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,