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(What’s Left of) Our Economy: Why the Really Tight U.S. Job Market Isn’t Propping Up Much Inflation

17 Tuesday Jan 2023

Posted by Alan Tonelson in (What's Left of) Our Economy

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CCP Virus, consumer spending, consumers, coronavirus, cost of living, COVID 19, Federal Reserve, headline PCE, inflation, inflation-adjusted wages, interest rates, Jerome Powell, monetary policy, PCE, personal consumption expenditures index, prices, recession, stagflation, stimulus, wages, {What's Left of) Our Economy

It’s been widely assumed that even though very tight U.S. labor markets haven’t yet touched off the kind of wage-price spiral that can supercharge inflation, they’ve been helping consumers offset the effects of rapidly rising prices – and therefore helping to keep living costs worrisomely high.

The intertwined reasons? Because even though when adjusted for inflation, wages generally have been falling since price increases took off in early 2021, rock-bottom unemployment rates and the wage hikes that have been received have enabled healthy consumer spending – and given business unusual pricing power.

Most important, this is what the Federal Reserve believes, and it’s the federal government institution with the prime responsibility for fighting inflation. According to Chair Jerome Powell, “demand for workers far exceeds the supply of available workers, and nominal wages have been growing at a pace well above what would be consistent with 2 percent inflation over time.”

For good measure, Powell said that the labor market “holds the key to understanding inflation” especially in U.S. services industries other than housing, which make up more than half of the set of inflation data favored by the Fed, and where “wages make up the largest cost.”

How come, then, when you look at the wage data put out by the federal government, it’s so hard to find evidence that recent wage levels have significantly bolstered U.S. workers’ spending power during this current high inflation period?

Given the Fed’s power, it makes sense to use the inflation measure it values most – which as RealityChek regulars know is the Personal Consumption Expenditures (PCE) Price Index. As the Fed prefers, we’ll focus on the “headline” gauge, which includes the food and energy prices that are stripped out of a different (“core”) reading supposedly because they’re volatile for reasons having nothing to do with the economy’s underlying prone-ess to inflation.

And for the best measure of the wages workers are taking home, we’ll use weekly wages. What they show is that since the headline PCE rate first breached the central bank’s two percent target, in March, 2021, inflation-adjusted weekly pay (as opposed to the pre-inflation wages Powell oddly emphasizes) is actually down – by 4.60 percent. For production and non-supervisory workers (call them “blue collar” workers for convenience’s sake), real weekly wages were off by a more modest but still non-trivial 3.52 percent.

And this has propped up American consumer spending exactly how?

The Fed actually looks more closely at a wider official measure of compensation than the wage figures. It’s called the Employment Cost Index (ECI) and it takes into account salaries as well as wages, along with non-wage benefits. The ECI only comes out quarterly, and the next one, for the fourth quarter,of last year, won’t be out till January 31. But from the second quarter of 2021 (roughly when headline annual PCE inflation rose higher than that two percent Fed target) through the end of the third quarter of 2022, the ECI for private sector workers) also dropped in after-inflation terms – by 2.39 percent.

But if American workers’ pay isn’t doing much to power their still-strong consumption, what is? Obviously, the answer is mainly the excess savings piled up thanks to pandemic stimulus programs and government measures aimed at…compensating them for high inflation.

When it comes to fighting inflation, there’s good news stemming from the status of these enormous amounts of cash injected into American bank accounts: They’re being run down significantly or are just about gone for everyone except the wealthy. That no doubt explains much of the recent evidence of the cooling of the white hot levels of consumer demand that filled so many businesses with confidence that they could jack up prices dramatically are cooling, and why headline PCE is showing some signs of ebbing.

The bad news remains what it always has – that meaningfully reduced consumer spending, combined with the Fed’s continued stated determination to keep increasing the price of the borrowing that spurs so much spending, could trigger more unemployment, even worse wage trends, and a possibly painful recession.

Yet as I wrote in that above-linked RealityChek post, the $64,000 questions that will determine inflation’s fate remains unanswered: Will recession fears lead the Fed to chicken out, and at least pause its inflation-fighting interest rate increases? And will Congress and the Executive Branch decide to ride to the rescue as well, with new politically popular stimulus programs – which are likely to stimulate inflation, too?  My answer remains a pretty confident “Yes,” which is why my forecast for the economy calls for a short, fairly shallow downturn followed by a significant stretch of “stagflation” – sluggish growth and above-Fed-target inflation.   

