(What’s Left of) Our Economy: The Worst of All Possible Inflation Worlds for U.S. Workers?

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ECI, Employment Cost Index, Federal Reserve, inflation, Jerome Powell, Labor Department, labor productivity, PCE, personal consumption expenditures index, productivity, recession, stagflation, wages, workers, {What's Left of) Our Economy

The newest report on a key official measure of worker compensation has just shown that, during today’s high inflation era, American workers could be both significantly fueling the soaring prices that are dominating the U.S. economy and getting shafted by them.

This measure – called the Employment Cost Index – is tracked by the Department of Labor, and is watched closely by the Federal Reserve (the government’s chief inflation-fighting agency) for two major reasons. First, it includes not just wages, but salaries and non-cash benefits. Second, unlike the Labor Department’s average wage figures, it takes into account what economists call compositional effects.

In other words, the those wage figures report hourly and weekly pay for specific sectors of the economy, but they don’t say anything about labor costs for businesses for the same jobs over time. The ECI tries to achieve this aim by factoring in the way that the makeup of employment between industries can change, and the way that the makeup of jobs within industries can change (e.g., from a majority of lower wage occupations to one of higher wage occupations).

In his press conference last Wednesday following the Federal Reserve’s announcement of a second straight big increase in the interest rate it controls directly, Chair Jerome Powell mentioned that the ECI report coming out on Friday would greatly influence the central banks’ decision on how much more tightening of credit conditions would be needed to slow the economy enough to cool inflation acceptably.

That’s because, as he has explained previously, the supposedly superior insights on worker pay provided by the ECI enable the Fed to figure out whether a major inflation engine has started to rev up – employee compensation rising faster than worker productivity. Industries (or entire economies) in this situation are denied the option of absorbing wage increases by achieving greater efficiencies in their operations Therefore, they face more pressure to maintain earnings and profits by passing pay increases onto their customers, their customers face more pressure to keep up with living costs by pushing for pay hikes themselves, and what economists term a classic and hard-to-break wage-price spiral takes off.

The new ECI results per se looked alarming enough from this perspective. They showed that between the second quarter of 2021 and the second quarter of 2022, total employee compensation for the private sector ose by 5.5 percent. That’s the fastest pace since this data series began in 2001. Moreover, this record represented the third straight all-time high. (RealityChek regulars know that private sector numbers are the most important gauge, since its pay and other indicators are mainly driven by market forces, unlike the statistics for government workers, where the indicators largely reflect politicians’ decisions.)

Sadly, though, according to the Fed’s favorite measure of consumer inflation (the Commerce Department’s Personal Consumption Expenditures price index), living costs increased by 6.45 percent. So workers fell further behind the eight ball.

Perhaps worst of all, however, productivity growth is in the toilet. We won’t get the initial second quarter figures until September 1, but during the first quarter, for non-farm businesses (the most closely followed measure for the private sector), it fell year-on-year by 0.6 percent – the worst such performance since the fourth quarter of 1993.

Nor was this figure a one-off for the current high inflation period. From the time consumer prices began their recent speed up (April, 2021) through the first quarter of this year, labor productivity is off by 1.36 percent, the ECI is up 3.95 percent, and PCE inflation has risen by 4.65 percent. So a strong case can be made that workers, businesses, and the economy as a whole are in the worst of all possible worlds.

Whenever productivity is the subject, it’s important to note that it’s the economic performance measure in which economists probably have the least confidence. And even if it’s accurate, don’t jump to blame workers for sloughing off. Maybe management is doing a lousy job of improving their productivity. Alternatively, maybe managers simply haven’t figured out how to do so in the midst of so many unusual challenges posed by the pandemic and its aftermath – chiefly the stop-go nature of the economy’s early aftermath, and the resulting turbulence that, along with the Ukraine war and China’s Zero Covid policy, is still roiling and stressing supply chains.

Whatever’s wrong, though, unless a course correction comes soon, it looks like the odds of the economy sinking into prolonged stagflation – roaring inflation and weak economic growth – are going up. And ultimately, that matters more to the American future than whether some form of recession is already here, or around the corner.

(What’s Left of) Our Economy: Another Dreadful U.S. Consumer Inflation Report

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Commerce Department, consumer price index, consumers, core inflation, cost of living, CPI, demand, energy, Federal Reserve, food, inflation, Labor Department, monetary policy, PCE, personal consumption expenditures index, prices, supply chains, Ukraine War, Zero Covid, {What's Left of) Our Economy

Optimism about U.S. inflation took another blow yesterday morning – though it shouldn’t have been unexpected – with the release of the latest data on the Federal Reserve’s favorite measure of price changes. I said “shouldn’t have been unexpected” because, as Fed Chair Jerome Powell and others have noted, this gauge and the higher profile Consumer Price Index (CPI) put out by the Labor Department normally track each other pretty closely over the long run, and those CPI results were deeply discouraging.

Nonetheless, latest results from the Price Indexes for Personal Consumption Expenditures (PCE) monitored by the Commerce Department matter because they strongly confirmed the latest CPI figures – which were pretty awful – starting with the month-to-month changes for the entire economy.

