(What’s Left of) Our Economy: Too Much Irrational Exuberance Today on U.S. Inflation

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consumer price index, core CPI, CPI, Federal Reserve, inflation, interest rates, monetary policy, personal consumption expenditures index, Producer Price Index, {What's Left of) Our Economy

Wall Street is ecstatic about today’s official report on two measures of consumer inflation, and President Biden is pretty pleased, too. Both see improvement in the October results for both overall (headline) inflation, and for core inflation (which strips out food and energy prices supposedly for reasons that have nothing to do with the economy’s underlying inflation prone-ness).

And both evidently believe that this improvement means that the Federal Reserve will start easing off on the interest rate hikes it’s both approved so far and promised in order to bring price increases down from their recent multi-decade-worsts. In other words, if inflation is moderating, the Fed might not have to slow down economic growth and job creation as much as feared in order to restore price stability.

Here’s why I think both are wrong – or at the very least prematurely optimistic. They’re ignoring that baseline effect. If you look at the data in context, you see that the annual increases in both the headline and core readings for the Consumer Price Index (CPI) are both coming off prices rises that were highs for the previous year, and that heated up considerably between September and October.

Specifically, although the year-on-year rise of headline CPI did slow to its weakest rate (7.76 percent) since January, the previous year’s annual October overall consumer price increase was that year’s fastest (6.24 percent). The new yearly annual CPI increase was indeed cooler than September’s (8.22 percent). But that figure was coming off a 2020-2021 rise of just 5.39 percent.

Core inflation displayed a similar pattern. In October, prices of goods and services excluding food and energy rose by 6.31 percent at an annual rate – down from a September increase of 6.66 percent that was the worst such figure since August, 1982 (7.06 percent). But the previous September, core annual inflation was 4.04 percent. The previous October, it was a considerably higher 4.59 percent.

The best interpretation, as I see it? Businesses still have plenty of pricing power, which will keep inflation dangerously high, because consumers still have plenty of spending power.

Such inflation pessimism (especially if the Fed does ease off its tightening policy) is also supported by the monthly headline CPI numbers. Overall prices climbed sequentially by 0.44 percent in October. That was way off the high for this year (March’s 1.24 percent). But it represented the third straight speed up.

The news was much better for core monthly CPI. The October rise of 0.27 percent was the year’s slowest, and down greatly from September’s 0.58 percent.

But that core performance bears careful watching, too, because energy prices in particular tend to influence consumer prices eventually, since energy is a key cost for virtually every good and service produced in America. In fact, month-to-month, energy prices were up 1.8 percent in October after falling 2.1 percent in September.

In that vein, another clue about future inflation rates is coming next Tuesday, with the release of the new producer price report. That measures what companies charge each other for the purchases needed to turn out whatever they provide to consumers and to each other (if businesses are their final market). And don’t forget: The CPI isn’t the Fed’s favorite gauge of inflation. It looks more closely at the price indices for “Personal Consumption Expenditures,” and these October results come out December 1.

These clues, however, even if taken all together, won’t be all that big for inflation-watchers, as they’ll cover just a single month.  As Fed Chair Jerome Powell stated earlier this month, the central bank is going to need to see “a series of down monthly readings,” and much other evidence, before concluding that inflation is “coming down decisively.”  Although he really was behind the curve is foreseeing how prices would shoot up, waiting for the trends over time to start appearing seems like by far the best inflation-fighting approach now.  And why the markets’ reaction to today’s data seems like what one of Powell’s predecessors called  “irrational exuberance.” 

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(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.

(What’s Left of) Our Economy: U.S. Inflation Just Rebounded on the Wholesale Level, Too

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Biden administration, consumer price index, core inflation, CPI, Federal Reserve, food stamps, inflation, interest rates, monetary policy, Obamacare, PPI, Producer Price Index, Social Security, student loans, veterans, wholesale inflation, {What's Left of) Our Economy

After today’s official report on producer price inflation in the United States, it’s hard to see how anyone could still genuinely believe that the worst of the recent, decades-high price increases afflicting Americans is past.

In the first place, both versions of the Producer Price Index (PPI) worsened sequentially in September) for the second straight month. And in the second place, these results are likely to generate acceleration in consumer prices (those September figures come out tomorrow) because these “final demand” producer price (also called wholesale price) numbers tell us what businesses charge for the goods and services they buy to create what they sell to consumers.

It’s true that, at some point, U.S. businesses will lose this pricing power because their customers simply can’t afford to keep buying as much. But continuing strong inflation at all levels by definition makes clear that this development isn’t imminent. (Otherwise, price increases would have cooled much faster.)