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(What’s Left of) Our Economy: Peak U.S. Inflation Still Tough to See in Latest U.S. Figures

01 Thursday Dec 2022

Posted by Alan Tonelson in (What's Left of) Our Economy

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Atlanta Federal Reserve Bank, core inflation, core PCE, Federal Reserve, fiscal policy, inflation, monetary policy, PCE, personal consumption expenditures index, {What's Left of) Our Economy

Even for those who don’t put much stock in using baseline comparisons, the latest official report on U.S. inflation – which covers the Federal Reserve’s preferred measure of price changes – there wasn’t much to get excited about..

The strongest evidence optimism that inflation’s peaking in this latest release on what’s called the price index for Personal Consumption Expenditures (PCE) came from the monthly results for core inflation. These strip out the food and energy results because they’re volatile for reasons supposedly having nothing to do with the economy’s fundamental prone-ness to inflation.

The latest number (for October) showed a 0.2 percent sequential rise in prices. That was one of the tamer results for the year, but it followed two straight months of 0.5 percent increases – which were among the highest results of the year. And to add a bit of insult to injury, July’s original monthly flatline figure has been revised up to 0.1 percent.

As for the monthly headline inflation result, that came to 0.3 percent in October. This increase also was one of the year’s lowest, but was the third straight month of prices rising at this rate. So a wait-and-see attitude seems to be the best that’s justified.

The annual PCE data for October was considerably less encouraging, largely because of that baseline effect. Core PCE was up five percent that month – mid-range in terms of this year’s figures. But between the previous Octobers, this inflation gauge jumped by 4.2 percent – to that point, by far the worst result of 2021.

In fact, in September of this year, when core PCE worsened by 5.2 percent, its baseline figure was just 3.7 percent.

In other words, core annual PCE inflation was getting really hot at this point a year ago. And over the course of the next year, it got hotter. And that 5.2 percent annual result for this past September has been revised up, too (from 5.1 percent).

Intriguingly, the headline annual PCE numbers reveal a very similar pattern. The bg difference: The October read of six percent matched the year’s lowest figure (from January). But the previous October annual rate was 5.1 percent – also the fastest increase that year to that point.

The September baseline figure was just 4.4 percent, and the 2022 annual headline PCE increase for that month was revised up itself – from 6.2 percent to 6.3 percent.

The bigger picture isn’t especially encouraging, either. That’s because whatever hints of inflation slowdown may be in the air surely stem from weakening momentum for the economy as a whole. (To be sure, many economists, like the Atlanta Federal Reserve’s crew, keep forecasting solid expansion continuing. But many forward-looking indicators are sending exactly the opposite message.) And as I’ve noted (e.g., here), it doesn’t take a policy genius to end inflation by tightening credit so much that growth and employment get crushed.

Further, what’s worrisome about this demand-centric approach, and continued neglect of boosting the supply of goods and services, is that when the Fed loosens monetary policy once more, or when Congress and the administration reopen the net spending spigots, or both, there will be every reason to expect strong inflation to return.

(What’s Left of) Our Economy: Too Much Irrational Exuberance Today on U.S. Inflation

10 Thursday Nov 2022

Posted by Alan Tonelson in (What's Left of) Our Economy

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consumer price index, core CPI, CPI, Federal Reserve, inflation, interest rates, monetary policy, personal consumption expenditures index, Producer Price Index, {What's Left of) Our Economy

Wall Street is ecstatic about today’s official report on two measures of consumer inflation, and President Biden is pretty pleased, too. Both see improvement in the October results for both overall (headline) inflation, and for core inflation (which strips out food and energy prices supposedly for reasons that have nothing to do with the economy’s underlying inflation prone-ness).

And both evidently believe that this improvement means that the Federal Reserve will start easing off on the interest rate hikes it’s both approved so far and promised in order to bring price increases down from their recent multi-decade-worsts. In other words, if inflation is moderating, the Fed might not have to slow down economic growth and job creation as much as feared in order to restore price stability.

