tags

baseline effect, core PCE, cost of living, energy, Federal Reserve, food, inflation, PCE, personal consumption expenditures index, prices, Ukraine, Ukraine-Russia war, {What's Left of) Our Economy

The new official figures on the Federal Reserve’s preferred gauge of consumer inflation are a good news/bad news story only if you follow the economy closely.

They amounted to good news for that group because they’ve made the inflation picture clearer than it’s been since the economy began recovering from the deep spring, 2020 downturn generated by the arrival in force of the CCP Virus and all the mandated and voluntary curbs on individual and business behavior it produced. And it’s noteworthy that the group includes the Fed, which bears the federal government’s prime responsibility for keeping inflation under control.

Specifically, today’s data represent annual inflation figures (the ones that attract the most attention because they measure price changes over a reasonable period of time) that finally aren’t being substantially distorted by baseline effects. That is, the multi-decade highs they’ve hit no longer stem significantly from the fact that the previous pandemic-y year’s inflation levels were so abnormally low.

But the new results for the price indexes for personal consumption expenditures (PCE) were bad news for everyone else. For they still did show near-multi-decade highs, and the baseline boost has now been in essence replaced by an energy price boost largely created by Ukraine war-related disruptions that aren’t likely to end any time soon.

It’s true that the U.S. government and most students of the economy distinguish between the inflation rates with and without energy prices, since the latter, along with food prices, are seen as prone to shocks that have nothing to do with the economy’s fundamental vulnerability to inflation. But it’s also true that this distinction can get awfully artificial awfully quickly because energy is used so prominently to turn out practically every good and service that Americans buy. So if energy prices remain strongly on the rise, prices everywhere else are bound to feel the effects. Or at least they’re bound to feel the effects until and unless businesses figure out how to offset their higher energy costs with greater efficiencies.

The first clues that energy prices are now unquestionably major inflation drivers comes from the month-to-month figures for overall PCE percentage change – which do include food and energy prices – starting with January, 2021.

Jan.             0.3

Feb.            0.3

March         0.6

April           0.6

May            0.5

June            0.5

July            0.4

Aug.           0.4

Sept.           0.3

Oct.            0.6 

Nov.           0.6

Dec.           0.5

Jan.            0.5

Feb.           0.6 revised to 0.5

March       0.9

As is clear, overall monthly PCE really took off in March – reaching its highest level during this period after several months of virtually identical monthly increases (which themselves jumped to a new level starting in October).

Keep in mind that these numbers don’t show that prices stopped rising during that period. What they show is that they weren’t rising at ever faster rates, which matters because one of the biggest fears harbored about inflation concerns its tendency to feed on itself and spiral out of control.

When food and energy prices are stripped out, and so-called core inflation can be seen, the monthly trend since January, 2021, is significantly different. Since last October, weakening momentum (though not actually falling prices) is the story here. And the sequential percentage increases in absolute terms have been lower recently. That’s why it’s ever more obvious that recent inflation is due mainly to those two supposedly volatile food and energy sectors. Here are these core PCE rises:

Jan.             0.2

Feb.            0.1

March        0.4

April          0.6

May           0.6

June           0.5

July            0.3

Aug.           0.3

Sept.           0.2

Oct.            0.5

Nov.           0.5

Dec.           0.5

Jan.            0.5

Feb.           0.4 revised to 0.3

March        0.3

As always, the baseline effect emerges upon examining the annual rates of change in inflation. Here they are for overall inflation since January, 2021:

Jan.            1.4

Feb.           1.6

March        2.5

April          3.6

May           4.0

June           4.0

July            4.1

Aug.           4.2

Sept.           4.4

Oct.            5.1

Nov.           5.6

Dec.           5.8

Jan.  21-22           6..0

Feb. 21-22           6.4 revised to 6.3

March 21-22        6.6

Again, the latest March figure is the highest in the series, and again, the pace quickened dramatically starting last October.