Moreover, the Federal Reserve’s tighter monetary policy, which makes credit more expensive, isn’t likely for at least several months to slow economic activity enough to moderate inflation. And the Biden administration keeps putting more money in people’s pockets (e.g., in the form of a – scaled back – student loan forgiveness program, a major expansion of food stamp eligibility and Obamacare benefits, and higher spending on veterans benefits). Further, tomorrow Washington could announce the biggest increase in Social Security payments (which are indexed to inflation) in decades.

Overall producer prices rose sequentially by 0.38 percent in September. The monthly increase was the first since June, but keep in mind that it followed a July drop of 0.41 percent and a smaller August decline of 0.18 percent (hence my claim above of two consecutive months of discouraging results).

As with the consumer price index (CPI), the government also releases “core” producer price figures that strip out food and energy prices supposedly because their volatility has nothing to with the economy’s fundamental vulnerability to inflation. And quickening inflation was apparent here, too, with September’s monthly increase of 0.36 percent following an August rise of 0.25 percent and a July bump up of 0.13 percent.

The headline year-on-year PPI increase looked a little better – but only if you forget the baseline effect, which can produce misleadingly high or low results if the preceding year’s readings (in this case) were abnormal in either direction.

The September annual rise of 8.55 percent represented the third straight month of deceleration, and the lowest such number since July, 2021’s 7.83 percent.

But it’s coming off an annual increase the previous September of 8.82 percent. By contrast, this year’s highest annual PPI increase (March’s 11.67 percent number) came off a yearly rise of only 4.06 percent the previous March. That’s less than half as high. Therefore, it’s entirely reasonable to see plenty of still worrisome producer price momentum in that most recent annual data.

As for core PPI, September actually saw an acceleration in the annual pace – from August’s 5.60 percent to 5.66 percent. And although the latest figure is still the year’s second lowest, it’s coming off a September, 2020-21 increase of 6.17 percent. The highest annual PPI result for this year (March’s 7.11 percent), that increase followed one between the previous March’s of a mere 3.15 percent – roughly only half as high.

Between these new wholesale price results and the rapid consumer prices increases revealed in last month’s official report on the consumer inflation measure preferred by the Fed, the case for peak inflation looks weaker than it has for months. And here’s one more reason for doubting that the cost of living crisis will abate much any time soon:  the unlikelihood, at least as I see it, that the Fed will keep tightening monetary policy much longer and risk being charged with throwing the economy into a recession with a presidential election coming up.

Of course, the central bank is supposed to be immune from political pressures (including public opinion). But of course, nothing in Washington is. I’ve actually been surprised that the Fed has persisted in its hawkish stance this long. But the real test of its convictions is still months away.       

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

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

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

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

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

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

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

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

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

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

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

And my reading of the numbers bears out this thinking.

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

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

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

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

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

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

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

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

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

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

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

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

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

(What’s Left of) Our Economy: More Evidence That Stimulus-Bloated Demand is the Main U.S. Inflation Driver

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CCP Virus, China, consumer price index, consumers, coronavirus, COVID 19, Covid relief, CPI, demand, inflation, Jobs, population, retirement, stimulus, Sun Belt, supply, supply chains, The New York Times, Ukraine War, workers, Wuhan virus, Zero Covid, {What's Left of) Our Economy

The New York Times just provided some important evidence on the big role played by super-charged consumer demand in super-charging inflation – this article showing that the Sun Belt has been the U.S. region where prices have been rising fastest.

The finding matters because a debate has been raging among politicians and economists over the leading causes of multi-decade high inflation rates with which Americans have been struggling over the last year and a half or so.

On one side are those who claim that overly generous government stimulus spending is the main culprit, because it’s increased U.S. buying power much faster than the supply of goods and services has grown. On the other side are those who focus on the inadequate amount of goods and services that companies are turning out, stemming from supply chain disruptions rooted in the stop-and-go nature of the American economy from successive waves of pandemic downturns and slowdowns to the Ukraine war to China’s ridiculously draconian Zero Covid policies.

Clearly, all these developments deserve blame, but the regional disparities in inflation rates provide pretty convincing support for emphasizing bloated demand.

Here’s the latest annual disparity in the headline Consumer Price Index as presented in the Times article:

U.S. total:    8.5 percent

South:          9.4 percent

Midwest:     8.6 percent

West:          8.3 percent

Northeast:   7.3 percent

It correlates roughly, by the way, with the data in this report last spring from the Republican members of Congress’ Joint Economic Committee.