Here’s why I think both are wrong – or at the very least prematurely optimistic. They’re ignoring that baseline effect. If you look at the data in context, you see that the annual increases in both the headline and core readings for the Consumer Price Index (CPI) are both coming off prices rises that were highs for the previous year, and that heated up considerably between September and October.

Specifically, although the year-on-year rise of headline CPI did slow to its weakest rate (7.76 percent) since January, the previous year’s annual October overall consumer price increase was that year’s fastest (6.24 percent). The new yearly annual CPI increase was indeed cooler than September’s (8.22 percent). But that figure was coming off a 2020-2021 rise of just 5.39 percent.

Core inflation displayed a similar pattern. In October, prices of goods and services excluding food and energy rose by 6.31 percent at an annual rate – down from a September increase of 6.66 percent that was the worst such figure since August, 1982 (7.06 percent). But the previous September, core annual inflation was 4.04 percent. The previous October, it was a considerably higher 4.59 percent.

The best interpretation, as I see it? Businesses still have plenty of pricing power, which will keep inflation dangerously high, because consumers still have plenty of spending power.

Such inflation pessimism (especially if the Fed does ease off its tightening policy) is also supported by the monthly headline CPI numbers. Overall prices climbed sequentially by 0.44 percent in October. That was way off the high for this year (March’s 1.24 percent). But it represented the third straight speed up.

The news was much better for core monthly CPI. The October rise of 0.27 percent was the year’s slowest, and down greatly from September’s 0.58 percent.

But that core performance bears careful watching, too, because energy prices in particular tend to influence consumer prices eventually, since energy is a key cost for virtually every good and service produced in America. In fact, month-to-month, energy prices were up 1.8 percent in October after falling 2.1 percent in September.

In that vein, another clue about future inflation rates is coming next Tuesday, with the release of the new producer price report. That measures what companies charge each other for the purchases needed to turn out whatever they provide to consumers and to each other (if businesses are their final market). And don’t forget: The CPI isn’t the Fed’s favorite gauge of inflation. It looks more closely at the price indices for “Personal Consumption Expenditures,” and these October results come out December 1.

These clues, however, even if taken all together, won’t be all that big for inflation-watchers, as they’ll cover just a single month.  As Fed Chair Jerome Powell stated earlier this month, the central bank is going to need to see “a series of down monthly readings,” and much other evidence, before concluding that inflation is “coming down decisively.”  Although he really was behind the curve is foreseeing how prices would shoot up, waiting for the trends over time to start appearing seems like by far the best inflation-fighting approach now.  And why the markets’ reaction to today’s data seems like what one of Powell’s predecessors called  “irrational exuberance.” 

Making News: Back on National Radio Talking Midterms and Trade…& a New Podcast!

09 Wednesday Nov 2022

Posted by Alan Tonelson in Making News

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agriculture, Biden, CBS Eye on the World with John Batchelor, Congress, Democrats, election 2022, environment, fast track, Federal Reserve, friend-shoring, interest rates, Kevin Brady, labor rights, MAGA Republicans, Making News, manufacturing, midterms 2022, monetary policy, recession, regulation, Republicans, reshoring, taxes, Trade Promotion Authority, U.S. content, U.S.-Mexico-Canada Agreement, unions, USMCA

I’m pleased to announce that I’m scheduled to return tonight to the nationally syndicated “CBS Eye on the World with John Batchelor.”  Our subjects: yesterday’s midterm election and how it might affect Washington’s approach to international trade.

I don’t know yet when the pre-recorded segment will be broadcast but John’s show is on between 9 PM and midnight EST, the entire program is always compelling, and you can listen live at links like this. As always, moreover, I’ll post a link to the podcast as soon as one’s available.

In that podcast vein, the recording is now on-line of yesterday’s interview on the also-nationally syndicated “Market Wrap with Moe Ansari.” The segment, which dealt with what the midterm results (which aren’t all in yet!) will mean for the U.S. economy – and the manufacturing sector in particular. It begins about 22 minutes into the program, and you can listen at this link.

Note: My forecast of significant Republican gains in the House and Senate seems to have been on the over-optimistic side, but of course, many key races remain undecided.

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

(What’s Left of) Our Economy: An End to a U.S. Trade Winning Streak?

