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

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

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

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

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

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

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

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

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

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

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

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

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

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

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(What’s Left of) Our Economy: Signs of the Wrong Kind of Inflation Progress

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baseline effect, Biden administration, core PPI, cost of living, energy prices, Federal Reserve, food prices, inflation, PPI, Producer Price Index, producer prices, recession, SPR, stimulus, Strategic Petroleum Reserve, wholesale inflation, {What's Left of) Our Economy

Yesterday’s official U.S. report on wholesale price inflation (for December) finally contained some modest signs of genuine cooling, but that’s not necessarily good news. The biggest reason seems to be a significant slowing in the nation’s economic growth and further confirmation that America remains far from creating a truly healthy economy – one that can expand adequately without either racking up towering debts or, more recently, igniting decades-high price increases.

As I’ve written previously, changes in this Producer Price Index (PPI) influence changes in consumer prices, but the relationship is more complex than often thought. Because wholesale prices represent costs for producing the goods and services that businesses sell to each other and to consumers, companies understandably try to pass increases on to their final customers – but can’t always do so.

That’s because the final result depends on these customers’ buying power. If they’ve got lots of it, chances are they’ll pay up, enabling businesses to preserve and even boost profits. If they don’t, they won’t, and margins will suffer with one big caveat – the ability of the sellers to become more efficient, and generate cost-savings elsewhere.

At the same time, if final customers feel flush with cash and/or credit, the businesses that supply them won’t necessarily, or even often, cut their selling prices if their costs decrease or stabilize. Why should they? With certain exceptions (like a prioritizing gaining market share), they’ll naturally charge whatever their customers seem willing to pay. 

And because some major signs of mounting economy-wide weakness have appeared recently (especially falling consumer spending), that new evidence of softer wholesale prices seems to add to the evidence that a recession of some kind is looming.

The best wholesale inflation news came in the new monthly numbers. The headline figure actually fell by 0.50 percent between November and December. That’s the most encouraging such result since this PPI dropped 1.29 percent sequentially in April, 2020 – when the CCP Virus’ first wave plunged the economy into a short but steep slump.

The core figure (which strips out food, energy, and a category called trade services, supposedly because they’re volatile for reasons largely unrelated to the economy’s fundamental vulnerability to inflation), did rise month-to-month, but only by a tiny 0.09 percent. That was the best such result since a fractionally lower figure in November, 2020.

Almost as good, the revisions for both for recent months didn’t meaningfully change this picture – though they do remind that PPI data can change non-trivially during the several months when they’re still considered preliminary.

The annual headline and core PPI figures did exhibit something of the baseline effect that always should be kept in mind when evaluating economic trends. That is, it’s essential to know whether improvements of worsening of data merely represent returns to a longer-term norm after stretches of abnomality. In the case of post-CCP Virus inflation readings, the big spike in price increases that began in early 2021 largely reflected a (ragged) normalization of economic activity and business pricing power that followed many months in 2020 when both were unusually subdued.

But for both measures of wholesale prices, the baseline effect appeared to be fading. For headline PPI, the December annual increase was 6.22 percent – the best such result since March, 2021’s 4.06 percent, and a big decline from November’s downwardly revised 7.34 percent. The baseline figure (headline annual PPI from December, 2020 through December, 2021) was a terrible 10.18 percent. But it was only slightly higher than its November counterpart of 9.94 percent.

Since the scariest aspect of inflation is its tendency to feed on itself, and keep spiraling higher, that feeble increase in the baseline figure over the last two months could well signal a loss of momentum. 

The annual core PPI statistics tell an almost identical story. The latest annual December increase of 4.58 percent was considerably lower than November’s upwardly revised 4.91 percent, and the best such result since May, 2021’s 5.25 percent. But the December baseline increase of 7.09 percent was barely faster than November’s 7.03 percent.

At the same time, the same kinds of big questions that hang over the consumer inflation figure hang over the wholesale inflation figure. For example, the annual increase in wholesale energy prices nosedived last year from 57.05 percent in June to just 8.58 percent in December. On a monthly basis, they’ve plummeted in absolute terms since June by 21.18 percent.