The annual inflation rates for the previous year, though, demonstrate a big fade in the baseline effect starting in March. Here they are in percentage terms.  

Jan.             1.8

Feb.            1.8

March        1.3

April          0.6

May          0.5

June          0.9

July          1.0

Aug.         1.2

Sept.         1.4

Oct.          1.2

Nov.         1.2

Dec.         1.3

Jan. 20-21           1.4

Feb. 20-21          1.6

March 20-21       2.5

Think of it this way: For many years before the CCP Virus began distorting the economy the Federal Reserve struggled to push yearly inflation up to two percent and keep it there for decent intervals. The central bank reasoned (correctly, IMO), that when prices rise too slowly, that can threaten deflation – a period prices that are falling in absolute terms. And when that happens, consumers in particular keep putting off purchases in hopes of finding better bargains in the future, demand for goods and services keeps dropping, production eventually follows suit, and a recession can ensue that’s not only deep but very difficult to escape as the new sets of expectations create their own downward spiral.

But as shown above, for all of (pandemic-y) 2020, annual inflation rates were well below two percent, and they stayed there till March, 2021. So the latest annual overall PCE figure of 6.9 percent (for this March) is coming off an overall PCE figure for last March that was already pretty strong. And the upcoming number for April, 2022 will represent the change from an April, 2021 figure that was much stronger – 3.6 percent. Unless that next annual overall inflation rate comes down considerably, the case that overall price increases have entered a new, more worrisome phase, will look awfully convincing.

The baseline fade is less pronounced so far for core PCE. Here are the annual percentage change figures starting again with January, 2021:

Jan.            1.5

Feb.           1.5

March        2.0

April          3.1

May           3.5

June           3.5

July            3.6

Aug.          3.6

Sept.          3.7

Oct.           4.2

Nov.          4.7

Dec.          4.9

Jan. 21-22             5.2

Feb. 21-22            5.4 revised to 5.3

March 21-22        5.2

Where the month-to-month figures showed weakened recent momentum as well as lower prices, these show stalled recent momentum – which isn’t greatly different given inflation’s above-noted tendency to keep speeding up.

And here are the annual core figures for the preceding year

Jan.             1.7

Feb.            1.9

March        1.7

April          0.9

May           1.0

June           1.1

July           1.3

Aug.          1.4

Sept.          1.5

Oct.           1.4

Nov.          1.3

Dec.          1.4

Jan. 20-21             1.4

Feb. 20-21            1.5

March 20-21         2.0

Judging by that two percent Fed target, these 2020 and early 2021 annual core inflation rates were decidedly feeble, and only hit two percent in March, 2021. So a baseline effect arguably remains in place here, and as I wrote previously, and probably won’t end until next month – because the April, 2021 annual core inflation rate breached the Fed target (and then some), rising all the way to 3.1 percent.

And as with overall PCE inflation, if that next core result (for April) doesn’t fall significantly, this type of price increase will start looking troublingly elevated for reasons related to current, not past, economic trends and developments. Further, even though the absolute core PCE rate is, as noted, lower than the over PCE rate, it’s still near multi-decade highs and, again, it’s sure to be increasingly affected by lofty energy prices for the foreseeable future.

Wall Street Journal columnist Greg Ip wrote Wednesday that the Ukraine war and its fallout could be “a prelude to an era in which geopolitical tensions, protectionist policies and natural disasters repeatedly stress the world’s supply networks. Central banks, which spent the last decade fighting off deflationary headwinds, might spend the next battling inflationary headwinds.”

Today’s PCE data look like they support that call to me. 