03 Thursday Nov 2022

Posted by Alan Tonelson in (What's Left of) Our Economy

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Advanced Technology Products, China, consumption-led growth, dollar, economic growth, exchange rate, exports, Federal Reserve, goods trade, imports, inflation, interest rates, Jerome Powell, manufacturing, monetary policy, non-oil goods, services trade, Trade, trade deficit, yuan, zero covid policy, {What's Left of) Our Economy

Today’s official U.S. monthly trade data (for September) signal an end to an encouraging stretch during which the national economy both exported more and imported less – and engineered some growth at the same time. (See, e.g., here and here.)

That’s been encouraging because it means expansion that’s powered more by production than by consumption – a recipe for much more solid, sustainable growth and prosperity than the reverse.

But the new trade figures show not only that the total trade gap widened for the first time since March (to $73.28 billion), and reached its highest level since June’s $80.88 billion. They also revealed that the deficit increased because of lower exports and higher imports for the first time since January.

The discouraging September pattern also indicates that American trade flows are finally starting to feel the effect of the surging U.S. dollar, which hurts the price competitiveness of all domestic goods and services in markets at home and abroad.

Some (smallish) silver linings in the new trade statistics? A bunch of (biggish) revisions showing that the August improvement in America’s was considerably better than first reported.

At the same time, two new U.S. trade records of the bad kind were set – all-time highs in services imports and in imports of and the deficit for Advanced Technology Products (ATP). But services exports reached an all-time high as well.

The impact of the revisions can be seen right away in that combined goods and services trade deficit figure. The September total was 11.58 percent higher than its August counterpart. And it did break the longest stretch of monthly drop-offs since the May-November, 2019 period. But that new August figure is now reported at $65.28 billion, not $67.40 billion. That’s fully 2.55 percent lower.

The August total exports figures saw a noteworthy upward revision, too – by 0.72 percent, from $258.92 billion to $260.79 billion. In September, however, these overseas sales decreased for the first time since January, with the 1.07 percent slippage bringing them down to $258.00 billion. That’s the lowest level since May’s $254.53 billion..

As for overall imports, they were up in September for the first time since May. The increase from $326.47 billion to $331.29 billion amounted to 1.47 percent.

As with the total trade deficit, the August figure for the goods trade gap was revised down by a sharp 1.67 percent, from $87.64 billion to $86.17 billion. And also as with the total trade shortfall, its goods component in September rose for the first time since March. The 7.63 percent worsening, to $92.75 billion, brought the gap to its highest since June’s $99.26 billion.

Goods exports for August were upgraded significantly, too – by 0.75 percent, from $182.50 billion to $183.86 billion. But in September, they shrank on month by 2.01 percent, with the $180.17 billion level the lowest since May’s $179.76 billion.

Goods imports for their part climbed for the first time since May. Their 1.09 percent increase pushed these purchases up from $270.04 billion in August to $272.92 billion in September.

The revisions worked the opposite way for the longstanding service trade surplus. August’s total is now judged to be $20.49 billion – 1.24 percent higher than the originally reported $20.24 billion. And in September it sank for the second straight month, with the 5.01 percent decrease representing the biggest monthly drop since May’s 9.69 percent, and the resulting in a $19.47 billion number the weakest since June’s $18.38 billion.

Services exports for August were upgraded by 0.67 percent, from $76.42 billion to $76.93 billion. They climbed increased further in September – by 1.18 percent to a fourth straight record of $77.83 billion.

The August services import totals were also revised up, with the new $56.44 billion level 0.46 percent higher than the original $56.18 billion. Their ascent continued in September, with the 3.42 percent surge – to a record $58.37 billion – standing as the biggest monthly increase since February’s 5.13 percent.

Domestic manufacturing had a mildly encouraging September, with its yawning, chronic trade gap narrowing by 1.74 percent, from $131.71 billion to $129.41 billion.

Manufacturing exports slumped from $113.34 billion in August (the second best ever after June’s $114.78 billion) to $110.688, for a 2.34 percent retreat.

Manufacturing imports tumbled by 2.02 percent, from August’s $245.05 billion (the second highest all-time amount behind March’s $256.18 billion) to $240.10 billion.

