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

Tags

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

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

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

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

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

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

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

Jan.             0.3

Feb.            0.3

March         0.6

April           0.6

May            0.5

June            0.5

July            0.4

Aug.           0.4

Sept.           0.3

Oct.            0.6 

Nov.           0.6

Dec.           0.5

Jan.            0.5

Feb.           0.6 revised to 0.5

March       0.9

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

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

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

Jan.             0.2

Feb.            0.1

March        0.4

April          0.6

May           0.6

June           0.5

July            0.3

Aug.           0.3

Sept.           0.2

Oct.            0.5

Nov.           0.5

Dec.           0.5

Jan.            0.5

Feb.           0.4 revised to 0.3

March        0.3

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

Jan.            1.4

Feb.           1.6

March        2.5

April          3.6

May           4.0

June           4.0

July            4.1

Aug.           4.2

Sept.           4.4

Oct.            5.1

Nov.           5.6

Dec.           5.8

Jan.  21-22           6..0

Feb. 21-22           6.4 revised to 6.3

March 21-22        6.6

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

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

Jan.             1.8

Feb.            1.8

March        1.3

April          0.6

May          0.5

June          0.9

July          1.0

Aug.         1.2

Sept.         1.4

Oct.          1.2

Nov.         1.2

Dec.         1.3

Jan. 20-21           1.4

Feb. 20-21          1.6

March 20-21       2.5

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

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

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

Jan.            1.5

Feb.           1.5

March        2.0

April          3.1

May           3.5

June           3.5

July            3.6

Aug.          3.6

Sept.          3.7

Oct.           4.2

Nov.          4.7

Dec.          4.9

Jan. 21-22             5.2

Feb. 21-22            5.4 revised to 5.3

March 21-22        5.2

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

And here are the annual core figures for the preceding year

Jan.             1.7

Feb.            1.9

March        1.7

April          0.9

May           1.0

June           1.1

July           1.3

Aug.          1.4

Sept.          1.5

Oct.           1.4

Nov.          1.3

Dec.          1.4

Jan. 20-21             1.4

Feb. 20-21            1.5

March 20-21         2.0

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

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

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

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

Those Stubborn Facts: China Celebrates Earth Day

Tags

China, climate change, coal, Earth Day, energy, fossil fuels, Those Stubborn Facts

Coal production capacity China says it will add this year:   300 million tons

Increase from China’s new coal production capacity last year: 36.36%

China share of global coal production & consumption: c. 50 percent

 

(Source: “With coal surge, China puts energy security and growth before climate,” by Christian Shepherd, The Washington Post, April 22, 2022, https://www.washingtonpost.com/world/2022/04/22/china-coal-climate-change-xi-energy/)

(What’s Left of) Our Economy: No More Baseline Excuses for U.S. Inflation

Tags

baseline effect, CCP Virus, China, consumer price index, core inflation, coronavirus, cost of living, COVID 19, CPI, energy, Federal Reserve, food, inflation, lockdowns, prices, sanctions, supply chains, Ukraine-Russia war, Zero Covid, {What's Left of) Our Economy

As if the new monthly and yearly numbers for March per se weren’t high enough, they were far from the only bad news, or even the worst news, in today’s Labor Department report on its inflation measure – the Consumer Price Index or CPI.

The new data also made clear that the baseline effect is definitely gone — especially for the overall CPI — which means that prices in America are no longer rising at annual rates not seen in decades partly because they were rising so slowly in the pandemic period 2020 and very early 2021.

Now their year-on-year jumps are resulting from their more recent and current momentum. And with much more in the way of surging food and energy costs coming in the next few months due to Ukraine war-related global supply disruptions and anti-Russia sanctions, that means Americans will be contending with sky-high and even hotter inflation rates for the foreseeable future.

The rise and fall of the baseline effect becomes clearest from looking at the annual overall inflation rates by month starting in January, 2021, and comparing them with their counterparts from the year before. (Starting with the January, 2022 figures, the baseline year of course is 2021.)

The admittedly complicated table below shows (from left to right) the originally reported annual inflation figures by month for this period, the revised results, and the same annual figure for that month from the previous, CCP Virus-ridden year. Where only one inflation rate is presented, the original figure has remained unrevised:

Jan. 2021:       from 1.37 percent to 1.36       from 2.47 percent to 2.46

Feb: 2021:      1.68 percent                            from 2.31 percent to 2.32

March 2021:  from 2.64 percent to 2.66        from 1.51 percent to 1.53

April 2021:    from 4.16 percent to 4.15        from 0.34 percent to 0.36

May 2021:     from 4.93 percent to 4.94        from 0.22 percent to 0.24

June 2021:     from 5.32 percent to 5.34        0.73 percent

July 2021:      5.28 percent                            from 1.05 percent to 1.03