(What’s Left of) Our Economy: A New Sign That Inflation Will Long Stay Lofty

Tags

consumer inflation, consumer price index, cost of living, CPI, Federal Reserve, inflation, Labor Department, monetary policy, PPI, Producer Price Index, recession, wholesale inflation, {What's Left of) Our Economy

Yesterday’s RealityChek post showed that the baseline effect was no longer a prime driving force behind the historically high consumer inflation rates with which Americans have struggled. That is, the new Labor Department data for the Consumer Price Index (CPI) revealed that unlike its monthly predecessors, the March annual inflation rate wasn’t so strong largely because prices were catching up from having risen so weakly the year before. Instead, because March, 2020-21 CPI was already getting pretty warm – because the U.S. economy had continued recovering (unevenly) from the deep spring, 2020 downturn – the March, 2021-22 inflation result made clear that worrisome price increases had acquired a momentum of their own.

This morning came both another sign that the baseline excuse for high inflation has run its course, and that rapid price increases could well continue for many more months – the Labor Department’s March inflation report for wholesale prices. As opposed to the CPI, which measures what business charge consumers, the so-called Producer Price Index (PPI) gauges what businesses themselves pay for the goods and services they need in order to turn out whatever they sell to individuals and households.

And because the new PPI makes clear that the baseline excuse can no longer be used for such wholesale inflation either, it augurs more torrid consumer price hikes, too – since businesses naturally try to pass on their higher costs to their final customers, and often succeed. Moreover, if you look at the annual inflation increases for recent months, you see that the baseline effect for the PPI ended in February.

The table below presents in the left column the annual PPI increases for each month from January, 2021 through this March, and in the right column, the same numbers for the previous year 2019-2020. As with the Consumer Price Index, the baseline year for the 2021-22 results is 2020-21.

Jan 2021:         1.60 percent            1.97 percent

Feb 2021:        2.96 percent            1.11 percent

March 2021:   4.15 percent            0.34 percent

April 2021:     6.51 percent           -1.52 percent

May 2021:      6.99 percent           -1.10 percent

June 2021:      7.56 percent            -0.68 percent

July 2021:       7.96 percent            -0.25 percent

Aug 2021:       8.65 percent            -0.25 percent

Sept 2021:       8.78 percent             0.34 percent

Oct 2021:        8.87 percent             0.59 percent

Nov 2021:       9.88 percent             0.85 percent

Dec 2021:       9.99 percent             0.84 percent

Jan 2022:      10.08 percent             1.60 percent

Feb 2022:     10.27 percent             2.96 percent

March 2022: 11.18 percent             4.15 percent

As the table indicates, the baseline effect for producer prices began earlier than that for consumer prices, was more dramatic, and lasted longer. Between January and August, 2020, such inflation plummeted from 1.97 percent to -0.25 percent. And yes, you read that last number right. Inflation became outright deflation, and producer prices actually fell on year for five straight months. The last time anything close to this happened was “never” (though, to be fair, the data for this measure of PPI, which is called final demand for both goods and servies, only go back to 2009).

So this dramatic descent into deflation deserves much of the blame for the surge in annual wholesale price inflation between January and August, 2021 – from 1.60 percent to 8.95 percent.

Moreover, 2019-20 annual PPI increases stayed below one percent through December. In January, 2021, the annual rate nearly doubled, to 1.60 percent – signaling that the baseline effect was ending. And its final (for now) demise came the following month, when it jumped to 2.96 percent. Yet during February, 2022, yearly wholesale inflation soared past ten percent. So these price increases obviously entailed much more than a return to normal from unusually low 2020-21 inflation (including those falling prices for nearly half the year). And the more so for this March, since its baseline comparison figure was a whopping 4.15 percent.

These PPI trends and the prolonged high consumer inflation they portend only sharpen the dilemma faced by the Federal Reserve – the only part of the federal government able to act relatively quickly to bring price increases under control. If it tightens monetary policy too dramatically, it could slow economic growth equally dramatically and even bring on a recession. If the central bank is too hesitant, it could still slow growth but leave inflation unacceptably high – a condition called “stagflation.” 

That is, there’s a real prospect that the economy could enter a state it last experienced during the era of disco, streaking, and shag haircuts. But as those of us who lived through it know, economically speaking, this “Seventies Show” was no comedy.