Due to these figures, manufacturing’s year-to-date trade deficit is running 18.17 percent ahead of 2021’s record level (which ultimately came in at $1.32977 trillion). In fact, at its current $1.13974 trillion, it’s already the second highest yearly manufacturing deficit in U.S. history.

Since manufacturing trade dominates America’s goods trade with China, it wasn’t surprising to see the also gigantic and longstanding merchandise trade deficit with the People’s Republic declining in September for the first time in five months.

The small 0.39 percent monthly decrease, from $37.44 billion in August (this year’s top total so far) to $37.29 billion no doubt reflected the effects of Beijing’s continuing and economically damaging Zero Covid lockdowns.

Indeed, however modest, this decrease is noteworthy given that China allowed its currency, the yuan, to depreciate by 11.29 percent versus the dollar this year through September.

U.S. goods exports to the People’s Republic were down in September for the first time since June, with the 7.39 percent fall-off pulling the total from $12.91 billion (a 2022 high so far) to $11.95 billion. The monthly decrease was the biggest since April’s Zero Covid-related 16.25 percent, and the level the lowest since June’s $11.68 billion.

America’s goods imports from China were off on month in September as well – and also for the first time in June. The contraction from August’s $50.35 billion (the second highest all-time total) to September’s $49.25 billion was 2.24 percent.

On a year-to-date basis, the China deficit has now risen by 21.98 percent. That’s important because it continues the trend this year of growing faster than its closest global proxy, the non-oil goods trade deficit (which has widened during this period by just 17.21 percent).

Moreover, this gap has widened overwhelmingly because of China’s feeble importing. Year-to-date, the People’s Republic’s goods purchases from the United States are up just 3.05 percent. The non-oil goods counterpart figure is 15.88 percent.

Finally, the U.S. trade deficit in Advanced Technology Products (the U.S. government’s official name for these goods, hence the capitalization) surged by 18.79 percent sequentially in September, from $20.47 billion to a new monthly record of $24.32 billion. That level topped March’s previous high of $23.31 billion by 4.35 percent.

ATP exports rose a nice 5.39 percent on month in September, from $32.60 billion to $34.33 billion. But imports popped by 10.50 percent, from August’s $53.08 billion to a record $58.65 billion – which surpassed the old record (also set in March) of $56.71 billion by 3.41 percent.

Moreover, year-to-date the ATP deficit is up 29.65 percent, from $137.31 billion to !$178.01 billion. That’s already equal to the third highest total annual total ever, behind last year’s $195.45 billion and 2020’s $188.13 billion. So look for another yearly worst t be hit in these trade flows.

At this point, the trade deficit’s future is especially hard to predict. On the one hand, if the chances of a U.S. recession before too long seem to have increased due to the Federal Reserve Chair Jerome Powell’s hawkish remarks yesterday on inflation and interest rates. Normally, that would force the deficit down as tighter monetary policy depressed consumption – and imports.

On the other hand, higher interest rates could well keep strengthening the dollar and keep the deficit on the upswing. So could the still enormous levels of savings (and spending power) that Americans have amassed since the CCP Virus pandemic struck.

The only thing that seems certain, unfortunately, is that the sweet spot that American trade flows have found themselves in recently looks like it’s gone for the time being.

(What’s Left of) Our Economy: No Shortage of U.S. Inflation Fuel

25 Tuesday Oct 2022

Posted by Alan Tonelson in (What's Left of) Our Economy

≈ 1 Comment

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CCP Virus, consumers, coronavirus, cost of living, COVID 19, debt, Federal Reserve, housing, inflation, interest rates, monetary policy, quantitative tightening, revolving credit, savings, stimulus, stock market, Wells Fargo, Wuhan virus, {What's Left of) Our Economy

As known by RealityChek regulars, I’ve repeatedly written (e.g., here) that sky-high U.S. inflation is going to remain sky high until the prices of the goods and services bought by consumers become genuinely unaffordable – and that their current towering levels make clear that we’re far from that point.

That’s why it’s so great that a team of economists from Wells Fargo bank have so clearly laid out the evidence for how much spending power remains with households – and therefore how much pricing power remains with businesses.