Aug 2021:     from 5.20 percent to 5.21        from 1.32 percent to 1.33

Sept 2021:     from 5.38 percent to 5.39        from 1.41 percent to 1.40

Oct 2021:      6.24 percent                             from 1.19 percent to 1.18

Nov 2021:     from 6.88 percent to 6.83        1.14 percent

Dec 2021:     from 7.12 percent to 7.10        from 1.31 percent to 1.28

Jan 2022:      7.53 percent                             from 1.37 percent to 1.36

Feb 2022:     7.91 percent                             1.68 percent

March 2022: 8.56 percent                            from 2.64 percent to 2.66

The baseline effect was strongest between March and July, 2021. That year, the annual overall (or “headline”) inflation rate went from 2.64 percent to 5.28 percent. But the annual rates for those months the year before dropped from 1.51 percent to 1.05 percent. Given that the Federal Reserve’s target rate for annual inflation (which helps determine how loose or tight it will keep the supply of credit to the economy and therefore – roughly – how much growth and job creation will be generated) is two percent (albeit for the slightly different gauge it uses), you can see how weakly prices were rising in deeply recessionary spring of 2020, and how those levels distorted the annual rates for the following year, as the economy returned — choppily — to normal growth. 

But a major baseline effect also shows up between September, 2021 at least through January, 2022. During that period, the annual inflation rates rose fom 5.38 percent to 7.53 percent. Yet their counterparts from the year before dipped from a still low 1.40 percent to 1.36 percent.

Starting in February, 2022, though, signs of a baseline fade began appearing, as the that month’s annual rate increased considerably over the January figure and its 2021 predecessor worsened to its highest level since the previous February – not so coincidentally, just before the virus’ arrival in force.

And last month’s big jump in the annual inflation rate came off a March, 2021 result that was significantly higher than the Fed target, and that also pierced that level for the first time since February, 2020.

The core inflation rate, which strips out food and energy because their price levels are supposed to be unusually volatile for reasons having little to do with the economy’s underlying vulnerability to inflation, shows a similar pattern, but with a recent wrinkle. The table below follows the same format as that for overall inflation, although as you’ll see, the absolute levels generally are somewhat lower.

Jan 2021:        from 1.40 percent to 1.39        2.26 percent

Feb 2021:       from 1.28 percent to 1.29        from 2.36 percent to 2.38

March 2021:  from 1.65 percent to 1.66        from 2.10 percent to 2.12

April 2021     from 2.96 percent to 2.97        from 1.44 percent to 1.46

May 2021:     from 3.80 percent to 3.81        from 1.24 percent to 1.25

June 2021:     4.45 percent                             1.20 percent

July 2021:      from 4.24 percent to 4.20        from 1.56 percent to 1.54

Aug 2021:      from 3.98 percent to 3.96        from 1.70 percent to 1.71

Sept 2021:      4.04 percent                            1.72 percent

Oct 2021:       from 4.58 percent to 4.59       1.63 percent

Nov 2021:      from 4.96 percent to 4.95       from 1.63 percent to 1.64

Dec 2021:      from 5.49 percent to 5.48       from 1.61 percent to 1.60

Jan 2022:       6.04 percent                            1.39 percent

Feb 2022:      6.42 percent                            1.29 percent

March 2022:  6.44 percent                            1.66 percent

Again, from March through July, 2021, the annual core inflation rate increased from 1.66 percent to 4.20 percent. But the comparable figures for the year before decreased for 2.12 percent to 1.54 percent. Also as with the headline inflation numbers, the baseline effect appeared later in the year, too. But it’s lasted longer. From September, 2021 through February, 2022, the yearly core inflation rate accelerated from 4.04 percent to 6.42 percent. For the same period from the year before, however, it sank from 1.72 percent to 1.29 percent.

Yet the new March, 2022 data indicate that the core’s baseline effects are numbered, as annual inflation inched up to a still very high 6.42 percent, but March, 2021’s version rose at a much faster clip – from that 1.29 percent to 1.66 percent. Yes, that’s still well below the Fed target, but the increase was the biggest in relative terms since July, and April, 2021’s annual rate had zoomed up to 2.96 percent – nearly doubling.

A glass-half-full result from the new CPI report came from the monthly change in the core figure. Not only did it tumble all the way from 0.51 percent in February to 0.32 percent. But the sequential decrease was the second straight, and the biggest in relative terms during the entire pandemic period and the level was the lowest for a single month since August’s 0.24 percent.

Unfortunately, Ukraine-related disruptions seem likely to reverse this trend, and this regression could well be reinforced by supply chain snags generated by China’s decision to lock down several enormous cities and industrial centers by responding to a recent rebound in CCP Virus cases with a return to its Zero Covid policies.