And here’s a principal, demand-related reason: The Sun Belt states of the South and West have been the U.S. states that have gained the most population during the pandemic period. Indeed, according to the latest U.S. Census data, eight of the ten states with the fastest overall population growth between July, 2020 and July, 2021 was a southern or southwestern state, and the same holds for five of the ten states with the fastest population growth in percentage terms.

It’s true that population growth often increases supply, too – by boosting numbers of workers. The U.S. government doesn’t break out job creation along the above regional lines, but a look at individual state totals doesn’t conclusively brand the Sun Belt as an national employment leader. On average, relatively speaking, Arizona, California, Florida, Nevada, and Texas have created more jobs from the pandemic-period bottom in April, 2020 through last month, as shown in this table:

U.S. total:    +16.87 percent

California:   +17.98 percent

Florida:        +21.05 percent

Texas:          +17.31 percent

Arizona:       +16.02 percent

Nevada:        +30.92 percent

But don’t forget – many of these states have outsized travel and tourism sectors, and you know what happened to those activities during the worst of the pandemic. So in part, their employment bounced back so quickly because they had plummeted so dramatically as the CCP Virus’ first wave spread.

Moreover, many of these states are big retirement destinations, too, and as their overall population increase makes clear, this trend has intensified since the pandemic arrived. Of course, the workers in any given state don’t only sell goods and services to that state’s population, and a given state’s residents don’t only buy goods and services from providers in that state. Yet it’s certainly noteworthy that the number of the Sun Belt states’ consumers rose faster relative to the national average than the number of Sun Belt workers.

And in this vein, Sun Belt inflation probably is also particularly hot partly because so many of the newcomers are wealthy. Indeed, one recent study found that, early in the pandemic, “Of the 10 states with the largest influx of high-earning households, nine are located in the Sun Belt, including the six-highest ranked states, starting with Florida.”

Because they bring so much spending power to their new home states, these wealthier Americans naturally tend to drive prices up unusually fast.

As the Times article notes, some prominent reasons for scorching Sun Belt inflation are unrelated to population-driven demand growth – notably much lower population densities that generate more gasoline-using driving.  But the impact of population movement and all the disproportionately high inflation it’s clearly creating is hard to ignore.  And if a consumption shock has spurred so much inflation in the Sun Belt, why wouldn’t it be affecting prices this way in the rest of the nation, too?          

 

(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: U.S. Inflation Just Got a Bit Better – But it’s Far From Good

Tags

consumer price index, core CPI, core inflation, CPI, energy prices, food prices, gasoline, inflation, PPI, Producer Price Index, recession, {What's Left of) Our Economy

Finally! Some good news about U.S. inflation! Not that it’s incredibly good news. But today’s July results for the Consumer Price Index (CPI) were sure better than June’s awful read.

The news was also somewhat surprising, at least to me, because the official June figures for wholesale inflation – the prices businesses charge each for the goods and services needed to turn out what they sell to consumers – had accelerated some since May. And that type of development in the Producer Price Index (PPI) is usually a sign that these businesses will pass these prices on commensurately to their final customers.

Still, there were two big flies in this mildly encouraging ointment.

First: Yes, overall, or “headline” CPI actually fell on a monthly basis and rose more slowly in July on an annual basis. And yes, “core” inflation (which strips out food and energy prices because supposedly they’re volatile for reasons have little to do with the economy’s fundamental inflation-proneness) rose less than half as fast month-to-month than in June. But on an annual basis the latter stayed at its alarming levels.

Second, the main reason that inflation generally speaking has been slower lately is because the economy is slowing – and may even be in recession. As I’ve explained several times (e.g., here and here), it’s anything but difficult for the Federal Reserve and the rest of the federal government to cool price increases by dampening the ability of consumers and businesses to buy goods and services. And just how loudly should we cheer the lower living standards resulting from those growth-slowing steps?

With these caveats in mind, today’s CPI report showed that headline inflation dipped sequentially in July by 0.02 percent. That’s the first monthly decrease in absolute terms since the 0.06 percent decline in May, 2020 – when the economy was just starting to recover from the first wave of the CCP Virus and the deep lockdowns-induced downturn it triggered. And the July figure was light years better than June’s 1.32 percent increase – the biggest monthly jump since July, 1980’s 1.33 percent.

This progress owes entirely (at least when we’re talking about the major categories of goods and services) to a 4.56 percent monthly drop in energy prices – the first such decline since April’s 2.70 percent and the biggest since the 10.31 percent plunge in April, 2020, while that virus-induced was still with us.

And energy prices weakened in turn largely because the recent sky-high prices for gasoline have led Americans to cut way back on their summertime driving – which has fallen below even pandemic-y 2020 levels, when so many CCP Virus-related travel restrictions remained in place. Indeed, gasoline prices on month sank by 7.71 percent – their biggest such tumble since the 20.80 percent crash dive also in pandemic-y April, 2020. (Don’t forget, though, that global energy prices are also off their recent peaks because growth in the rest of the world is down considerably, too.)