The two key facts entail how much in extra savings households have amassed since the CCP Virus pandemic struck in force in early 2020 and ushered in a period of both greatly reduced spending opportunities and greatly increased stimulus payments from Washington. As shown in this chart, the resulting “excess savings” zoomed up starting then and continued through mid-2021, when they peaked at about $2.5 trillion.

Source: U.S. Department of Commerce and Wells Fargo Economics

They’ve come down since – but still stood at just short of $1.3 trillion as of this past summer. Moreover, don’t forget – that number doesn’t tell us the actual level of consumer savings. It tells us how far above the pre-pandemic normal it stands.

For an idea of the actual amount of cash households have to spend, check out this second graph. It shows that even factoring in inflation, Americans’ checking and savings accounts hold a total of $13.9 trillion (the dark blue line), and that this figure is way up since the beginning of the pandemic, too.

Source: Federal Reserve Board and Wells Fargo Economics

You might have read that one big reason for worrying about the sustainability of consumer spending – and as a result, one big reason for optimism that inflation will soon peak or has already topped out – is that “Inflation is driving consumers to rack up more debt to purchase essentials.” Sounds like a sign of soaring desperation, right? Not if you look at the big picture.

Sure, credit card use has boomed over the last year (a high inflation year) in particular. Indeed, as shown in the third chart, it’s not only above pre-CCP Virus levels. It’s above its levels during the bubble years that preceded the Global Financial Crisis which ended in the worst economic downturn America had suffered to that point since the Great Depression of the 1930s. (The pandemic recession of 2020 was deeper than the Great Depression, but was much shorter.)

Source: Federal Reserve Board and Wells Fargo Economics

But that’s only one side of the credit card story, and not the most important side. The other side is how that “revolving” credit card and other consumer debt compares with consumers’ spend-able incomes. And as the chart below shows, although the “Household Financial Obligations Ratio” has worsened a lot recently, in absolute terms it’s not only considerably below its levels just before the CCP Virus’ arrival in force. It’s still at post-1990s lows – and by a wide margin.

Source: Federal Reserve Board and Wells Fargo Economic

As the Wells Fargo economists point out, this consumer spending power has to run out at some point, especially since households have been buying more than they earn, since their net worth (and therefore their ability to borrow robustly) is down some because both housing and stock prices have been sinking, and since the Federal Reserve’s inflation-fighting interest rate hikes and other tightening measures keep making such borrowing more expensive. Inflation-adjusted wages keep falling, too. 

Nevertheless, rate hikes (which only began this past March) can take up to 18-months to slow spending and the entire economy. The Fed is also reducing its balance sheet, which skyrocketed to astronomical levels as the central bank bought vast quantities of bonds during the worst of the pandemic in order to flood the economy with cheap money and keep it afloat during the worst of the CCP Virus downturn. But for what it’s worth, the consensus among economists to date is that this “quantitative tightening” isn’t severe enough depress economic activity significantly for some time, either. (See, e.g., here.)

And don’t forget – Washington keeps putting more money in consumers’ pockets directly and indirectly, most recently with an increase in Social Security payments to compensate for…high inflation, and another release from the Strategic Petroleum Reserve to dampen down oil prices.   

So it’s still true that, ultimately, the surest cure for high prices is high prices. But it’s just as true that everything known about consumer finances and the inflation fuel they represent says that these prices have a long way to go before those consumers start crying “Uncle!”

(What’s Left of) Our Economy: Yet Another 40-Year Worst for U.S. Inflation

13 Thursday Oct 2022

Posted by Alan Tonelson in (What's Left of) Our Economy

≈ 3 Comments

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Biden administration, Congress, consumer price index, core CPI, core inflation, cost of living, CPI, energy prices, Federal Reserve, inflation, monetary policy, oil prices, OPEC, Social Security, {What's Left of) Our Economy

For a change, the real headline development in my opinion revealed by today’s official report on U.S. consumer inflation (for September) wasn’t in the headline number (the figure that measures prices increases throughout the entire economy).

Instead, it was in the core consumer inflation number – the one that strips out food and energy prices supposedly because they’re volatile for reasons having nothing do with the economy’s fundamental inflation prone-ness.

Last month, the core Consumer Price Index (CPI) rose by 6.66 percent year-to-year. That wasn’t only the second month of speed up in these annual data. It was the worst such result since August, 1982’s 7.06 percent.