In June, headline PCE inflation shot up sequentially by a full one percent – much faster than May’s 0.6 percent and indeed the fastest rate not only throughout this latest high-inflation period, but the fastest since it increased by one percent in September, 2005.

But another observation should make even clearer how unusual that monthly headline increase was. The Commerce Department has been keeping these data since February, 1959. That’s 749 months worth of results through last month. How many times has monthly headline PCE inflation been one percent or higher? Twelve. And the all-time record is just 1.2 percent, hit in March, 1980, and February and March, 1974.

The annual figures were no better, and RealityChek regulars know that they’re more reliable than the monthlies because they measure changes over a longer time period, and therefore smooth out short-term fluctations.

June’s 6.8 percent rise was the strongest of the current high inflation era, and a significant pickup from May’s 6.3 percent. And it looks even worse when the fading baseline effect is taken into account. The June yearly jump in headline PCE came off a June, 2020-21 increase of four percent. So that year’s June PCE rate was already twice the Federal Reserve’s two percent annual inflation target.

By comparison, headline PCE this March was only a little lower than the June result – 6.6 percent. But the baseline figure for the previous March was only 2.5 percent. That rate was still higher than the Fed target, but not by much. So arguably unlike the price advances of June, this March’s inflation reflected some catching up from price increases that were still somewhat subdued due to the economy’s stop-go recovery from earlier during the pandemic.

Core PCE was lower by both measures, because it strips out the food and particularly energy prices that have spearheaded much headline inflation, and that are excluded supposedly because they’re volatile for reasons having little to do with the economy’s fundamental vulnerability to inflation. But here the monthly figures revealed new momentum, with the June seqential increase of 0.6 percent twice that of May’s 0.3 percent, and the highest such number since May and June of 2021.

Before then, however, core inflation hadn’t seen a monthly handle in the 0.6 percent neighborhood since September and October of 2001, which registered gains of 0.6 and 0.7percent, respectively.

On an annual basis, June’s core PCE increase of 4.8 percent was slightly higher than May’s 4.7 percent, but well below the recent peak of 5.3 percent in February. But the baseline effect should dispel any notions of progess being made. For June-to-June inflation for the previous year was 3.5 percent – meaningfully above the Fed’s two percent target. Core annual PCE inflation for the previous Februarys was just 1.5 percent – meaningfully below the Fed target.

As with most measures of U.S. economic perfomance, an unprecedented number of wild cards that can affect both PCE and CPI inflation has rendered most crystal balls (including mine) pretty unreliable. To cite just a few examples: Will China’s Zero Covid policy keep upending global supply chains and thus the prices of Chinese exports? Will the ongoing Ukraine War have similar impacts on many raw materials, especially energy? Will the Federal Reserve’s tightening of U.S. credit conditions per se bring inflation down significantly in the foreseeable future by dramatically slowing the nation’s growth? Will high and still soaring prices, coupled with vanishing savings rates, achieve the same objective if the Fed’s inflation-fighting zeal wanes? Or will the still huge amounts of money in most consumers’ bank accounts along with continuing robust job creation keep the demand for goods and services elevated for the time being whatever the Fed does?

Here’s what seems pretty certain to me: As long as that consumer demand remains strong, and as long as producer prices keep jumping, businesses will pass these rising costs on to their customers and keep consumer inflation worrisomely high. That seemed to be precisely the case in the last two months, with a torrid May read on producer prices being followed by the equally torrid June consumer inflation reports. So unless this wholesale inflation cooled a great deal this month, I’d expect at least another month of red hot consumer inflation. That producer price report is due out August 11.

(What’s Left of) Our Economy: The Real Message Behind the New U.S. Inflation Figures

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bubbles, consumer price index, core PCE, CPI, energy, Federal Reserve, inflation, Jerome Powell, monetary policy, PCE, personal consumption, personal consumption expenditures index, productivity, recession, {What's Left of) Our Economy

There – that wasn’t so hard, was it? Meaning that if a national government (including its central bank) wants to get inflation down, it’s not a rocket science-type challenge. Elected officials (or dictators) can cut public spending, monetary authorities like America’s Federal Reserve can tighten monetary policy, and voila. Receiving less financial juice, consumers stop consuming so much, businesses stop investing and hiring so robustly, and the lower level of economic activity begins depriving sellers of pricing power – at least if they want to keep their sales up. 

Moreover, these governments can enjoy the benefits of a venerable economic adage: an effective cure for high prices is high prices. That is, at some point, regardless of government policies, goods and services begin getting unaffordable. So businesses and consumers alike don’t buy so much of them, and the reduced demand also forces sellers that want to keep sales up to start marking them down.

At least that’s a message that’s easy to take away from the today’s new official report on U.S. “Personal Income and Outlays,” which, as usual, contains data on price increases and consumer spending, and which shows a softening in both.