Moreover, since energy prices in particular eventually feed into price levels for every U.S. economic actor that uses energy, the headline-core inflation distinction will surely look more academic than ever in the months ahead.

Meanwhile, the red hot monthly headline CPI increase of 1.24 percent in March was the biggest such jump since 2005, and a huge speed-up over February’s 0.80 percent. For me, the big takeaway is that the U.S. economy now clearly faces a danger not only of the Federal Reserve creating a recession by tightening monetary policy enough to bring inflation under the control, but of such tightening producing that recession while still leaving inflation far too high.

Those Stubborn Facts: Is the European Union Really Standing with Ukraine?

Tags

energy, European Union, military aid, natural gas, oil, Russia, Those Stiubborn Facts, Ukraine invasion, Ukraine-Russia war

Amount of European Union payments to Russia for

energy supplies since it invaded Ukraine: $38

billion

 

Amount of European Union aid to Ukraine to help

it resist the Russian invasion: $1.09 billion

 

(Source: “The EU is paying 35 times as much for Russian fuel as it’s given Ukraine for defense, chief diplomat says,” by Sinead Baker, Business Insider India, April 6, 2022, https://www.businessinsider.in/politics/world/news/the-eu-is-paying-35-times-as-much-for-russian-fuel-as-its-given-ukraine-for-defense-chief-diplomat-says/articleshow/90686530.cms)

(What’s Left of) Our Economy: Americans’ Real Wages Keep Sinking

Tags

CCP Virus, China, consumer price index, coronavirus, cost of living, COVID 19, CPI, energy, food, inflation, inflation-adjusted wages, living costs, lockdowns, private sector, real wages, Russia, sanctions, supply chains, Ukraine, Ukraine invasion, Ukraine-Russia war, wages, Wuhan virus, zero covid policy, {What's Left of) Our Economy

Last Thursday’s news coverage of U.S. inflation rates (as measured by the Labor Department’s Consumer Price Index, or CPI) rightly emphasized that the February headline figure hit its highest annual rate in 40 years. What such reports seem to have missed is something at least as important, especially for understanding why the American public seems so angry about these price hikes despite lots of other strong economic indicators.

Specifically, the same day the Labor Department released the new CPI numbers, it also posted data showing that after adjusting for inflation, wages for many major categories of U.S. workers saw their greatest drops in several months and in some cases longer than that. And much of the news was especially bad in manufacturing.

To start with the broadest grouping, in February, hourly pay for the average private sector worker fell on month by 0.80 percent, the worst such performance since the 1.72 percent decrease in June, 2020, early during the recovery from the CCP Virus’ first wave. (As known by RealityChek regulars, the Labor Department doesn’t track wages for government workers because those pay levels are mainly set by politicians’ decisions, and therefore say little about the fundamental state of the nation’s labor market or broader economy.)

For private sector production and nonsupervisory workers (who are often called blue-collar workers), the 0.86 real wage decline they experienced was also the worst since June, 2020 (1.30 percent).

On an annual basis, after-inflation wages in February sank for all private sector workers by 2.63 percent – the fastest pace since last May’s 2.67 percent. And for the blue-collar subset, they’re off by 1.93 percent – also the most since last May (2.69 percent).

Throughout manufacturing, these inflation-adjusted wages took major hits, too. For all workers in the sector, such pay dropped by 1.29 percent between January and February – the biggest falloff since May, 2020’s 1.76 percent. For industry’s blue-collar employees, they tumbled by 0.57 percent – the steepest since June, 2020’s 1.31 percent.

Much worse for manufacturing wages were the February year-on-year results. For manufacturing as a whole, they were down in after-inflation terms by 3.43 percent – the greatest decline since April, 2021’s 3.85 percent.

But the real stunner came for the production and nonsupervisory group. The 3.41 percent annual retreat in their real wages was the worst in more than 41 years – going back to July, 1980’s 3.90 percent.

And especially discouraging – with further price hikes in energy (and all the products and services that depend on it) and food seemingly certain because Russia’s invasion of Ukraine has disrupted global markets and supply chains anew, inflation-adjusted wages also seem likely to keep falling. The news that China has just locked down two big industrial cities in an attempt to fight a CCP Virus surge with its Zero Covid policy won’t help, either.

It’s true, as President Biden and his supporters keep noting, that growth is still strong, and that unemployment is way down.  But the former understandably can seem abstract, and high inflation means that even recent job gainers can’t be faulted for feeling that they’re falling behind economically despite paychecks resuming.  

