(What’s Left of) Our Economy: Why Peak Inflation Claims Should Finally Peak

Tags

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

Tags

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)

Our So-Called Foreign Policy: The Other Scary Ukraine War Threat

Tags

energy, energy prices, global financial crisis, globalism, hunger, Lehman Brothers, Lehman moment, Our So-Called Foreign Policy, Russia, Taiwan, Ukraine, Ukraine War, Vietnam War, vital interests, Western Europe

Take it from me – the words “Lehman” and “moment” are words that no one should ever want to see in the same sentence ever again. Yet they’ve been making a collective comeback lately (see, e.g., here, here, and here), signaling in the process that the determination of the United States and other countries to help Ukraine achieve its goal of expelling Russia from the territory it’s lost could backfire disastrously.

This specific risk has emerged not because the conflict could spread beyond Ukraine’s borders and embroil the big new concentrations of U.S. and other NATO military forces right next door – and therefore all too easily escalate to the nuclear level. It’s also emerged because of the growing economic hardship and potential political instability in major world regions created by the disruption of global energy and food trade triggered by Russia’s invasion and the sanctions it’s triggered.  

The phrase “Lehman moment” refers to the time when the national and global financial systems and economies nearly collapsed because so many of the world’s major banks and other lenders had engaged in such reckless practices, and because they were so interconnected that the failure of one – America’s Lehman Brothers – threatened to topple the whole house of cards that had been created.

Today’s Lehman moment is feared to be coming in Europe’s energy sector – also dominated by huge, closely connected institutions and also endangered by contagion. But this time the culprit hasn’t been greedy executives or asleep-at-the-switch regulators. It’s been the price of natural gas. The Russian invasion of Ukraine itself, the duration of the fighting, Russian supply curbs and threats of cut-offs have pushed it so high that many European utilities have been forced to buy the increasingly scarce fuel on the very expensive spot market and sell it to customers at the much lower prices stipulated by the contracts they’ve signed. (See here for a useful explanation of all of the above.)

As with the original Lehman moment, government bailouts are likely to save the day – at least for the foreseeable future. But the costs are shaping up to be astronomical, and even if they’re paid by all of the continent’s well- and less well-off countries alike, enormous national debts are sure to grow. Moreover, Europe’s near-term energy, and overall economic, future looks so grim because major shortages and towering prices this winter seem both inevitable and bound to bring on a serious recession and all the suffering and anxiety that accompany such downturns.

That sure sounds like a formula for even more political instability than Europe has already seen lately, including a loss of public faith in national and regional establishments and institutions of all kinds, and a further strengthening of the sort of political movements – on the right end of the political spectrum in particular – that globalists keep warning are grave dangers to the democracy and even the peace the continent has enjoyed until Russia’s attack on Ukraine.

Nor is Ukraine War-rooted turmoil confined to Europe. As the Biden administration has just warned, “protracted conflicts – including Russia’s invasion of Ukraine” have been developments that have “disrupted global supply chains and dramatically increased global food prices.” As a result, “world leaders [need] to act with urgency and at scale to respond…and avert extreme hunger for hundreds of millions of people around the world.”

Sub-Saharan Africa, one of the areas of greatest risk, has (rightly) never been seen as a high U.S. foreign policy priority. The other area, though, is the Middle East, which has become much less important even to America’s economic well-being because of the energy production revolution at home, but which continues to attract considerable attention from globalist U.S. leaders.

Hence the backfire risk – and a gigantic irony. Globalist backers of the current Ukraine strategy justify it as necessary to protect what they call a “rules-based international order” they believe has been essential for preventing great power conflict, as well as for promoting impressive degrees of prosperity and democracy around the globe. I’d give far more credit to the balance of nuclear terror that’s prevailed for nearly all of that period, but that’s not the main point.  The main point is that, along with great power conflict, the widespread international turbulence being fueled by the duration of the Ukraine War per se is another major geopolitical nightmare that globalism has striven to avert.  

It’s true that incurring great risks to protect specific, concrete interests the U.S. considers vital – like the security of Western Europe and, more recently, Taiwan (because of its leadership in manufacturing the world’s most advanced semiconductors) – by definition are worth running. This logic also holds for objectives like fostering and maximizing stability the world over, even though they’ve always been more dubious because they’re so much gauzier and less realistic. For whatever the damage possible from attempting to safeguard any of these interests, the term “vital” means that failure can generate even greater dangers – particularly national survival and independence.