But these impressive results stemmed mainly from historically large releases of oil from the nation’s Strategic Petroleum Reserve (which of course expanded supply) and the Chinese economic growth that was severely depressed by dictator Xi Jinping’s wildly over-the-top Zero Covid policy. and therefore dampened global oil demand enough to affect prices in the United States.

The petroleum reserve, however, is now down to its lowest level in 39 years, which explains why far from contemplating further sales, the Biden administration is now slowly starting to refill it. Morever, China has now decided (for now) to reopen its economy, which will again put upward pressure on energy prices.

In addition, one lesson that Americans should have learned from this latest spell of inflationis that wages and other forms of income (including investment income) are hardly the only sources of consumer buying power. The government can supply oceans of it, too, and as I wrote yesterday, it’s entirely possible that U.S. politicians and Federal Reserve officials become recession-phobic that they decide to subsidize Americans’ buying power again. Hence my medium-term forecast of stagflation – a stretch of uncomfortably low growth and stubbornly high prices. 

That’s certainly better than a future of continually rising inflation. But anyone describing the current and likely economic situation facing Americans as “good” is using a depressingly low bar.

(What’s Left of) Our Economy: Why the U.S. Inflation Outlook Just Got Even Cloudier

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CCP Virus, China, consumer price index, consumers, core CPI, coronavirus, cost of living, COVID 19, CPI, energy prices, Federal Reserve, food prices, inflation, Jerome Powell, prices, recession, stagflation, stimulus, supply chains, Ukraine War, Wuhan virus, {What's Left of) Our Economy

If the big U.S. stock indices didn’t react enthusiastically to yesterday’s official American inflation figures (which were insensitively released the very day I had a minor medical procedure), that’s because they were too mixed to signal that consumer prices were finally being brought under control.

Lately, good news on inflation-fighting has been seen as good news for stock investors because it indicates that the Federal Reserve may at least pause its campaign to hike interest rates in order to slow economic growth significantly– and even trigger a recession. That’s because a weaker economy means consumers will have less money to spend and that businesses therefore will find it much harder to keep raising prices, and even to maintain prices at currently lofty levels. And all else equal, companies’ profits would take a hit.

So already softening inflation could convince the central bank that its efforts to date have been good enough, and that its goal of restoring price stability can be achieved without encouraging further belt tightening – and more downward pressure on business bottom lines.

Of course, stock investors aren’t always right about economic data. But their take on yesterday’s figures for the Consumer Price Index (CPI), which cover December. seems on target.

The data definitely contained encouraging news. Principally, on a monthly basis, the overall (“headline”) CPI number showed that prices actually fell in December – by 0.08 percent. That’s not much, but this result marks the first such drop since July’s 0.02 percent, and the biggest sequential decline since the 0.92 percent plunge recorded in April, 2020, when the economy was literally cratering during the CCP Virus’ devastating first wave. Further, this latest decrease followed a very modest 0.10 percent monthly increase in November.

So maybe inflation is showing some genuine signs of faltering momentum? Maybe. But maybe not. For example, that CPI sequential slip in July was followed by three straight monthly increases that ended with a heated 0.44 percent in October.

Moreover, core CPI accelerated month-to-month in December. That’s the inflation gauge that strips out food and energy prices because they’re supposedly volatile for reasons having little or nothing to do with the economy’s underlying inflation prone-ness.

December’s sequential core CPI rise was 0.30 percent – one of the more sluggish figures of the calendar year, but a rate faster than a November number of 0.27 percent that was revised up from 0.20 percent. Therefore, these last two results could signal more inflation momentum, not less.

In addition, as always, the annual headline and core CPI numbers need to be viewed in light of the baseline effect – the extent to which statistical results reflect abnormally low or high numbers for the previous comparable period that may simply stem from a catch-up trend that’s restoring a long-term norm.

Many of the multi-decade strong year-to-year headline and core inflation rates of 2021 came after the unusually weak yearly results that stemmed from the short but devastating downturn caused by that first CCP Virus wave. Consequently, I was among those (including the Fed) believing that such price rises were “transitory,” and that they would fade away as that particular baseline effect disappeared.