But even had this near-forty-year high not been recorded, the new CPI report would have been full of bad news. Contrary to recent claims that America’s cost-of-living crisis has peaked, headline inflation on a monthly basis acclerated for a second straight time, and the 0.39 percent number was the highest since June’s 1.32 percent.

On that same sequential basis, core CPI quickened for the second consecutive month, too, and the 0.58 percent result was also the worst since June (0.71 percent).

There was one bright spot on the consumer price front: Annual headline inflation declerated in September – to 8.22 percent. The slowdown was the third straight, and the best such number since June’s nine percent, but it’s tough to see this trend continuing much longer.

After all, as mentioned in yesterday’s post about the latest official wholesale inflation figures (which in and of themselves signaled renewed price increases that businesses could easily pass on to consumers), there’s no shortage of reasons for thinking that the consumer purchasing power to support such continued business pricing power will remain strong.

Moreover, on top of the aforementioned expansion of food stamp, Obamacare, and veterans’ benefits, and some possible version of student loan relief (pending legal challenges), we just learned today that Social Security recipients will get their biggest (8.7 percent) annual cost of living increase since 1981. All these actions arguably are worthy, but they all add to consumer demand without increasing the nation’s supply of goods and services – a proven recipe for stoking inflation.

And don’t forget that the global oil cartel decided last week to cut production substantially, which can only boost upward pressure on energy prices.

This lastest lousy inflation report underscores what a stunning change has taken place on the cost-of-living front – and how miserably both the monetary policy makers at the Federal Reserve and the fiscal policy makers in the Biden administration and Congress have failed. Not so long ago, Americans were debating how quickly raging inflation would end. Now the big question is how deeply it’s been embedded in the economy.

(What’s Left of) Our Economy: U.S. Inflation Just Rebounded on the Wholesale Level, Too

12 Wednesday Oct 2022

Posted by Alan Tonelson in (What's Left of) Our Economy

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Biden administration, consumer price index, core inflation, CPI, Federal Reserve, food stamps, inflation, interest rates, monetary policy, Obamacare, PPI, Producer Price Index, Social Security, student loans, veterans, wholesale inflation, {What's Left of) Our Economy

After today’s official report on producer price inflation in the United States, it’s hard to see how anyone could still genuinely believe that the worst of the recent, decades-high price increases afflicting Americans is past.

In the first place, both versions of the Producer Price Index (PPI) worsened sequentially in September) for the second straight month. And in the second place, these results are likely to generate acceleration in consumer prices (those September figures come out tomorrow) because these “final demand” producer price (also called wholesale price) numbers tell us what businesses charge for the goods and services they buy to create what they sell to consumers.

It’s true that, at some point, U.S. businesses will lose this pricing power because their customers simply can’t afford to keep buying as much. But continuing strong inflation at all levels by definition makes clear that this development isn’t imminent. (Otherwise, price increases would have cooled much faster.)

Moreover, the Federal Reserve’s tighter monetary policy, which makes credit more expensive, isn’t likely for at least several months to slow economic activity enough to moderate inflation. And the Biden administration keeps putting more money in people’s pockets (e.g., in the form of a – scaled back – student loan forgiveness program, a major expansion of food stamp eligibility and Obamacare benefits, and higher spending on veterans benefits). Further, tomorrow Washington could announce the biggest increase in Social Security payments (which are indexed to inflation) in decades.

Overall producer prices rose sequentially by 0.38 percent in September. The monthly increase was the first since June, but keep in mind that it followed a July drop of 0.41 percent and a smaller August decline of 0.18 percent (hence my claim above of two consecutive months of discouraging results).

As with the consumer price index (CPI), the government also releases “core” producer price figures that strip out food and energy prices supposedly because their volatility has nothing to with the economy’s fundamental vulnerability to inflation. And quickening inflation was apparent here, too, with September’s monthly increase of 0.36 percent following an August rise of 0.25 percent and a July bump up of 0.13 percent.

The headline year-on-year PPI increase looked a little better – but only if you forget the baseline effect, which can produce misleadingly high or low results if the preceding year’s readings (in this case) were abnormal in either direction.

