(What’s Left of) Our Economy: New U.S. Inflation Numbers Show New U.S. Inflation Momentum

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Biden administration, Commerce Department, consumer price index, core inflation, CPI, Federal Reserve, inflation, Labor Department, monetary policy, PCE, personal consumption, supply chains, transitory, {What's Left of) Our Economy

Claims made by Federal Reserve leaders and the Biden administration (along with Yours Truly) that current lofty levels of U.S. inflation are transitory took another hit this morning with the Commerce Department’s release of the October figures for the Personal Consumption Exepnditures (PCE) price indices.

For some reason, these data don’t get the same attention as the Labor Department’s Consumer Price Index (CPI), but they should, since they’re the Fed’s inflation gauge of choice, and the Fed’s power to control inflation (or not) through monetary so profoundly influences the cost of credit, and therefore how fast or slowly the economy grows.

And the new PCE numbers show that between September and October, monthly and yearly price increases regained momentum that had previously showed signs of waning. Let’s go the statistics lists (an economist’s version of “Let’s go to the videotape”). First, the year’s monthly percentage changes in overalll PCE inflation:

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.           0.4

Oct.            0.6

Moreover, not only is the October increase back to the previous peaks in March and April, but the August and September results were each revised up from 0.3 percent.

As you can see from the next list, the same kind of pick up can be seen in overall PCE inflation rates on a year-on-year basis. And these percentage canges are more important than the monthly changes because they measure the trend over a longer period of time, and also smooth out the kind of fluctuations that can pop up for random reasons in the short term. Just FYI, the July result was revised down from 4.2 percent.

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.              5.0

The monthly core inflation figures strip out food and energy prices – because they can be volatile for reasons like weather, and foreign oil cartels, that have nothing to do with the economy’s underlying proneness to price increases (or decreases). They’ve been somewhat lower in absolute terms than the overall PCE monthly increases. In October, moreover, though they doubled over the September rate, they’re still lower than the price rises recorded in spring and early summer. But that doubling snapped a five-month streak of stabilization or declines. Here are these percentage changes.

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.            0.4

As for the year-on-year core percentage changes, they’ve arguably been worse momentum-wise than their monthly counterparts because they’d shown no signs of decline through September. Now they’ve become worse still with the jump to 4.1 percent in October (the biggest such surge in decades). And September’s rate has been revised up from 3.6 percent.

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.           4.1

My gut still tells me that current inflation will be transitory – and in some meaningful sense, not because “nothing lasts forever except death and taxes.” That’s because the CCP Virus-era economy is still so downright weird, and because its disruptions – along with the current severity of the disease – are bound to at least calm down at some point in the foreseeable future.

But the new numbers revealing new inflation momentum are telling the opposite story, and their importance is all the more impressive for basically matching the trends shown by the CPI figures. So the burden of proof on inflation’s future has definitely shifted to the shoulders of the transitory-istas.

(What’s Left of) Our Economy: In Case You Still Think Wages are Driving U.S. Inflation

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consumer price index, CPI, inflation, inflation-adjusted wages, Labor Department, wage-price spiral, wage-push inflation, wages, {What's Left of) Our Economy

Although American workers’ pay has kept falling behind living costs this entire year on net, some serious students of the economy (see, e.g., here and here) seem to believe that they’re already starting to fuel the lofty inflation the nation has experienced recently, or will soon begin to.

So I thought that today I’d add to the evidence I’ve already presented (see, especially, here and here) making clear that nothing of the kind has happened so far during 2021, and no signs of this kind of “wage-price spiral” are yet visible.

The first new set of figures clashing with fears of what’s also called “wage push” inflation is below, in a table comparing the monthly overall inflation rates as measured by the U.S. Labor Department’s Consumer Price Index, and the monthly changes in pre-inflation hourly wages (also tracked by the Labor Department.

                    Monthly inflation rate this year     pre-inflation wages this year

Dec-Jan:                   0.26 percent                                 0.03 percent 

Jan-Feb:                   0.35 percent                                 0.27 percent

Feb-March:              0.62 percent                               -0.10 percent 

March-April:           0.77 percent                                 0.66 percent 

April-May:              0.64 percent                                 0.46 percent

May-June:               0.90 percent                                 0.43 percent 

June-July:                0.47 percent                                  0.36 percent

July-Aug:                0.27 percent                                  0.39 percent 

Aug-Sept:               0.41 percent                                  0.59 percent

Sept.-Oct:               0.94 percent                                  0.36 percent

As the table shows, in only two months so far – August and September – has the increase in the pay received by workers exceeded the increase in total U.S. prices. And in October, the gap between inflation rates and wage increases expanded again to its widest extent of the entire year. Indeed, the October current dollar wage increase matched the smallest secured the entire year.

If a wage-powered inflationary spiral was underway, then exactly the opposite would be taking place. Workers would continue seeking raises that consistently topped inflation rates, and employers would continue raising their prices in bids to keep up. And you certainly wouldn’t see the wage gains losing momentum instead of gaining momentum.