But as I’ve posted (e.g., last month), that fade has been underway for months, and annual inflation remains powerful and indeed way above the Fed’s two percent target. The main explanations as I see it? The still enormous spending power enjoyed by consumers due to all the pandemic relief and economic stimulus approved in recent years, and other continued and even new major government outlays that have put more money into their pockets (as listed toward the end of this column).

(A big hiring rebound since the economy’s pandemic-induced nadir and rock-bottom recent headline unemployment rates have helped, too. But as I’ll explain in an upcoming post, the effects are getting more credit than they deserve.)

And when you look at the baselines for the new headline and core CPI annual increases, it should become clear that after having caught up from the CCP Virus-induced slump, businesses still believe they have plenty of pricing power left, which suggests at the least that inflation will stay high.

Again, here the inflation story is better for the annual headline figure than for the core figure. In December, the former fell from November’s 7.12 percent to 6.42 percent – the best such number since the 6.24 percent of October, 2021, and the sixth straight weakening. The baseline 2020-2021 headline inflation rate for December was higher than that for November (6.83 percent versus 7.10 percent), and had sped up for four consecutive months. But that November-December 2020-2021 increase was more modest than the latest November-December 2021-2022 decrease, which indicates some progress here.

At the same time, don’t forget that the 6.24 percent annual headline CPI inflation of October, 2020-2021 had a 2019-2020 baseline of just 1.18 percent. Hence my argument that businesses today remain confident about their pricing power even though they’ve made up for their pandemic year weakness in spades.

In December, annual core inflation came down from 5.96 percent to 5.69 percent. That was the most sluggish pace since December, 2020-2021’s 5.48 percent, but just the third straight weakening. But the increase in the baseline number from November to December, 2021 was from 4.59 percent to that 5.48 percent – bigger than the latest November-December decrease. In other words, this trend for core CPI is now running opposite it encouraging counterpart for headline CPI.

Finally, as far as baseline arguments go, that 5.48 percent December, 2021 annual core CPI increase followed a baseline figure the previous year of a mere 1.28 percent. Since the new annual December rate of 5.69 percent comes on top of a rate more than four times higher, that’s another sign of continued business pricing confidence.

But the inflation forecast is still dominated by the question of how much economic growth will sink, and how the Fed in particular will react. And the future looks more confusing than ever.

The evidence for considerably feebler expansion, and even an impending recession, is being widely cited. Indeed, as this Forbes poster has reported, “The Federal Reserve Bank of Philadelphia’s Survey of Professional Forecasters indicates the highest probability of a recession over the next 12 months in the survey’s 55-year history.”

If they’re right, inflation may keep cooling modestly for a time but still remain worrisomely warm. And the Fed may react either by keeping interest rates lofty for longer than expected – as Chair Jerome Powell has already said – or even raise them faster. 

Nonetheless, although the recession that did take place during the first and second quarters of last year convinced numerous observers that worse was yet to come, the third quarter saw a nice bounceback and the fourth quarter could be even better. So if a downturn is coming, it will mean that economic activity will need to shrink very abruptly. Hardly impossible, but hardly a sure thing.

And if some form of economic nosedive does occur, it could prompt the Fed to hold off or even reverse course to some extent, even if price increases remain non-trivial. A major worsening of the economy may also lead Congress and the Biden administration to join the fray and approve still more stimulus to cushion the blow.

Complicating matters all the while – the kind of monetary stimulus added or taken away by the central bank takes months to ripple through the economy, as the Fed keeps emphasizing.  Some of the kinds of fiscal stimulus, like the pandemic-era checks, work faster, but others, like the infrastructure bill and the huge new subsidies for domestic semiconductor manufacturing will take much longer.

Additionally, some of the big drivers of the recent inflation are even less controllable by Washington and more unpredictable than the immense U.S. economy – like the Ukraine War’s impact on the prices of energy and other commodities, including foodstuffs, and the wild recent swings of a range of Chinese government policies that keep roiling global and domestic supply chains. 