But running such risks on behalf of Ukraine’s independence – which was never seen as remotely vital U.S. interest even at the height of the Cold War, which was habitually described as a Manichean struggle for the entire world’s future – is a different matter altogether, and indeed makes no sense at all.

During the Vietnam War, a U.S. Army officer is supposed to have told a reporter after one battle that “It became necessary to destroy the town to save it.” The Lehman moment references and mounting signs of tumult in several major regions long seen by Washington as bearing at least significantly and even vitally on America’s safety and well-being indicates how close U.S. Ukraine policy – even if it simply prolongs heavy but geographically contained fighting – is moving toward achieving that absurdly self-destructive goal.

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

Tags

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: Are High Prices Starting to Cure Wholesale Inflation, Too?

Tags

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: New U.S. Wholesale Price Results Belie Biden’s Inflation Optimism

Tags

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: The Transitory Inflation Story Endures

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CCP Virus, consumer price index, core inflation, coronavirus, COVID 19, CPI, energy prices, Federal Reserve, food prices, inflation, Jay Bhattacharya, Jerome Powell, lockdowns, mandates, shortages, stimulus, supply chains, vaccine mandates, Wuhan virus, {What's Left of) Our Economy

Rather than presenting a good news/bad news story, today’s official U.S. figures on one key measure of inflation (bringing the story through December) put into pretty clear focus an important old news/new news story. And its main implication is that the current version of lofty inflation looks considerably different from the standard versions that have hit the nation previously. Therefore, it’s looking more “transitory” (at least in terms of stemming mainly from developments specific to the CCP Virus epidemic) than ever.

This distinction of course matters because evaluating the nature of today’s inflation will greatly influence how American policymakers (especially the Federal Reserve) respond, and how they should respond. If today’s price increases stem from standard sources, then a standard response – tighter monetary policy, less government spending – make sense. If current inflation is distinctive, more austere economic policies stil may be needed for any number of reasons, but inflation-fighting won’t be a strong one.

The new news? The U.S. government tracks two main measures of inflation: Overall price increases, and price increases for “core” goods and services. The latter gauge strips out food and energy prices – because ordinarily they’re supposed to be extraordinarily volatile for reasons mainly unrelated to the economy’s underlying inflation prone-ness.

But today’s inflation data (for what’s called the Consumer Price Index, or CPI), demonstrates that during the virus era, the core price increases have been more volatile than their overall counterparts.

Let me make clear two crucial points right at the outset, though: First, as I’ve written previously, “transitory” (a term used for months but “retired” recently by the Federal Reserve) doesn’t necessarily mean “short-lived.” That’s because the virus itself and its effects may well not be short-lived. Indeed, because of the unusually rapid spread of the Omicron variant, pandemic-related and inflation-fueling economic disruptions could well last for months more.

Second, viewing today’s inflation as transitory doesn’t mean that the Biden administration and Congress may not have made a serious mistake in supporting a major round of economic stimulus earlier this year – and therefore greatly boosting Americans’ spending power while the amount of goods and services remained limited for all sorts of (CCP Virus-related and other) reasons.

At the same time, precisely because the last stimulus bill was explicitly linked to the the pandemic’s effects, because the infusion of new money has been running out, and because President Biden’s Build Back Better bill looks pretty dead in Congress, this fiscal policy mistake’s effects are looking transitory, too.

Don’t forget, moreover, the immense monetary policy support for the economy provided by the Fed. It’s virus-related, too, and yesterday, Chair Jerome Powell made clearer than ever his view that the case for such emergency assistance no longer holds, and that the central bank’s decision to start withdrawing it is firmly on track.

In addition, some of the old news (at least for RealityChek readers) about today’s inflation still holds – and further reenforces the case for “transitory-ness.” And this old news concerns the baseline effects phenomenon – by which unusual results recorded at the beginning of a period of time in which comparisons are made exercise powerful, but intrinsically, misleading results at the end of that period. In this instance, the unusually low annual inflation numbers of 2019-2020 have been bound to play a significant role in generating abnormally strong increases for 2020-2021. (BTW, savvy investors take these baseline effects into account when evaluating stock performance, too. Just Google “easy comps.”)