The second set of figures debunking the wage-push inflation claims and fears was inspired by my buddy Widge, who I first met on Twitter, and whose insights on the economy and many other subjects I’m always learning from. (Widge has always been too modest to use his name, but I know he’s a real person because we’ve had dinner together.)

Last week, Widge tweeted a chart illustrating the astronomical spike in prices of new motor vehicles and accompanied it with the question, “Do you think it is wages of 4 million fewer payroll employees that are driving the massive inflation of new Autos in the past year?”

Widge’s tweet prompted me to ask a slightly different question: “How do price increases in the hottest inflation sectors of the economy compare with the wage trends in those industries”? Presumably, if the United States was already experiencing wage-push inflation, worker pay in sectors where prices have jumped over the past year faster than the overall annual inflation rate (5.4 percent for September) would be unusually high, too.

Unfortunately, the industry-by-industry wage and price data tracked by the Labor Department don’t always match up, but the table below presents the results for ten high-inflation sectors from all over the economy, and they won’t make the wage-price spiral crowd happy, either. (I’m using September’s statistics because that’s the latest data month for which the most numbers are available.)

                Sept. 2020-2021 CPI change                         Sept 2020-21 wages change

non-poultry meat:    12.6 percent                                          6.84 percent 

poultry:                      6.1 percent                                        13.01 percent 

restaurants:                5.3 percent                                        12.21 percent

furniture/bedding    12.0 percent                                          6.79 percent 

new vehicles             9.8 percent                                         -0.54 percent 

used vehicles          26.4 percent                                         -6.46 percent 

motor vehicle parts   8.8 percent                                         -4.19 percent 

hotels/motels:         17.5 percent                                         12.76 percent

laundry/dry cleaning 6.9 percent                                        10.60 percent

gasoline*:                49.6 percent                                        10.57 percent**

*motor fuel

**gas stations without convenience stores

After all, in the ten sectors shown, pre-inflation wages have surged faster than prices in only three – poultry processing, restaurants and other eating places, and laundry and dry cleaning services. And in three of the ten industries (new motor vehicles, used motor vehicles, and motor vehicle parts) wages have actually fallen before inflation is taken into account. Again, if wages were the main, or even a prime, inflationary culprit, they’d generally be rising faster than prices overall.

No one in his right mind can rule out the possibility that a wage-price spiral will be ignited. Workers are still returning to the job market at a relatively slow rate. Funds from the CCP Virus relief bill ae still being injected into the economy, more infrastucture and related spending will soon start being released, and still more will be on the way if the Senate passes a version of President Biden’s Build Back Better bill that’s close to the measure the House has approved.

But for now, anyone blaming American workers for recent inflation can be rightly accused of blaming the victim.

(What’s Left of) Our Economy: U.S. Manufacturing Returns to Growth – On Automotive’s Back

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aerospace, aircraft, aircraft parts, appliances, automotive, Boeing, CCP Virus, climate change, consumers, coronavirus, COVID 19, election 2021, electrical equipment, Federal Reserve, inflation, inflation-adjusted output, machinery, manufacturing, medical devices, medical equipment, monetary policy, petroleum and coal products, pharmaceuticals, printing, real output, Wuhan virus, {What's Left of) Our Economy

Just as earlier in this CCP Virus-whipsawed economy of ours, as goes the U.S. automotive sector, so goes domestic manufacturing when it comes to output (at least to a great extent). That’s the main story told not only by the inflation-adjusted manufacturing production figures released by the Federal Reserve this morning (for October), but by virtually this entire data series this year.

Domestic industry grew in price-adjusted terms by a healthy 1.30 percent on month in October, snapping a two-month losing streak, and the results were pulled up powerfully by combined vehicle and parts production – which shot up by 10.98 percent. That was its biggest sequential increase since July, 2020’s 29.39 percent, when industry and the entire economy were snapping back strongly from the steep but short virus-induced recession. Without this automotive spurt, real manufacturing output would still have risen nicely in October, but that 0.62 percent monthly gain was less than half the total with automotive.

Complicating the picture still further: Mainly because of the semiconductor shortage, after-inflation automotive output has been on a nothing less than a roller coaster this year. Here are the monthly results for 2021 so far:

January:         +0.63 percent

February:      -10.65 percent

March:            -3.99 percent

April:              -7.23 percent

May:              +5.20 percent

June:               -4.97 percent

July:               +8.54 percent

August:           -2.95 percent

September:     -7.12 percent

October:       +10.98 percent

And for a change, revisions didn’t make a big difference in either the recent overall manufacturing or automotive statistics.

Aside from automotive, manufacturing’s biggest growth winners among the big categories tracked by the Fed were petroleum and coal products (up 4.97 percent), chemicals (up 1.93 percent), printing and related support actvities (1.41 percent) and aerospace and miscellaneous transportation (1.36 percent).