My own outlook? It’s for a pretty shallow, short recession followed by a comparably moderate recovery and all accompanied by price levels with which most Americans will keep struggling. Back in the 1970s, it was called “stagflation,” I’m old enough to remember that’s an outcome that no one should welcome, and it will mean that the country remains as far from achieving robust, non-inflationary growth as ever.  

(What’s Left of) Our Economy: New Official Data Show U.S. Inflation is Far From Whipped

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baseline effect, core PCE, cost of living, energy prices, Federal Reserve, food prices, Gerald R. Ford, inflation, PCE, personal consumption expenditures index, recession, soft landing, Whip Inflation Now, {What's Left of) Our Economy

There’s a new reason emerging for doubting that recent official U.S. inflation figures are showing real progress being made against rising prices, and today’s release of the numbers the Federal Reserve takes most seriously are a great example. The reason? The results of previous reports – which have generated so much of the optimism (see, e.g., here) – have often been revised higher.

This morning’s data from the Commerce Department on what’s called the price index for Personal Consumption Expenditures (PCE) matter greatly. After all, the Fed is the government agency mainly responsible for keeping inflation under control. If its officials are convinced that price increases are indeed cooling significantly, they could in principle decide to stop raising interest rates and/or draining the money supply so vigorously in order to tame inflation by dramatically slowing growth and hiring.

Signs of real success, in other words, could boost the odds that the Fed’s efforts to slash consumer spending bring the economy to a soft landing – either a short, moderate growth slowdown or brief, shallow recession – rather than trigger a longer, deeper downturn. But if the Fed isn’t satisfied with anti-inflation progess, then it’s likelier to turn the clamps even tighter, and increase the chances of a painful recession or worse.

And those of you who follow the news closely know that many students of the economy (e.g., this fellow) have been insisting that inflation rates have already come down so impressively that the Fed’s stated determination to continue its restrictive policies could inflict much needless damage.

As known by RealityChek regulars, my doubts that inflation is being whipped have sprung largely from examining the baseline effect. Specfically, I look at the year-on-year results to see how they compare to those of the year before. If the former look abnormally high but the latter are abnormally low, then the most recent lofty results can be reasonably attributed to a catch up process that will simply result in price increases returning to a typical (and presumably acceptable) rate.

But if back-to-back annual inflation rates are both strong, even if these latest yearly results seem to be slowing with each passing month, then it’s just as reasonable to conclude that unacceptably high inflation retains strong momentum. And in recent months, that’s exactly what the situation has been – including today’s figures, which take the story through November.

So it’s true that November’s headline annual PCE inflation rate of 5.5 percent was the lowest since October, 2021’s 5.1 percent, and a sizable weakening from October’s 6.1 percent. But in October, 2021, when annual headline PCE was running at that 5.1 percent pace, the baseline figure headline PCE for October, 2019-2020 was 0.1 percent.

It was obvious to me, therefore, that late last year, prices were rising at rates needed to make up for the rock-bottom inflation rates of the year before, when the economy was kneecapped by the CCP Virus pandemic. That’s why I believed at that point that high inflation was “transitory.” (So did the Fed.) But it’s just as obvious that a 5.5 percent November, 2021-22 PCE inflation rate following a 5.6 percent rate between the previous Novembers means that a catch up phase has ended, and that businesses still believe they have ample scope to keep charging their customers more and more.

Adding to my concerns: That October headline annual PCE inflation rate of 6.1 percent followed a yearly rise between the previous Octobers of 5.1 percent. And then there are those revisions. That latest 6.1 percent October figure was originally reported at six even. September’s initially reported 6.2 percent now stands at 6.3. Same for August. So no one can reasonably rule out an upgrade for the November results.

The core annual PCE results tell a similar story. These data omit food and energy prices, supposedly because they’re volatile for reasons having nothing to do with the economy’s fundamental prone-ness to inflation. And the November read of 4.7 percent was the lowest since July’s identical figure, and a seemingly comforting decrease from October’s five percent.

But the baseline figure for annual November core PCE is an identical 4.7 percent – significantly higher than both October’s 4.2 percent and July’s 3.6 percent.