Nevetheless, even this old news now reflects some of the new news. Meaning that for overall inflation, the baseline effect is fading and will continue to fade for the next two data months. For the core, however, the baseline effect will stay strong through March.

The month-by-month and year-by-year figures for both overall and core CPI illustrate all of these points nicely. First, let’s review the monthly changes in overall CPI for this calendar year:

Dec-Jan:                          0.26 percent

Jan-Feb:                          0.35 percent

Feb-March:                     0.62 percent

March-April:                  0.77 percent

April-May:                     0.64 percent

May-June:                      0.90 percent

June-July:                      0.47 percent

July-Aug:                      0.27 percent

Aug-Sept:                      0.41 percent

Sept-Oct:                      0.94 percent

Oct-Nov:                       0.78 percent

Nov-Dec:                      0.47 percent

That new December figure represents both the smallest such increase since July, and a big slowdown from November. So that’s a noteworthy sign of transitory-ness right there.

Yet on a monthly basis, as shown below, core inflation actually quickened a bit in December:

Dec-Jan:                      0.03 percent

Jan-Feb:                       0.10 percent

Feb-March:                  0.34 percent

March-April:                0.92 percent

April-May:                   0.74 percent

May-June:                    0.88 percent

June-July:                     0.33 percent

July-Aug:                     0.10 percent

Aug-Sept:                    0.24 percent

Sept-Oct:                     0.60 percent

Oct-Nov:                     0.53 percent

Nov-Dec:                    0.55 percent

A closer look, however, shows that the core’s ups and downs have been greater than that for overall inflation, and that was especially true early in the pandemic. From January through April, it skyrocketed from 0.03 percent to 0.92 percent, whereas overall price increases went up more slowly (though still impressively), from 0.26 percent to 0.74 percent.

Similar increase patterns are revealed in the annual overall and core inflation increases, but the volatility trends are somewhat different. First, the overall data:

Jan:                             1.37 percent

Feb:                            1.68 percent

March:                       2.64 percent

April:                         4.16 percent

May:                          4.93 percent

June:                          5.32 percent

July:                           5.28 percent

Aug:                           5.20 percent

Sept:                          5.38 percent

Oct:                            6.24 percent

Nov:                           6.88 percent

Dec:                           7.12 percent

Here the nation has experienced not only accelerating annual inflation, but a fourth straight month of acceleration.

Ditto for annual core inflation:

Jan:                            1.40 percent

Feb:                            1.28 percent

March:                       1.65 percent

April:                         2.96 percent

May:                          3.80 percent

June:                          4.45 percent

July:                          4.24 percent

Aug:                          3.98 percent

Sept:                          4.04 percent

Oct:                           4.58 percent

Nov:                          4.96 percent

Dec:                           5.49 percent

But rather than being more volatile early in the pandemic period, these prices sung the most between last June and September, and during December. Still, if the volatility of overall and core inflation have been in the same ballpark lately, that’s an indication that this most recent burst of inflation has broken the mold.

The baseline effects are also signaling the recent outsized volatility of core inflation. Since it was so unusually depressed early in the first pandemic year 2020, these effects, as mentioned above, will stay prominent in January and February, too. But the baseline effect for regular inflation is already fading and will continue on that path. 

As has been the case for nearly two years now, however, the wild card remains the CCP Virus and now its Omicron variant and even more particularly, government reactions to its stunning transmissability. Moreover, it’s not just the Biden administration that may contribute to inflation-boosting supply chain bottlenecks and shortages due to vaccine mandates, other curbs, and their impact on individual fears and behavior. China’s ongoing Zero Covid policy looms as a major threat, too.     

All of which brings up a point made by Stanford University medical school professor Jay Bhattacharya, a leading public health authority. He’s repeatedly written that “The end of the pandemic is primarily a social and political decision” because although “we have no technology to eradicate the virus,”`the knowhow and strategies for reopening safely and sustainably are already available. If, as I believe, he’s right, then ending virus-induced inflation and making it truly transitory is well within reach, too.