 

(What’s Left of) Our Economy: #PutinPriceHike? Not Even Close – Yet

Tags

baseline effect, Biden administration, CCP Virus, coronvirus, COVID 19, energy, fossil fuels, gasoline, inflation, lockdowns, oil, Putin, sanctions, stay-at-home, Ukraine invasion, Ukraine-Russia war, Wuhan virus, {What's Left of) Our Economy

According to the Biden administration, it’s the #PutinPriceHike. That is, don’t blame anything Washington has or hasn’t done for the the bulk of the high gasoline prices Americans have been paying lately. Instead, blame Russian dictator Vladimir Putin, his aggression against Ukraine, and the global oil market turmoil it’s triggered.

The trouble is, if you look at these prices in a comprehensive, statistically legitimate way, scapegoating Putin in this case isn’t justified yet. But the same methodology shows that Mr. Biden and his aides are off the hook, too – at least until recently.

Critics (see, e.g., here) have countered the Biden claims by noting that strong U.S. gasoline inflation predates the Ukraine war and even Russian military buildup by many months, and they’re right. As known by RealityChek readers, however, that’s far from the whole story. In particular, they’re ignoring the impact on gasoline and other prices of the ongoing aftermath of the CCP Virus pandemic, the brief but sharp recession created by the disease and related lockdowns and voluntary behavioral changes, and ongoing stop-start U.S. economy that’s still resulting.

In other words, they’re ignoring the “baseline effect” caused by the economic shocks of the 2020 pandemic year in particular. These drove economic activity down to such low levels, and kept it there so long, that any major return to normal (and therefore normal prices) is going to produce unusually lofty inflation stemming from a catch-up effect. Therefore, it won’t be possible to determine the role of other contributors to inflation in gasoline or any other goods and services until this baseline effect fades significantly and finally disappears. And therefore, scapegoating Biden for soaring gasoline prices pre-Ukraine buildup isn’t justified, either.

RealityChek reported yesterday that the latest official U.S. figures show that the baseline effect has ended for headline inflation, and looks on the way out for core inflation (which strips out food and energy price. And roughly the same is true for gasoline prices.

The table below shows their monthly year-on-year percentage changes for last year (2020-21) in the middle column and for pandemic-dominated 2019-2020 (in the righthand colum). The numbers begin in March because March, 2020 was the first month in which the virus began significantly affecting the economy.

Gasoline price annual percentage changes      2020-21             2019-20

March:                                                               22.58                 -10.05

April:                                                                 49.68                 -32.03

May:                                                                  56.51                 -33.67

June:                                                                  45.42                 -23.41

July:                                                                   41.93                -20.12

Aug.:                                                                  42.76                -16.67

Sept.:                                                                  41.93                -15.43

Oct.:                                                                   49.52                -18.15

As is evident, starting in March, 2020, gasoline prices began nosediving from their levels of 2019, and steep annual drops continued (though at a slower pace) through October. It’s easy to understand why. The combination of lockdowns and stay-at-home behavior caused automotive travel to crater, and national demand for gasoline naturally plummeted as well. Further, that’s clearly a big part of the reason why during the following March-October period, gasoline prices prices skyrocketed on the same annual basis. They were returning to normal from an artificially low base. And as a result, it’s wrong to blame the Biden administration exclusively or even mainly for this hot gasoline inflation.

From that point, however, the Blame Biden case gets stronger. The above table stops in October, 2021 because November was when the Putin military buildup began – and according to the Biden argument, gasoline prices really began taking off. What happened to annual gasoline prices increases from then until the end of  2021, and how strong was the baseline effect? Here are the numbers for November and December, with the 2020-21 annual increases in the middle column and the 2019-20 increases in the righthand column:

Gasoline price annual percentage changes      2020-21             2019-20

Nov.:                                                                  57.76                 -19.53

Dec.:                                                                  49.34                 -15.34

The strong 2020-21 yearly price increases continued for these two months. But the baseline effect (from the big 2019-20 price drops) weakened. In fact, the December, 2019-20 annual 15.34 percent annual gasoline price decline was the smallest such figure since March, 2019-20’s 10.05 percent. And the annual increase for the following March (22.58 percent) was less than half December’s 49.34 percent.

What about this January and February? For these months, of course, the comparison years are 2021-22 (whose increases are presented in the middle column) and 2020-21 (in the right hand column).

Gasoline price annual percentage changes      2020-21             2019-20

Jan.:                                                                   40.02                  -8.90

Feb.:                                                                   38.01                   5.42

So the story for the first two months of this year – between the start of Putin’s buildup and the (late February) invasion – is that annual increases slowed, but the baseline effect vanished much faster. Indeed, between February, 2020 and February, 2021, gasoline prices actually rose. So the administration’s #PutinPriceHike claims hold much less water.