Moreover, upward revisions have been made recently here, too. For example, September’s initially reported 5.1 percent annual core PCE inflation is now recorded at 5.2 percent. And June’s initially reported 4.8 percent was revised up to five percent. Let’s see what the next PCE report does with today’s November figure.

The revisions have been noteworthy in the monthly PCE figures, too. November’s headline PCE rose sequentially by 0.1 percent – the best such result since July’s 0.1 percent dip, and decidedly weaker than October’s 0.4 percent. But that October result was originally pegged at 0.3 percent. Therefore, between July and October, headline PCE heated up significantly on a monthly basis. Does November signal the beginning of a sequential cooling trend? Stay tuned.

Revisions figure even more prominently in the monthly core PCE readings. November’s 0.2 percent sequential advance was also the best result since July – when it rose just 0.1 percent. It, too, was better than October’s 0.3. But October’s monthly core PCE used to be 0.2. That July advance used to be a flatline. And August’s initially reported 0.5 percent rise is now judged to have been one of 0.6 percent. So the real November figure could well be higher, too.

During the 1970s, then President Gerald R. Ford tried to deal with that era’s cost of living crisis by fostering a grassroots campaign called “Whip Inflation Now.”  Pretending today that the data are showing the anti-inflation war already won or nearly over is likely to flop just as badly. 

(What’s Left of) Our Economy: Why Today’s Best Recent U.S. Inflation Report Isn’t Nearly Good Enough

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Biden, consumer price index, core inflation, CPI, energy prices, Federal Reserve, food prices, inflation, Labor Department, {What's Left of) Our Economy

Today the U.S. government delivered the best report on consumer inflation Americans have seen since this past summer. That said, that’s a pretty low bar, and the Consumer Price Index (CPI) figures released by the Labor Department (for November) still leave some big questions unanswered.

The biggest: Do the signs of improvement mainly stem from a major slowdown in the economy? Even assuming (as I do), that bringing price increases way down from current levels must be the nation’s top economic priority, (as I’ve written before, e.g. here) slashing inflation rates by tightening credit enough to kneecap consumer spending (through a combination of stagnant growth, higher borrowing costs, and mounting joblessness) takes no special expertise. And it certainly deserves no particular applause.

As I’ve also written, if that’s the case, then in principle, all else equal, inflation will rise again as soon as growth and all its benefits return to acceptable levels.

But first, the good news, which came in the data on core inflation. Those are the price advances that leave out energy and food, because they’re supposedly volatile for reasons having nothing to do with the economy’s underlying vulnerability to inflation.

Core prices climbed just 0.20 percent sequentially in November – the weakest such result since February, 2021’s 0.15 percent. Moreover, this new core CPI figure marks the first time since the stretch between last December and this past March that this monthly number has improved – which could signal that this measure of living costs is losing significant momentum.

Of course, after this past March, monthly core inflation popped right back up – until it hit 0.71 percent in June. Core inflation rebounded after February, 2021, too. So unless the economy’s current expansion really is winding down, as they also say on Wall Street, this kind of past performance doesn’t guarantee future results.

The headline CPI results weren’t as noteworthy, but the 0.10 percent sequential advance in November did break a three-month streak of accelerating consumer inflation. Even so, it was only the best result since this past July – when these consumer prices actually dipped in absolute terms by 0.12 percent. But right afterwards, the three-month losing streak began, so that’s another reason for holding the applause.

As for the annual results, they continue to be distorted by that baseline effect that should be so familiar to RealityChek regulars. In other words, for both headline and core CPI, November’s yearly increases (like all yearly increases) need to be compared with those of the previous twelve months. If the latter were unusually low, then chances are an encouraging-looking rise could simply represent a reversion to the mean trend. But if they were unusually high, then chances are they’re revealing continuing strong momentum, along with how much more progress is needed before any cost of living crisis can be considered over.

And the comparisons show that for both headine and core consumer inflation, the baseline figures were unusually high. Therefore, although the November annual headline CPI increase of 7.12 percent was better than October’s 7.76 percent, and indeed the best such 2022 result since January’s 7.52 percent, the October figure followed a rise between the previous Octobers of 5.39 percent. The November baseline figure was an even higher 6.83 percent. In fact, that was the fastest increase for the first eleven months of last year. Even more striking, the January 7.52 percent increase was coming off a headline consumer inflation rate of just 1.36 percent – the lowest figure for 2020-21.