The September annual rise of 8.55 percent represented the third straight month of deceleration, and the lowest such number since July, 2021’s 7.83 percent.

But it’s coming off an annual increase the previous September of 8.82 percent. By contrast, this year’s highest annual PPI increase (March’s 11.67 percent number) came off a yearly rise of only 4.06 percent the previous March. That’s less than half as high. Therefore, it’s entirely reasonable to see plenty of still worrisome producer price momentum in that most recent annual data.

As for core PPI, September actually saw an acceleration in the annual pace – from August’s 5.60 percent to 5.66 percent. And although the latest figure is still the year’s second lowest, it’s coming off a September, 2020-21 increase of 6.17 percent. The highest annual PPI result for this year (March’s 7.11 percent), that increase followed one between the previous March’s of a mere 3.15 percent – roughly only half as high.

Between these new wholesale price results and the rapid consumer prices increases revealed in last month’s official report on the consumer inflation measure preferred by the Fed, the case for peak inflation looks weaker than it has for months. And here’s one more reason for doubting that the cost of living crisis will abate much any time soon:  the unlikelihood, at least as I see it, that the Fed will keep tightening monetary policy much longer and risk being charged with throwing the economy into a recession with a presidential election coming up.

Of course, the central bank is supposed to be immune from political pressures (including public opinion). But of course, nothing in Washington is. I’ve actually been surprised that the Fed has persisted in its hawkish stance this long. But the real test of its convictions is still months away.       

Making News: Podcast On-Line of New National Radio Interview on the Economy’s Confusing State

05 Wednesday Oct 2022

Posted by Alan Tonelson in Making News

≈ Leave a comment

Tags

election 2024, Employment, Federal Reserve, inflation, interest rates, Jobs, Making News, Market Wrap with Moe Ansari, monetary policy, quantitative tightening, recession, stagflation

I’m pleased to announce that the podcast is on-line of my latest appeaance on the nationally syndicated “Market Wrap with Moe Ansari.” Click here for an unusually detailed discussion of the outlook for the U.S. economy, why the signals being sent out from every source imaginable are still so wildly mixed, and on how politics could be driving many key decisions going forward.

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

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

26 Monday Sep 2022

Posted by Alan Tonelson in (What's Left of) Our Economy

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Tags

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

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

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

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

Reuters Graphics

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

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

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

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

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

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

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

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  • In the News
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  • Our So-Called Foreign Policy
  • The Snide World of Sports
  • Those Stubborn Facts
  • Uncategorized

The Snide World of Sports

  • (What's Left of) Our Economy
  • Following Up
  • Glad I Didn't Say That!
  • Golden Oldies
  • Guest Posts
  • Housekeeping
  • Housekeeping
  • Im-Politic
  • In the News
  • Making News
  • Our So-Called Foreign Policy
  • The Snide World of Sports
  • Those Stubborn Facts
  • Uncategorized

Guest Posts

  • (What's Left of) Our Economy
  • Following Up
  • Glad I Didn't Say That!
  • Golden Oldies
  • Guest Posts
  • Housekeeping
  • Housekeeping
  • Im-Politic
  • In the News
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  • Our So-Called Foreign Policy
  • The Snide World of Sports
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Current Thoughts on Trade

Terence P. Stewart

Protecting U.S. Workers

Marc to Market

So Much Nonsense Out There, So Little Time....

Alastair Winter

Chief Economist at Daniel Stewart & Co - Trying to make sense of Global Markets, Macroeconomics & Politics

Smaulgld

Real Estate + Economics + Gold + Silver

Reclaim the American Dream

So Much Nonsense Out There, So Little Time....

Mickey Kaus

Kausfiles

David Stockman's Contra Corner

Washington Decoded

So Much Nonsense Out There, So Little Time....

Upon Closer inspection

Keep America At Work

Sober Look

So Much Nonsense Out There, So Little Time....

Credit Writedowns

Finance, Economics and Markets

GubbmintCheese

So Much Nonsense Out There, So Little Time....

VoxEU.org: Recent Articles

So Much Nonsense Out There, So Little Time....

Michael Pettis' CHINA FINANCIAL MARKETS

RSS

So Much Nonsense Out There, So Little Time....

George Magnus

So Much Nonsense Out There, So Little Time....

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