Blaming Putin will become more credible going forward, as sales of Russian oil worldwide are curbed by sanctions. Since the global oil market is so thoroughly integrated, U.S. oil supplies will be crimped and upward price pressures will strengthen. But this is also the point at which other major administration policies will rightly attract attention for their role in spurring torrid gasoline inflation. They include in particular measures and rhetoric that throughout the President’s term have convinced oil and other fossil fuel providers that their industries’ growth will keep facing ever greater policy obstacles, and whose cumulative effect has undercut their ability to ramp up output quickly to fill the Russia gap.(See, e.g., here and here.)

All of which means that, as is the almost always the case with major economic trends and developments, recent gasoline price inflation has many causes, not one. And they can change profoundly in their nature and respective importance with the kinds of changing circumstances that have shaken the global oil and U.S. energy policy landscapes since the CCP Virus pandemic began. Let’s all hope, therefore, that American leaders across the political spectrum begin spending more time developing effective responses to oil price inflation, and less on bombarding each other and the rest of us with facile talking points.

(What’s Left of) Our Economy: High Inflation’s No Longer Baseline-y But Getting No Less Puzzling

Tags

baseline effect, consumer price index, core inflation, CPI, energy, Federal Reserve, food, inflation, Russia, stimulus, Ukraine, Ukraine-Russia war, {What's Left of) Our Economy

This morning’s final pre-Ukraine War Labor Department report on U.S. inflation (for February) contained some relief for data geeks: The “baseline effect” for headline inflation that I (and others) have been arguing has kept reported price rises higher than they’d ordinarily be, seems to have come to an end. 

So going forward, these data should stop confusing the inflation picture (which would already have been worrisome enough). That’s because on an annual basis, they’ve partly stemmed from the inflation figures from 2019-2020 and early 2020-21 being uusually low because of the CCP Virus, related lockdowns, and their depressing effect on economic activity and consumer prices.

Not that the nature of inflation will become entirely clear – or that the news on the prices front is becoming remotely good. After all, regardless of how strongly or not the U.S. economy keeps recovering from its pandemic-related ills, headline inflation appears bound to get worse going forward because of the disruptions to global oil and food supplies resulting from the Ukraine conflict – including curbs on purchases of energy from Russia. And these of course are coming on top of the supply chain snags that have pushed inflation up because of the peculiar stop-start nature of the pandemic era economy and its only gradually normalizing aftermath.

The February numbers indicate that the baseline effects are already shrinking for core inflation data, too. These strip out both energy and food costs because they’re seen as unusually volatile for reasons having nothing to do with the economy’s underlying inflation “prone-ness.”

Not that this distinction between headline and core inflation is or ever has been truly clearcut. Energy prices, in particular, strongly affect the costs of virtually everything created or provided by businesses (including food!). So the energy and food components of headline inflation clearly bleed into core inflation.

Even so, deciding the nature of inflation’s main causes matters because they heavily influence the response of the Federal Reserve – which is required by law to help maintain price stability (along with promoting employment). If the Fed judges that today’s inflation is mainly the classic type – consumer demand growing much faster than the supply of goods and services simply because Americans have too much spending power – then it will continue responding, as it has so far. That is, it will keep reducing the massive stimulus it injected into the economy during the sharp virus-induced recession.

Such monetary “tightening” would slow growth (and cool off prices), and even risk another recession. But so far, the Fed seems convinced that’s a risk worth taking in order to bring inflation under control.

But if the central bank changes its mind and assigns much more blame for inflation to serious price shocks in energy and commodities due to the Ukraine conflict, then it will probably keep monetary policy extremely loose, or tighten less and even more gradually than originally planned.

Adequate growth, therefore, could be maintained, but prices could spiral to genuinely dangerous degrees, and inflation’s momentum could strengthen further because both producers and consumers will start behaving as if they expect prices to keep surging.

That headline figure for the Labor Department’s inflation gauge (called the Consumer Price Index, or CPI) – the gauge that includes food and energy prices – saw its biggest relative monthly jump (23.08 percent, from 0.65 percent to 0.80 percent) since October (when it more than doubled). Further, its level in absolute terms was the highest since October’s 0.87 percent.

Core inflation, however, actually slowed down in February – from January’s 0.58 percent increase to 0.51 percent. And the deceleration (12.07 percent) was the biggest since November’s (13.33 percent).

As for the baseline effect, a February fade becomes clear upon examining the latest monthly annual changes in headline inflation with those that came the year before. Let’s start with the March through December, 2021 period, with the 2020-21 monthy figure on the right and the 2019-20 figure on the far right . (March is chosen because that’s the month in 2020 when the virus’ first major economic effects were felt.)