The trends in annual core CPI are only slightly different. The November core rate of 5.96 percent was the lowest of this year and a clear improvement over October’s 6.31 percent. But the baseline figure for October was 4.95 percent – a good deal lower than the November counterpart of 4.95 percent that not so coincidentally was the highest for 2020-21. And back in January, the 2022 annual headline CPI rate was coming off a 2020-21 figure of just 1.39 percent – the second lowest for 2020-21.

But maybe the strongest evidence for greeting today’s inflation report cautiously came from President Biden. Although he’s rarely shy about talking up the economy during his administration, he made clear that “he hopes prices will return to normal by the end of next year, if not sooner. But he stressed he cannot make that prediction.”  

 

(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: Why Peak Inflation Claims Should Finally Peak

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Biden adminstration, core PCE, energy prices, Federal Reserve, food prices, food stamps, inflation, PCE, personal consumption expenditures index, student loans, {What's Left of) Our Economy

Here’s how bad today’s official report on the Federal Reserve’s preferred gauge for U.S. inflation was: It looked awful even without taking the baseline effect into account. That is, it looked awful even if you don’t examine how the new (August) year-on-year increases compare with both their predecessors and those for the preceding year, and understand that the 2021-22 numbers are coming off 2020-21 results that were alarmingly high to begin with,

Yes, the annual increase in August in the headline version of the Fed’s favored price index for Personal Consumption Expenditures (PCE) dipped from 6.4 percent in July to 6.2 percent. But by last August, it had already climbed to 4.2 percent – more than twice the Fed’s target rate.

Worse, though, was the acceleration in the August annual core PCE read from 4.7 percent to 4.9 percent . These are the figures that leave out food and energy prices – supposedly because they’re volatile for reasons that have nothing to do with the economy’s underlying inflation prone-ness.

Inflation optimists had seized upon the June-July drops in the headline PCE (from seven percent to 6.4 percent and from five to 4.7 percent, respectively) as a major sign that price increases had peaked. The August statistics seem to throw frigid water on that conclusion.

Worse still was the speed up in both inflation indicators on a monthly basis. Headline PCE had actually fallen sequentially in July by 0.1 percent, but in August it rose by 0.3 percent. And that’s despite energy prices nosediving (by fully 5.5 percent on month) both because towering gasoline prices had forced many Americans to cut back on driving, and because the rest of the world economy is seeing dramatically reduced growth, which depresses energy demand.

Replacing energy as a major cost-of-living driver were food prices, which were up month-to-month by 0.8 percent. So unless you think energy prices will keep sinking like a stone, it’s become tougher to stick with the peak inflation claims.

But the biggest blow to the peak inflation case came from the monthly core results. Even omitting those volatile food and energy prices, core inflation jumped by 0.6 percent between July and August, after flatlining between June and July. And this new August monthly hike ties June’s for the year’s worst.

And I’d be remiss in closing without mentioning two recent Biden administration steps sure to buoy inflation still further – the student loan forgiveness plan (even – if it survives legal challenges – in its new scaled back form) and his big expansion of food stamp benefits (prompted at least in part, and ironically, due to those huge food price increases). Whatever you think of the merits of these programs, their net effect inevitably will put more income in consumers’ pockets and thus support spending while doing nothing to increase production. That is, as economists like to say, more money will be chasing the same amount of goods and services – an inflation-fueling formula no thinking person disputes.

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

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

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

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

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

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

(What’s Left of) Our Economy: More Evidence of Biden-Flation’s Toll

Tags

American Rescue Plan, Biden administration, Covid relief, energy prices, Federal Reserve, food prices, hunger, inflation, monetary policy, progressives, recession, supply chain, Ukraine War, {What's Left of) Our Economy

Left-of-center critics of the Federal Reserve’s inflation-fighting efforts keep insisting that risking recession to tame prices would unnecessarily harm the most vulnerable Americans and their struggling working class counterparts. Instead,  many have claimed that living costs can be cut sufficiently by forcing greedy corporations to charge less through windfall profits taxes, price controls, and the like.