The biggest losers? Electrical equipment, appliances and components (down 1.53 percent), machinery (down 1.27 percent), and miscellaneous durable goods (a grouping that includes much pandemic-related medical equipment – down 0.88 percent).

The machinery drop – the biggest since February’s 2.59 percent – was particularly discouraging, as its products are used throughout manufacturing and big non-manufacturing sectors (like agriculture and construction) alike.

As for manufacturing industries that have been prominent in the news during the pandemic, their October performance was decidedly unimpressive.

Aircraft and parts was the best of the lot. Their real output expanded by 1.43 percent on month in October, but September’s initially reported 1.83 percent increase was revised down considerably, to 0.45 percent. In all, price-adjusted aircraft and parts production is now 14.59 percent above its levels in February, 2020 – the U.S. economy’s last full pre-CCP Virus data month.

Moreover, the sector’s giant, Boeing, has had an excellent news week this past week – especially reports that China may end its two-year ban on buying the company’s jets. So even though aircraft and parts output after inflation has already topped February, 2020’s levels by 14.59 percent, even better times may lie ahead.

Pharmaceuticals and medicines, however, have lost significant growth momentum recently. Following August’s strong (but downwardly revised) 2.46 percent sequential real production increase, the sector has now slumped for two straight months. September’s previously reported 0.74 percent decline is now pegged as a 1.04 percent drop, and inflation-adjusted production sank another 0.51 percent in October. As a result, measured in constant dollars, these industries are just 11.86 percent bigger than just before the pandemic struck – and this despite massive vaccine production.

The news was only slightly better in the crucial medical equipment and supplies sector – which includes virus-fighting items like face masks, protective gowns, and ventilators. After-inflation production was off 1.08 percent in October from September levels, and September’s own initially reported 1.53 percent real monthly output growth is now estimated at just 0.73 percent. Since February, 2020, therefore, real output of these products has advanced by just 2.57 percent.

Whereas I was somewhat pessimistic about U.S. manufacturing’s near-term prospects in my post last month on the output data, the picture now looks brighter. As mentioned just above, the aircraft industry may be back after some very difficult years caused by the CCP Virus-caused slump in travel and Boeing’s safety problems. An infrastructure bill has been passed (though its impact is unlikely to be felt in a major way for many months). Strong overall economic growth seems likely for the fourth quarter of this year. And although the pandemic is by no means over, its main growth-depressing effects may well be past.

Moreover, most of the remaining threats to domestic industry – big business tax hikes and stricter environmental and climate-change regulations – seem less likely due to Republican victories in so many of this year’s elections. And manufacturing’s continued growth seems to indicate that, however serious supply chain snags have been, and however much longer they may last, companies are managing their way through them reasonably well.

The biggest cloud hanging over manufacturing – and the entire economy – looms bigger than ever, though: a tightening of monetary policy to try to tame heated inflation that looks less transitory with each passing month, and that also could curb consumers’ so-far-raging appetites all by itself. Don’t be surprised if volatile automotive stays a major key.  

Those Stubborn Facts: Behind Biden’s Lousy Polls on the Economy

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Biden administration, inflation, inflation-adjusted wages, real wages, Those Stiubborn Facts, Trump administration, wages, workers

After-inflation wages for all private sector workers, Feb.-Oct., 2020: (last Trump year):  +2.81 percent 

After-inflation wages for all private sector workers, Feb.-Oct., 2021 (first Biden year):  -1.84 percent  

After-inflation wages for private non-managerial workers, Feb.-Oct., 2020: +2.84 percent 

After-inflation wages for private non-managerial workers, Feb.-Oct., 2021: -1.53 percent  

 

(Sources: “Average hourly earnings of all employees, 1982-1984 dollars, total private, seasonally adjusted,” Employment, Hours, and Earnings from the Current Employment Statistics survey (National), Databases, Tables & Calculators by Subject, Data Tools, U.S. Bureau of Labor Statistics, Bureau of Labor Statistics Data (bls.gov) and “Average hourly earnings of production and nonsupervisory employees, 1982-84 dollars, total private, seasonally adjusted,” Ibid.)

(What’s Left of) Our Economy: Inflation Derangement Syndrome

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economists, inflation, non-supervisory workers, Paul Krugman, private sector, production workers, pundits, Tyler Cowen, {What's Left of) Our Economy

To Paul Krugman, Americans’ recent grumpiness about the state of their economy has little to do with the state of their economy itself (which he writes is “seemingly booming”) and lots to do with a ceaseless barrage of misinfomation – generally from Republican politicians and conservative news outlets – that’s “disconnected with personal experience.”

In other words, Paul Krugman is a New York Times columnist and Nobel Prize-winning economist who hasn’t looked at the official U.S. data on Americans’ real wages. If he had – as suggested in brief yesterday by fellow noted economist Tyler Cown – he’d have known that for most of this year so far, the purchasing power of what his compatriots typically earn on the job has been shrinking, and therefore their living standards have been worsening, due to inflation.