March:    2.66 percent     1.53 percent

April:     4.15 percent      0.36 percent

May:      4.94 percent      0.24 percent

June:      5.34 percent      0.73 percent

July:       5.28 percent      1.03 percent

Aug:      5.21 percent      1.33 percent

Sept:      5.39 percent      1.40 percent

Oct:       6.24 percent      1.18 percent

Nov:      6.83 percent      1.14 percent

Dec:      7.10 percent      1.28 percent

Given that the Fed’s recent annual inflation target has been two percent, you can see how weakly headline prices rose in 2019-20, and why the economy’s return to normal the following year created a catch up effect for prices.

The two monthly figures below show the annual 2021-22 changes in the monthly inflation rates for the first two months of the year (on the right) and for 2020-21 (on the far right).

Jan:       7.53 percent      1.36 percent

Feb:      7.88 percent      1.68 percent

To me, the end of the baseline effect is augured by the newest, February numbers because the 2020-21 headine inflation rate made its closest approach to the two percent target in more than a year, and at the same time, a strong speed up took place in the 2021-22 annual headline rate. And in March, 2021, the annual headline inflation rate blew past the target – reaching 2.66 percent. So the next CPI report (covering March) should make clear that the baseline effect is completely gone.

By contrast, the annual core inflation figures still look pretty baseline-y. In fact, they’re looking increasingly baseline-y. Here’s how the recent annual results by month compare with those for the year before for March through December, 2021. Again, the 2020-21 results are on the right, and their 2019-20 counterparts on the far right:

March:    1.66 percent     2.12 percent

April:      2.97 percent      1.42 percent

May:       3.81 percent      1.25 percent

June:       4.45 percent      1.20 percent

July:        4.20 percent      1.54 percent

Aug:        3.96 percent      1.71 percent

Sept:        4.04 percent      1.72 percent

Oct:         4.59 percent      1.63 percent

Nov:        4.95 percent      1.64 percent

Dec:         5.48 percent      1.60 percent

The pattern here is somewhat different from that of headline inflation, in that the 2019-20 figures generally stayed and moved closer to the Fed’s two percent target through September. But then, they began a retreat, even as 2021-22 rates quickened. And the baseline effect became much more conspicuous in January and February, as the 2020-21 annual rates slowed dramatically while the 2021-22 rates increased markedly.

Jan:           6.04 percent     1.39 percent

Feb:          6.42 percent     1.29 percent

As shown above, annual core inflation bounced back to 1.66 percent in March, 2021. That’s still below the Fed target, but if next month’s CPI report shows a continued speed-up in the annual rate, that would be pretty strong evidence that this baseline effect is gone, too.

Unfortunately, unprecedented baseline-induced inflation confusion seems sure to turn into major energy and other commodity shock inflation confusion – making the Fed’s judgements about why prices keep rising so strongly more important than ever.

Making News: Back on National Radio to Talk War and the Economy

Tags

climate change, energy, European Union, fossil fuels, green energy, Green New Deal, Iran, Iran nuclear deal, JCPOA, Making News, Market Wrap with Moe Ansari, Moe Ansari, natural gas, oil, renewable fuels, Russia, Ukraine

I’m pleased to announce that tonight I’m scheduled to be back on the nationally syndicated “Market Wrap with Moe Ansari” radio program to discuss the economic – and especially energy – repercussions of the Ukraine-Russia war.

“Market Wrap” is broadcast nightly between 8 and 9 PM EST, the guest segments typically come in the second half-hour, and you can tune in by visiting Moe’s website and clicking on the “Listen Live” link on the right-hand side.

As usual, moreover, if you can’t tune in, the podcast will be posted as soon as it’s on-line.

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

Our So-Called Foreign Policy: Biden’s Worrisome State of the Union Message to China

Tags

alliances, allies, Biden, China, energy, inflation, Our So-Called Foreign Policy, Russia, sanctions, State of the Union, Taiwan, Ukraine, Ukraine invasion, Vladimir Putin, Xi JInPing

Let’s start with a confession: I’m one of the numerous viewers and listeners who has no idea what President Biden meant when he ended his State of the Union address last night with an ad-libbed “Go get him!” right after his usual closing, “May God protect our troops.”

This seemingly provocative placement notwithstanding, it probably wasn’t a suggestion that the U.S. military would be roaring into action to help Ukraine win its war with Russia – which segues nicely into today’s theme of what message China probably gleaned from the speech.

The subject matters greatly because Chinese leaders have been eyeing a takeover of Taiwan and threatening the island’s independence even longer than Vladimir Putin has been eyeing a takeover of Ukaine, and for similar stated reasons. Just as Putin insists that Ukraine historically has been part of Russia, Beijing views Taiwan as a renegade province of China. And although there’s no important connection I can see between Ukraine’s fate and America’s own security and prosperity, Taiwan is the world leader in semiconductor manufacturing technology – which is crucial to U.S. military power and economic well-being.