As for core inflation, progress was registered on a monthly basis, too, with these prices rising sequentially in July by just 0.31 percent – much lower than July’s 0.71 percent and the best such performance since last September’s 0.25 percent.

Yet on an annual basis, as indicated above, July core inflation stayed exactly where is was in June: 5.91 percent. And although this pace was the slowest since last December’s 5.48 percent, it also means that progress according to this measure has stopped for the time being.

Can falling energy prices continue, and keep dragging down the headline CPI? The U.S. Energy Department has just weighed in here:

“The August Short-Term Energy Outlook (STEO) is subject to heightened uncertainty resulting from Russia’s full-scale invasion of Ukraine, how sanctions affect Russia’s oil production, the production decisions of OPEC+, the rate at which U.S. oil and natural gas production rises, and other contributing factors. Less robust economic activity in our forecast could result in lower-than-forecast energy consumption.”

In brief, “Search us.”

Will big elements of core inflation, like housing and new vehicles and used vehicles and healthcare, keep stabilizing at current (still historically high) rates or even moderating some? And can this progress continue while a recession is avoided? Those are the questions that need to be answered to get some visibility on future inflation, and figure out how satisifed we’ll be with the results.

In the meantime, look out for the next official release on wholesale prices – which is released tomorrow! 

 

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

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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.

(What’s Left of) Our Economy: New U.S. Wholesale Price Results Belie Biden’s Inflation Optimism

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Biden, consumer price index, core inflation, CPI, credit, energy prices, Federal Reserve, food prices, inflation, monetary policy, PPI, Producer Price Index, recession, retail inflation, wholesale inflation, {What's Left of) Our Economy

Yesterday, I wrote that we’ll know if President Biden’s optimism about the direction of multi-decade high consumer inflation is well founded when today’s data about producer prices come in. Now they’ve been released, and Mr. Biden or one of his aides might want to consider walking that one back. Because the new producer price index results (PPI) were as bad as those consumer price index (CPI) figures the President tried to explain away.

According to Mr. Biden, yesterday’s worrisome CPI release (taking the story up through June) is “out-of-date.” The reason? Oil prices, which have done so much to spur the recent “headline” (economy-wide) inflation, have come down this month. He added that “core inflation” (which strips out food and energy prices supposedly because they’re volatile for reasons having little to do with the economy’s underlying vulnerability to inflation) was subsiding, too.

As I noted, the PPI results would matter so crucially because they measure what businesses pay for the goods and services they need to create the output they try to sell to their customers. And if customer demand is strong enough (which yesterday’s numbers made clear is the case), these companies can and will pass along any higher prices they pay. So as long as producer price (or wholesale) inflation is bad, it’s a safe bet that succeeding consumer price (or retail) inflation will follow suit for a while.

And that’s exactly the message being sent by the new PPI report – especially when you take into account the baseline effect (which you always should).

The headline annual June PPI increase of 11.19 percent was the highest since March’s 11.57 percent. And although it does include those food and energy prices, since energy in particular is a major input for so many of the U.S. businesses that turn out so much of what consumers buy, it’s likely that these higher costs will wind up keeping both the headline and the core CPI numbers troublingly high next month – and possibly push them higher.

June’s core wholesale inflation read looks considerably better. Indeed, at 6.33 percent, it was the lowest since last October’s 6.26 percent. But here’s where the baseline effect comes in. The baseline figure for the October, 2021 annual PPI increase was the October, 2019-20 rise of 0.90 percent. In othe words, back then, wholesale inflation was super-low, thanks mainly to continuing worries about the course of the CCP Virus and its impact on the overall economy and therefore on consume spending.

And as known by RealityChek regulars, because that baseline annual increase was so unusually low, the subsequent return to some version of economic normality was bound to produce an unusually high annual increase the following year.

But check out the baseline for last month: It was 5.84 percent – more than six times higher than that of October, 2020. Therefore, a 6.33 percent yearly wholesale inflation increase coming off that baseline is powerful evidence that major producer and consumer price increases are going to remain facts of American economic life for the time being – specifically, as long as demand holds up.

Sooner or later, President Biden will be right. Unfortunately, as I’ve written, that’s sure to be because either the Federal Reserve will tighten credit conditions so much that demand weakens enough to produce a recession, because ever higher prices weaken demand substantially on their own, or some combination of the two. If that happens while he’s still President, somehow I don’t think Mr. Biden will be saying “I told you so.”

(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.