For example, he’d know that in October (the latest available figures), average inflation-adjusted hourly pay for private sector workers fell by 0.53 percent month-on-month in October, and 1.24 year-on-year. He’d know that in April, change in these constant dollar wages tuned negative on an annual basis (by 3.66 percent) for the first time since February, 2017 (when they dipped by just 0.09 percent).

And he’d know that the current 18-month stretch of 4.68 percent cumulative decline in real wages for the entire private sector is the longest such workers have endured since the 19 months between July, 2011 and February, 2013. And then, this compensation decreased by just 0.49 percent. (As known by RealityChek regulars, government workers’ wages aren’t tracked by the Labor Department because their levels are largely set politicians’ decisions, not by market forces, and therefore say little about the funamental state of the nation’s labor markets.)

In addition, Krugman would know that in October, for production and supervisory workers, after-inflation wages tumbled by 0.72 percent on month, and by 1.13 percent on year. He’d know that annual change in price-adjusted hourly pay for these workers also turned negative in April (by 3.37 percent), and that for the first time since July, 2018, when it sank by 0.22 percent.

He’d also know that this workforce hasn’t lived through a span of falling real wages this long (4.26 percent over 18 months) since the August, 2016 through February, 2018 timespan (when it was shrank by a fractional 0.05 percent over the same 18-month period).

But clearly Krugman hasn’t looked at any of this, and the reason is pretty clear to me: For too many folks like Krugman, who work in lucrative and coddled occupations like tenured academia and punditry (seriously, when’s the last time you heard of a Mainstream Media columnist losing a job or getting a pay cut for peddling obvious falsehoods and predictions that turned out to be laughingly offbase?), current inflation is indeed something that can be blandly and abstractly described as “indeed high by recent standards.”

For too much of the rest of the country, it means the loss of hard-won economic gains – and often real pain due to soaring food and energy prices. All of which indicates that you can learn more about at least some of the economy’s biggest problems by watching, say, Fox News than by reading Paul Krugman.

(What’s Left of) Our Economy: The Case for Transitory U.S. Inflation Just Weakened

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CCP Virus, consumer price index, core inflation, coronavirus, COVID 19, CPI, inflation, Labor Department, lockdowns, logistics, prices, reopening, stay-at-home, supply chain, transportation, Wuhan virus, {What's Left of) Our Economy

At first glance, this morning’s U.S. inflation report almost had me throwing in the towel in the debate between those (like me) believing that recent price hikes will peter out sooner rather than later, and those believing that they’ll be much longer lasting.

My pessimism stemmed from the indisputable facts not only that by all the major month-on-month and year-on-year measures, the numbers for October were terrible in their own right. They also showed inflation gaining momentum. My case for optimism focused on a loss of momentum I’d identified through September.

Today’s statistics definitely shifted the weight of the evidence in favor of the pessimists. But I still see one possible reason for continued optimism – though the accent is on “possible.” Specifically, the year-on-year numbers may again be partly functions of unusually weak inflation last year, when the CCP Virus pandemic was undermining the economy even more than this year.

Let’s review the main monthly and annual numbers for this calendar year first, though, because it’s worth seeing just how bad they are and how much inflation momentum they reveal. First, the monthly results for overall inflation (as measured by the Labor Department’s Consumer Price Index, or CPI). As you can see, whereas sequential price increases between July and September had been coming in considerably lower than their June peak, in October they shot up past the June peak – to the highest level since June, 2008 (1.05 percent).

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

The recent acceleration in the monthly changes in so-called core inflation was even stronger. (This gauge strips out food and energy prices, because however vital these commodities are to daily life, their price levels can be influenced by developments like bad weather or the decisions of the OPEC oil-producing countries’ cartel that supposedly say little about how fundamentally inflation-prone the economy is or isn’t.)

As of October, core inflation is still well below its peak in early spring. But it’s much highe than it’s been in the last three months:

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

The case for acceleration is at least as strong for annual overall inflation. As I wrote last month, the rate of change had been more or less plateauing since May, but clearly shifted into a higher gear in October. Indeed, last month’s yearly increase was the biggest since December, 1990’s increase of 6.25 percent.

Jan:                             1.37 percent

Feb:                            1.68 percent

March:                       2.64 percent

April:                         4.15 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

The same speed-up can be seen in the annual core inflation figures. And they’ve just hit their highest level since September, 1991 (4.60 percent).

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

But now the data providing (some) cause for optimism. They cover the annual inflation figures for 2019-2020, and the reason for examining them is that if inflation that year was unusually low, then whatever price hikes are recorded the year after will be unusually – and to some extent, artificially – high.

As clear from the below numbers, those 2019-2020 inflation rates became rock bottom as the CCP Virus began spreading, the economy began locking down, and consumers turned super cautious. From June through September, they rose again as the reopening after that first virus wave proceeded. But numbers like those, with one handles, hadn’t been seen recently since the summer of 2017, and even these were all well above 1.50 percent.