That’s why I’m concerned that too much of the Biden speech signaled to China that its increasingly aggressive moves against the island can continue and even intensify with impunity.

For not only did the President once again vow that “our forces are not engaged and will not engage in conflict with Russian forces in Ukraine.” He added that “I’m taking robust action to make sure the pain of our sanctions  is targeted at Russia’s economy. And I will use every tool at our disposal to protect American businesses and consumers.”

In other words, although “we the United States of America stand with the Ukrainian people,” that’s only true as long as Americans themselves don’t run any significant risks or pay any significant price.

Nor is this Biden qualification limited to words. It’s precisely to avoid boosting already lofty U.S. inflation rates even higher than the President has excluded energy from his anti-Russia sanctions package so far – even though Putin’s massive earnings from oil and gas exports clearly help finance his Ukraine war. 

Mr. Biden did repeat his pledge that “the United States and our Allies will defend every inch of territory of NATO countries with the full force of our collective power.” But like Ukraine, which is not a member of that North Atlantic Treaty Organization, Taiwan is not an official ally. Therefore, China could well conclude that the United States would stay out of a Taiwan conflict for similar reasons.

The State Department has warned that “We have an array of tools that we can deploy if we see foreign companies, including those in China, doing their best to backfill U.S. export control actions, to evade them, to get around them.”

But if the administration’s top Ukraine sanctions priority to date has been shielding the U.S. economy from their impact, you couldn’t blame Xi Jinping’s regime for not taking seriously the notion that Washington would punish China for propping up Putin.

After all, the United States (unforgivably) has become highly dependent on his economy for a wide range of products. China’s markets for U.S. goods and services simply dwarf Russia’s. And indeed, these links have become so broad and deep that nearly the entire American big business community has become an ardent and highly effective lobby for preventing any boat-rocking. .

None of the above is to say that U.S. rhetoric and moves on the Ukraine, or any other foreign policy fronts, will be the sole or even the main determinants of China’s Taiwan strategy. After all, Beijing has been ramping up pressure on the island long befor the conflict in Eastern Europe broke out – for reasons ranging from concerns about Taiwan declaring its formal independence and potentially exposing China as a paper tiger in the process to Xi’s decision to link “reunification” to his legacy.

But just as American leaders should never make threats they can’t or won’t back up (or make commitments that create many more dangers than they can prevent, which I believe to be the case with NATO’s expansion into Eastern Europe and years of talk about adding Ukraine and other Russian neighbors), they need to be careful about signaling weakness or timidity. And I fear that’s exactly what was conveyed to China by the sharp contrast between President Biden’s apocalyptic warnings about the need to resist Putin’s aggression and the tight limits he revealed to his willingness to do so.              

Our So-Called Foreign Policy: How the Last Seven Days Could Really Shake the World

Tags

alliances, Baltics, Crimea, deterrence, Donbass, energy, European Union, free-riding, Georgia, Germany, NATO, North Atlantic treaty Organization, nuclear deterrence, Olaf Scholz, Our So-Called Foreign Policy, Poland, Russia, spheres of influence, Ukraine, Ukraine invasion, Ukraine-Russia war, Vladimir Putin

The situation in Ukraine as of this morning remains as fluid and full of uncertainties as it was when yesterday when caution persuaded me to pause and turn my attention to a sobering CCP Virus milestone.

But one feature of the conflict is becoming clear, and if it holds much longer, opens up the distinct possibility that the major assumptions that have animated U.S. policy toward European security merit major rethinking.

That feature: Ukraine is proving to be a much tougher military challenge for Russia than anyone, including me, expected. It’s still not entirely certain why. But even the explanations most favorable to Moscow and Russian military prowess – that Vladimir Putin decided to go gradual for fear of destroying the infrastructure of a country his regime will eventually need to run, or of needlessly enflaming the occupied population to the point of triggering an insurgency with staying power, or some combination of the two – lead (logically, anyway) to these potentially game-changing conclusions: that Russia is too weak to bend countries of any decent size to its will, and that there’s no reason to believe it will acquire the necessary power in the policy relevant future.

In other words, it’s one thing to take control over two tiny enclaves of a very small neighbor like Georgia (2008), or to seize a part of Ukraine with a sizable ethnic Russian population (Crimea in 2014), or to use local proxies to challenge on the cheap Ukrainian sovereignty over an eastern region also full of Russian speakers, or even to march into and annex two provinces of this Donbass region.

But using force to turn the rest of Texas-sized Ukraine with its population of more than 40 million people into a Russian satellite? That’s obviously been a much taller order.