And they’ve bridled in particular at charges that the Biden administration’s American Rescue Plan (ARP) greatly worsened the problem by handing trillions of dollars of CCP Virus relief – and therefore purchasing power – to U.S. consumers well after economic growth had already rebounded strongly and unemployment had already nosedived.

Any development that can engulf the gargantuan American economy, like historically high inflation, almost by definition has many different causes. But anyone doubting the economic overheating role of the ARP should check out the graph below, which is found in this Reuters piece from over the weekend.

The article adds to the evidence that still-towering inflation rates are devastating low-income Americans by super-charging the prices of that most basic of basics: food. But the graph makes clear as can be how the ARP contributed to the problem.

As it shows, prices of food (the darker line) began taking off just about the time that the ARP’s strings-free child tax credit payments started to be sent out (July 15, 2021, to be precise) – and not just to the needy, but to considerably better off households as well. Not so coincidentally, the share of American families with children reporting to U.S. Census Bureau surveys being “sometimes or often” short of food (the lighter line) started taking off soon after. And also noteworthy – these food price rises began many months before Russia’s February, 2022 invasion of Ukraine began playing its own major food inflation role. 

As the article also emphasizes, between 2020 and 2022, “as pandemic restrictions eased, so did the appetite for congress and some states to fund hunger prevention efforts.” But continuing federal purchases for “pantries, schools and indigenous reservations” were needed in the first place largely because food – not to mention other necessities – kept becoming so much more expensive.

The lesson here isn’t that no pandemic assistance should have been provided at all. After all, genuine suffering was widespread in its early phases and no one knew how long they would last. And the Fed’s left-of-center critics are correct that ongoing CCP Virus-related and Ukraine War-related energy supply disruptions have greatly boosted prices recently, too.

But as noted here previously, the supply- and demand-side roots of inflation are very closely related (because businesses can be relied on to continue raising prices as long as they can find enough buyers, and to cut them when customers start balking). Moreover, although in economists’ lingo, some prices are “inelastic” (because they’re for goods and services that are essential enough to prevent purchasing cutbacks even after major price increases), when they rise high enough, they can still foster lower prices for other purchases that are deemed less important.

Therefore anything, like big government checks, that fills consumer pockets will strongly tend to spur inflation sooner or later. So when help does need to be provided, it should be much more precisely focused on relieving genuine privation than pandemic relief was.

Even more important: The inflationary effects of supporting household consumption can be offset – and are best offset – by policies to support more production. When the Fed’s left-of-center critics start addressing defects in that supply side of the economy, rather than trafficking in gimmicks sure to exacerbate them, their complaints about excessive central bank monetary medicine will deserve a much bigger audience. In the process, they’ll be able to deliver lasting assistance to those whose plight they rightly emphasize.        

Glad I Didn’t Say That! Energy Security One Tanker at a Time

Tags

energy, energy crisis, energy prices, Germany, Glad I Didn't Say That!, inflation, natural gas, Olaf Scholz, Persian Gulf, Ukraine, Ukraine War

”Germany secures more gas shipments as [Chancellor Olaf] Scholz visits [Persian] Gulf”

 —Associated Press, September 25, 2022

Number of gas shipments Scholz has secured during his visit to the Persian Gulf: 1

–Bloomberg.com, September 25, 2022

 

(Sources: “Germany secures more gas shipments as Scholz visits Gulf,” by Frank Jordan, Associated Press, September 25, 2022, https://apnews.com/article/russia-ukraine-boris-johnson-united-arab-emirates-germany-b2ff121c9b7e3931ab3c89acdf76beaa and “Germany Secures Just One Tanker of Gas During Scholz’s Gulf Tour,” by Birgit Jennen and Omar Tamo,” Bloomberg.com, September 25, 2022, https://www.bloomberg.com/news/articles/2022-09-25/germany-nabs-uae-gas-deal-as-energy-squeeze-tightens?srnd=premium&leadSource=uverify%20wall)