But October saw a sizable dropoff – from 1.41 percent to 1.19 percent.

Jan:                            2.47 percent

Feb:                            2.31 percent

March:                       1.51 percent

April:                         0.34 percent

May:                          0.22 percent

June:                          0.73 percent

July:                          1.05 percent

Aug:                          1.32 percent

Sept:                         1.41 percent

Oct:                          1.19 percent

And possibly as interesting: The November, 2019-2020 overall inflation rate (below) was even lower. December’s was higher, but not by much. So I’d argue that caution is warranted in reading too much into the latest big annual CPI increase.

Nov:                          1.14 percent

Dec:                           1.30 percent

The story told by the core inflation data is similar. Annual price hikes below two percent didn’t reappear until March, 2018 and stayed above that level until the depths of last year’s short but steep pandemic-induced recession. Following that first wave and its dramatic impact, annual 2019-2020 core inflation rates came back, but never approached two percent. And in October, fell back to 1.63 percent.

Jan:                           2.26 percent

Feb:                          2.36 percent

March:                      2.10 percent

April:                        1.44 percent

May:                         1.24 percent

June:                         1.20 percent

July:                         1.56 percent

Aug:                         1.70 percent

Sept:                        1.72 percent

Oct:                          1.63 percent

How did they perform through the end of 2020? Cumulatively, they drifted down further.

Nov: 1.65 percent

Dec: 1.61 percent

In this vein, it will be especially interesting to see how the annual 2021-2022 statistics look when they begin coming in early next year. My bet right now is that they’ll decline simply because this particular CCP Virus effect will be wearing off. And hopefully, progress toward untangling knotted global supply chains will help moderate the monthly numbers. (Until then, though, the holiday shopping season could well keep propping them up.) But if those logistics and transport troubles remain serious, all bets come off. Ditto for energy prices if they stay up.

None of this is to minimize the pain that recent and current inflation have inflicted on Americans, and especially lower income Americans. And the October results suggest that even if these price hikes prove to be a transitory development due largely to one-off CCP Virus-related disruptions, there’s no doubt that the definition of “transitory” keeps expanding chronologically – and possibly making this debate look pretty moot.

(What’s Left of) Our Economy: New U.S. Inflation Data Score One More for the Transitory-istas

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CCP Virus, consumer price index, coronavirus, COVID 19, CPE, CPI, inflation, personal consumption expenditures index, shortages, supply chains, Wuhan virus, {What's Left of) Our Economy

This morning saw the latest shot fired in the analytical war being fought over whether recent U.S. inflation is “transitory” – i.e., due to CCP Virus-related disruptions to the nation’s supply chains and labor markets, and therefore bound to ease once normality returns – or reflects deeper, more lasting changes in the economy. And the new findings from the Commerce Department modestly strengthen claims of the transitory-istas (like me).

Today’s data cover what are called the price indexes for personal consumption expenditures (PCE). They’re one of the two sets of statistics measuring U.S. inflation rates (the other being the consumer price index – CPI), and they’re of special interest because they’re the numbers most closely tracked by the Federal Reserve – whose policies do so much to determine inflation rates and in turn the economy’s overall growth.

The results? On a monthly basis, CPE rose by 0.3 percent in September, and the core reading (excluding food and energy prices, which can be volatile for reasons, like weather, having little to do with the economy’s fundamentals) was up 0.2 percent. The annual increases for these indexes were 4.4 percent and 3.6 percent respectively.

But these isolated numbers say nothing about the issue driving the transitory debate: whether inflation is gaining or losing momentum. And momentum is crucial because the biggest danger posed by inflation is its tendency to feed on itself. That is, businesses that face rising costs for the goods and services they use seek to pass them on to their customers (other businesses and consumers). The business customers respond by seeking to pass those costs along to their own customers, while consumers seek pay raises to keep up with mounting living costs. But these moves force up more costs for their employers. And so on.

So it’s crucial to note that three of the four new CPE readings support the transitory-istas. Here are the monthly percentage increases for this year so far:

Jan.          0.3

Feb.         0.3

March     0.6

April       0.6

May        0.5

June        0.5

July         0.4

August    0.3

Sept.       0.3

Far from seeing growing inflation momentum, the pace of price increases seems to be stabilizing – and at a rate half that seen during the spring.

The problem comes in with the year-on-year PCE data. They’re more important than the monthly results because they measure the trend over a longer period of time. Therefore, they tend to smooth out the kinds of fluctuations that can distort shorter-term figures. Here’s how they look, and you can see that these annual inflation rates remain on the upswing.

Jan.       1.4

Feb.      1.6

March   2.5

April     3.6

May      4.0

June      4.0

July       4.2

Aug.      4.2

Sept.      4.4

The monthly core inflation data, though, look better from a momentum standpoint:

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

In fact, momentum-wise, the monthly core data look a lot like the monthly overall data – except that as of September, the price increase slowdown has been even greater. It’s just a third of peak spring levels, not half.