And even if superior Russian troop numbers and weaponry ultimately do achieve their apparent near-term goal of replacing Volodymyr Zelensky’s government with pro-Moscow puppets, and thereby the longer-term goal of keeping Ukraine out of NATO, these results will seriously challenge the views of folks like me (most recently, here), who had credited Russia with enough power to bring into a sphere of influence Ukraine – along with smaller neighbors, like the rest of Georgia plus Moldova (neither of which belongs to the North Atlantic Treaty Organization – NATO), and even the three Baltic states that are NATO members.

After all, as mentioned above, keeping control over Ukraine alone may well seriously drain lots of Russian military power, and further strain an economy that’s not exactly a powerhouse to begin with. And if even the old Soviet leaders eventually found keeping Afghanistan not worth the candle, in part because public anger over casualties kept mounting, will Putin really be able to demonstrate greater staying power in Ukraine? Much less simultaneously keep the clamps on other small neighbors? Much less achieve the same objectives vis-a-vis larger Eastern European countries like Poland? Much less even credibly threaten anyone in Western Europe?

But if the more optimistic Ukraine scenario plays out, that would mean that the mainstream, globalist foreign policy leaders and thinkers who view keeping that country free of Russian control, and even bringing it into NATO, as essential for America’s security have been wrong as well – precisely because severe limits on Russian power are becoming increasingly obvious. Unless a Russia that can’t pose a military threat to Western Europe can pose one to the United States?

Russian failure or overly costly success in Ukraine even undercuts arguments that the militarily dominant, or any major, American role in NATO remains crucial. On the one hand, it’s true that, Russia has attacked non-NATO member Ukraine but not NATO allies like Poland and the Baltics. So Putin surely sees a big difference between countries to whose defense the alliance is committed (including with recent deployments of U.S. and other members’ military forces), and those outside the NATO umbrella.

But does that mean that the United States must still remain the kingpin, and contribute an outsized (and very expensive) share of the alliance’s military might? And continue to extend a nuclear shield over Europe – which of course creates a risk of nuclear war with Russia? Maybe not, especially upon considering the West European NATO members’ response to the Ukraine invasion.

Specifically, it’s been much stronger than I and most others expected, too. And the German response has been most revealing of all. After decades of being the alliance’s worst military free-rider, and skimping on its defense budget to the point that a top general just called his forces “more or less bare,” new Chancellor Olaf Scholz has now vowed a big increase in military spending and promised not only that Germany will hit the goal of members’ defense budgets representing two percent of their economies, but exceed it. Moreover, the entire European Union (EU), whose membership overlaps considerably with NATO’s, is now finally recognizing how dangerously moronic they’ve been in boosting their dependence on Russian fossil fuel supplies.

What this seems to demonstrate is that once the Europeans (many of whom have free-ridden militarily themselves) perceive a sharp enough threat to their own safety and independence and well-being, they change profoundly. They begin to act less like cunning and not-so-reliable protectorates determined to gain any benefits they can from Russia in full confidence that America will shield them from any dangers, and more like countries that recognize that their best bets for security and prosperity are their own considerable resources.

By the way, these resources include not only the wealth to field much larger conventional militaries, but French and British nuclear forces. So NATO’s European members should be able not only to deter Russia conventionally, but at the strategic nuclear level as well. And if they deem those nuclear forces inadequate to the task, they can build more

Just as important, this European awakening seems at least partly due to a dawning recognition that for a wide variety of reasons (e.g., America’s preoccupation with its internal problems, its supposedly unreliable recent political leadership, its higher prioritization of Asia, its resentment at being played), historic U.S. enabling can no longer be taken for granted.

All of which means that the American response should be not devoting more of its military strength to deterring or countering Russia in Europe, moving still more conventional forces to Eastern Europe, or unleashing a new round of rhetoric declaring its own vital, ironclad, and undying stakes in the continent’s security, but encouraging these trends – and especially appreciating the opportunity to let itself off the nuclear hook.

This doesn’t mean that the United States should make no contributions to Europe’s defense. But whatever assistance is proposed to the American political system should be clearly described to the public (and to the Europeans) as a policy of choice, not of necessity, and should be flexible enough to enable the nation to opt out of a conflict on the continent if it so decides, not trapped into one, as is potentially the case now. Indeed, as I’ve written, that danger could all too easily still result from the Ukraine war, because non-negligible U.S. forces are now deployed close to the actual fighting.

In 1919, American journalist John Reed came out with a book describing first-hand the Bolshevik Revolution of two years before called Ten Days that Shook the World.  I’m sure not yet certain that this first week of the Ukraine war will turn into seven days that shook the strategic and geopolitical worlds.  (And I certainly hope that the above scenarios turn out to be more accurate than Reed’s sunny expectations of Soviet communism.)  But American leaders focused on their own country’s genuinely vital interests shouldn’t overlook the possibility.