The year-on-year core numbers aren’t as encouraging as the monthly core numbers. But they’re more heartening from the year-on-year overall PCE figures. For rather than showing a September rise, and increases for the entire year, they make clear stabilization since June.

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.      3.6

Before we get too enthusiastic, though, it’s critical to remember that these inflation statistics build upon each other. That is, using these last core figures as an example, “stabilization” doesn’t mean that price hikes have stopped. They simply mean that prices have started rising at the same rate each month, or on an annual basis. So if August and September core prices are both up 3.6 percent each annually, then the September figure added 3.6 percent to the August number. And these results are definitely higher than their pre-pandemic counterparts. So don’t expect relief in the sense of falling prices anytime soon for any of these major inflation categories. (Individual products and services can be another story.)

Again, however, when we’re talking about the outlook, momentum’s the dominant consideration, because the performance of something as gargantuan as the U.S. economy doesn’t change direction overnight, or even quickly (barring a total economic disaster like a burst bubble, or a non-economic shock like a pandemic). In fact, what happens is that the statistical curve bends – as with various pandemic indicators. And since the September PCE release reports downward bending or flattening curves for most of the inflation measures, it’s got to be scored as a win for the transitory-istas – though anything but a rout.

(What’s Left of) Our Economy: U.S. Inflation Signals Turned (More) Mixed in September

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

Today’s report from the Labor Department on the September inflation figures contained something for everyone, and unfortunately, that’s not great news for anyone trying to figure out whether current price rises are going to continue worrisomely for the foreseeable future, or whether they’re “transitory.” That’s the term that’s been used by Federal Reserve officials in particular to describe their expectations that these trends result mainly from pandemic-related supply chain and other economic disruptions, and will return to normal territory once the CCP Virus is clearly under control.

The inflation pessimists can point to accelerations in all four main measures of inflation reported today. On a monthly basis, the overall consumer price index (CPI), rose by 0.41 percent on month in September versus 0.27 percent in August, and the so-called core measure – which strips out unusually volatile food and energy prices, increased sequentially by 0.24 percent, versus August’s 0.10 percent

The year-on-year figures, which are more closely followed because they cover a longer time span and therefore are less vulnerable to inevitable random fluctuations – told much the same story. The overall CPI was up 5.38 percent in September as opposed to 5.20 percent in August, and the core climbed from 3.98 percent to 4.04 percent.

Many transitory-istas (who include yours truly) can and no doubt will take some comfort from the lower core figures. But pessimists will rightly observe that, however subject to wide swings, food and energy are vital to all the rest of the economy, and if their prices are on a rapidly moving escalator up, the effects are sure to spread in numerous other sectors.

I’m more impressed by the still-waning momentum in both inflation gauges. It’s evident from the monthly changes in the overall CPI so far this year. Despite the sequential speed up this month, these price increases are still nowhere their spring peaks. In fact, they’re still down on net since July.

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

The monthly core changes look very similar:

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

The case for acceleration looks stronger based on the year-on-year overall CPI changes, although a plateauing since May can be seen as well.

Jan:                                1.37 percent

Feb:                               1.68 percent

March:                           2.64 percent

April:                             4.15 percent

May:                              4.93 percent

June:                              5.32 percent

July:                               5.28 percent

Aug:                               5.20 percent

Sept:                               5.38 percent

Ditto for the annual core inflation increases:

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

And it’s still true that these strong overall CPI and core inflation results stem partly from abnormally weak inflation in 2020, when the virus dramatically depressed inflation according to both measures. Here are the 2019-20 figures for the overall CPI:

Jan:                               2.47 percent

Feb:                              2.31 percent

March:                         1.51 percent

April:                           0.34 percent

May:                            0.22 percent

June:                            0.73 percent

July:                            1.05 percent

Aug:                            1.32 percent

Sept:                            1.41 percent

And here they are for the core:

Jan:                              2.26 percent

Feb:                             2.36 percent

March:                         2.10 percent

April:                          1.44 percent

May:                           1.24 percent

June:                           1.20 percent

July:                           1.56 percent

Aug:                           1.70 percent

Sept:                           1.72 percent

All the same (and I realize I’m starting to sound like the proverbial two-handed economist), the pessimists can point out that the 2020 annual inflation rates began rebounding once again. And because these “comps” have become harder to beat, the case for troubling, lasting inflation has become more compelling.

I’d agree with the “more compelling” conclusion. But to me, that still doesn’t translate into “particularly compelling.” Until it does, I’ll stay in the transitory camp – keeping in mind all the while that, as noted last month, the likely timeframe for the return to normality keeps getting stretched out.

(What’s Left of) Our Economy: U.S. Inflation Still Looks Transitory No Matter How You Look at It

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CCP Virus, consumer price index, coronavirus, COVID 19, CPI, Fed, Federal Reserve, inflation, Jerome Powell, PCE, personal consumption expenditures index, supply chain, transitory, Wuhan virus, {What's Left of) Our Economy

I’m still in the “U.S. inflation is transitory” camp and still not overly worried about recent price increases because they look to be products of the CCP Virus and the sudden stop-start pattern is produced in the economy and not stronger, more lasting changes. But it’s important to note that my arguments have been based on only one of two major groups of official statistics – the consumer price index (CPI) kept by the Labor Department. (See, e.g., here.) 

The continuing growth of inflation worries among economists and the public indicates that this is a good time to look at that other data set – the personal consumption expenditures (PCE) price index tracked by the Commerce Department. Another good reason: This is the inflation measure preferred by the Federal Reserve, one of whose two main missions is preventing hot inflation (the other being maintaining employment), and of course this central bank’s monetary policy decisions are central to the nation’s success at keeping prices under control.

My bottom line: The PCE figures seem to support the transitory viewpoint as well.  The Fed believes this, too. But many other serious students of the economy, as indicated above, have taken exactly the opposite interpretation of the latest PCE results, so let’s try and identify what’s troubling them, and in the process, see how they differ from their CPI counterparts.

A big part of the answer comes from these side-by-side comparisons. The table below shows how both gauges have measured month-to-month price increases this year so far (through August) in percentage terms.

                          CPI                          PCE

Jan.                    0.3                            0.3

Feb.                   0.4                            0.3

March               0.6                             0.6

April                 0.8                             0.6

May                  0.6                             0.5

June                  0.9                             0.5

July                  0.5                              0.4

August             0.3                              0.4

Interestingly, although the PCE changes are steadier, they show that, at least on a monthly basis, inflation’s momentum displays no signs of speed-up – which matters greatly because inflation is a problem that can so easily feed on itself (as expectations of ongoing price increases spur businesses and consumers to increase their purchases more, boosting demand and thus pushing prices yet higher). In fact, the PCE numbers reveal deceleration, too on this basis.

Also worth stipulating: both these inflation measures include food and energy prices, which often have little to do with the economy’s underlying inflation prone-ness (but which certainly do impact price changes overall). And as known by anyone who’s gassed up a vehicle lately, energy prices in particular have been surging recently.

But inflation watchers also look closely – often more closely – at year-on-year price increases, and that makes sense because data over longer timeframes is less susceptible to random or otherswise misleading fluctuations than data over shorter timeframes. So here are those year-on-year results for both inflation indices in percentage terms for the first eight months of this year:

                          CPI                          PCE

Jan.                    1.4                            1.4

Feb.                   1.7                            1.6

March               2.6                             2.5

April                 4.2                             3.6

May                  4.9                             4.0

June                  5.3                             4.0

July                  5.3                              4.2

August             5.6                              4.3

These numbers clearly are the cause of the inflation concerns, as they do show not only strong but accelerating momentum.

But they don’t show it conclusively or, in my view, in any way that undermines the transitory school of thought. And the reason is that inflation was so low in pandemic-dominated 2020 that a combination of mean reversion and virus-induced supply chain disruptions and consequent shortages was bound to generate higher than normal price increases.

This table makes the point, by showing how low the yearly inflation increases in percentage terms were for the bulk of last year, and especially during the early spring, when the economy fell into a deep (but short) recession.

                          CPI                          PCE

Jan.                    2.5                            1.9

Feb.                   2.3                            1.8

March               2.6                             1.3

April                 0.3                             0.5

May                  0.2                             0.5

June                  0.7                             0.9

July                  1.0                             1.1

August             1.5                             1.4

It’s still possible to argue that, however low 2019-2020 inflation became, it quickened to some extent starting in June (according to both measure). And because the 2020-2021 results also show increasing post-June momentum, inflation is still worsening.

My rejoinder – the post-June inflationary momentum this year so far is much slower than last year’s. Between June and August, 2019, for the PCE, the yearly inflation rate increased by 55.56 percent (from 0.9 percent to 1.4 percent). Between this June and August, that increase was just 7.5 percent (from four to 4.3 percent).  For the CPI, you can see that this difference was even bigger.

Moreover, even this year’s modest post-June inflation speed-up has only lasted for two months.

But don’t think for a minute that the inflation news is all good. Principally, even the optimistic Fed now believes that the transitory developments that have pushed inflation higher this year will last longer than it had been expecting. Just last week, Chair Jerome Powell said it was “frustrating to see the bottlenecks and supply chain problems not getting better — in fact at the margins apparently getting a little bit worse. We see that continuing into next year probably, and holding up inflation longer than we had thought.”

In other words, “transitory” may be pretty long-lasting, and the longer it lasts, the more pressure the Fed will face to cool the economy off faster, probably slowing job creation and wage increases, whether it holds to its diagnosis or not.

(What’s Left of) Our Economy: The New U.S. Inflation Slowdown Still Leaves Lots of Questions

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CCP Virus, core inflation, coronavirus, COVID 19, Immigration, inflation, inflation-adjusted wages, jobs report, Labor Department, New York Fed, productivity, real wages, transitory, wages, Wuhan virus, {What's Left of) Our Economy

Given how the U.S. economy could still face some major ups and downs in the next few months, largely because no one really knows what will happen with the CCP Virus and the responses from government, business, and consumers, only an idiot would confidently declare that this morning’s official report shows that the recent inflation burst is over. 

So even though I’ve been in that inflation-is-transitory camp – and therefore, that price trends haven’t yet provided the government to use its taxing, spending, and monetary policy tools to slow the economy’s expansion – I’ll just note how the inflation situation has changed in recent months.

What matters most is that the monthly inflation rate has come way down since June. During the first half of this year, the sequential pace of all price increases sped up from 0.3 percen to 0.9 percent. July’s result was down to 0.5 percent and the August figure just released by the Labor Department was just 0.3 percent – right back where it was in January, when the virus’ last powerful winter wave was cresting.

Also important: The so-called core inflation rate (this measure strips out food and energy prices, supposedly because they can be volatile for reasons having nothing to do with the level of overall national economic activity, and how fundamentally inflation-prone it is) has lost major momentum, too. Between January and June the monthly rise in prices increased from 0.1 percent to 0.9 percent . Since then, it fell to 0.3 percent in July and back to 0.1 percent last month.

Inflation pessimists can still point to year-on-year inflation rates that remain elevated by historic standards (5.3 percent for the total measure and four percent for the core). But the statistical curve is bending in the right direction on these two counts also, and as I’ve written previously, the annual numbers are still distorted – and therefore rendered useless – by the unusually weak inflation reads generated by last year’s short but steep virus-induced recession.

Further, that slowing monthly momentum counts for a lot because the biggest fear surrounding inflation is that it could feed on itself and spiral out of control, as higher and higher prices convince all sorts of customers for goods and services that prices will only keep increasing. As a result, they can fuel further inflation by stepping up purchases and pushing prices still higher (because greater demand for anything, all else equal, will enable producers and providers to charge more). Weaker monthly inflation figures indicate that these pressures have been easing lately.

Focusing singlemindedly on the core carries risks, though. Principally, food and energy prices may well belong in their own analytical category when it comes to measuring inflation. But when it comes to living life day-to-day, it’s another story altogether – since it’s hard to imagine living without them. So price trends could still be hammering consumers and businesses, and in turn the broader economy, even though the core inflation rate is signaling that all’s well.

Just as important, food and energy costs are so important that, if they last long enough, they could feed persistent inflationary fires throughout that broader economy.   

Another potential reason to check inflation optimism: The Labor Department also reported today that price-adjusted hourly wages climbed month-to-month by 0.4 percent. That’s the first positive monthly number since December’s 0.8 percent. A single data point proves little, especially in the pandemic era, but if wages begin advancing faster than overall price increases, many businesses will try to respond to these higher costs by hiking their prices – potentially adding new momentum to inflation.

The consistent drop in inflation-adjusted wages, however, between January and July shows that nothing of the kind had been happening, even though most businesses seem to keep complaining about labor shortages (which should be forcing wages – the price workers can command for their services – up strongly).

Moreover, as I’ve repeatedly pointed out, historically, American employers overall have responded to perceived or actual labor shortages by boosting their productivity – that is, using new technologies (like labor-saving equipment or software) or better management, or both, to improve efficiency and better enable themselves to absorb higher prices rather than pass them on to customers.

This scenario may sound bad for workers, and for some over various periods of time it will be. But to me, anyway, the clear lesson of history is that higher productivity does indeed, as the economic conventional wisdom holds, raise living standards (including wages) in general over time by (a) fostering the emergence of wholly new industries (which invariably need new workers); and (b) boosting existing industries’ ability to turn out more goods and services (which invariably creates the need for new workers, too).

At the same time, clearly not all businesses will take this tack. In fact, many are trying to keep wages low for many employees by agitating for more mass immigration. So far, this lobbying hasn’t succeeded, but it’s still way too early to say that workers have now regained enough bargaining leverage to ensure that their after-inflation pay continues rising robustly.

Wage increases (which I believe are long overdue) may also come to an end, or slow significantly, if weaker recent inflation stems from weaker economic growth – which would be bad for just about everyone. Unfortunately, the last monthly jobs report (also for August) and two important growth forecast series indicate that that’s precisely the case. (See here and here.)

But let’s close on a highly revealing note: One of the sources of these forecasts, the Federal Reserve Bank of New York, has just decided to suspend releasing these projections until it can figure out how to adequately take into account “The uncertainty around the pandemic and the consequent volatility in the data….” If this august institution, with its legions of Ph.D. economists, is telling us that assessing the economy’s direction and fundamental health is currently a mug’s game, that seems like a pretty good reason for caution in interpreting the new inflation report, too.