Before delving into the specifics, however, it’s important to point out that (1) less economic activity means less prosperity – and in many instanaces can mean much worse – for most of the population; and (2), the higher inflation has become, the more belt tightening is needed, and the more economic suffering must be imposed, in order to bring it to levels considered acceptable. And since the new, better numbers from Washington still reveal price increases near multi-decade highs, it figures that returning to satisfactory inflation will require many Americans to experience significantly more economic pain.

In other words, the “soft landing” that Fed officials in particular describe as the goal of their anti-inflation policy – that is, taming inflation while still fostering some growth – still looks like much less than a sure bet. Even Fed Chair Jerome Powell acknowledges this.

Powell and many others insist that even if the landing is hard, the anti-inflation medicine will be necessary, since, in his words, “Economies don’t work without price stability.” Often they add that the steps necessary to defeat inflation will also help cure the economy of its long-time addiction to bubble-ized growth – that is, prosperity based on credit conditions that are kept way too loose, that deprive producers of the market-based disciplines needed to keep prosperity sustained, and that in fact spur so many bad and even reckless choices by all economic actors that they inevitably end in torrents of tears.

I’m sympathetic to these arguments, but the main point here is that killing off inflation per se has always been first and foremost a matter of will – which has clearly been lacking for too long. Avoiding recession, conversely, is no great accomplishment, either: Just keep inflating bubbles with easy money. It’s fostering soundly based, sustainable growth that’s been the challenge that American leaders have long failed to meet.

As for the specifics, let’s start with the inflation figures contained in today’s report from the Commerce Department. They’re somewhat different from the more widely covered Consumer Price Index (CPI) tracked by the Labor Department, but this Personal Consumption Expenditures (PCE) price index matters a lot because it’s the inflation measure favored by the Fed, which has major inflation-fighting responsibilities.

On a monthly basis, “headline” PCE inflation (the broadest measure) bounced up from April’s 0.2 percent (the weakest such figure since the flatlline of November, 2020) to 0.6 percent (the worst such figure since March’s 0.9 percent). The “core” figure (which strips out food and energy prices supposedly because they’re volatile for reason largely unrelated to the economy’s fundamental vulnerability to inflation), increased sequentially in May by 0.3 percent for the fourth straight month. Those are the smallest such increases since September, 2020’s 0.2 percent.

These results are one sign that spending has fallen off enough to prevent still strong energy inflation from bleeding over into the rest of the economy – just about all of which uses energy as a key input. And indeed, the new Commerce release reports that adjusting for inflation, personal consumption fell on month (by 0.4 percent) for the first time since last December (1.4 percent).

As known by RealityChek regulars, the annual rates of change are usually more important than the monthly, because they gauge developments over longer time periods and are therefore less likely to be thrown off by short-term developments or sheer statistical randomness. And encouragingly, they tell a similar story. The headline annual PCE inflation rate of 6.3 percent was the same as April’s, and lower than March’s 6.6 percent. Annual core PCE inflation dropped to 4.7 percent from April’s 4.9 percent and hit its lowest level since last November’s 4.7 percent – another sign that because consumers have pulled back, hot inflation in energy isn’t stoking ever stronger price rises elsewhere.

No one could reasonably call today’s inflation report “good” – especially since the baseline effect (which RealityChek readers know throughout 2021 produced annual inflation rates that were unusually high because of a catch-up effect from the unusually low inflation results of 2020) is gone. In other words, price increases much higher than the Fed’s two percent target rate are persisting.

But to this point, anyway, these increases aren’t coming faster – which is crucial because one reason inflation is so feared is its tendency to feed upon itself.

As pointed out above, though, weakening inflation by tanking the economy is no great triumph of economic policy. Worse, it’s all too easy to conclude from recent history that, even though a recession hasn’t officially arrived, once it does, most politicians will rev up the spending engines again, and (successfully) pressure the Fed to at least stop the tightening. And inflation will take off again. 

There’s a much better inflation-fighting alternative that’s available, at least in principle:  Increase the nation’s sagging productivity growth.  Boosting business’ efficiency enables companies to deal with cost increases — including wage hikes — without passing them on to consumers.  But a productivity rebound seems nowhere in sight, seemingly leaving the nation stuck in a pattern of blowing up bubbles to achieve periods of acceptable growth and employment, popping them at least occasionally to keep prices in check, and hoping the whole Ponzi scheme can somehow continue indefinitely.  

(What’s Left of) Our Economy: Curb Your Enthusiasm About Those New U.S. Inflation Figures

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Atlanta Federal Reserve Bank, consumer price index, core inflation, CPI, economic growth, GDP, gross domestic product, inflation, PCE, personal consumption expenditures index, stagflation, {What's Left of) Our Economy

Don’t get me wrong – any signs that U.S. inflation is cooling are welcome, and some can be found in today’s official report containing data on the Federal Reserve’s preferred gauge of consumer price increases. At the same time, for two main reasons, I’d recommend at least curbing enthusiasm about the inflation outlook.

The first concerns the baseline effect I’ve been writing about since prices began surging early last year. The second has to do with the likely relationship between the new (April) results for the price indexes for personal consumption expenditures (PCE) and the sagging rate of American economic growth.

But let’s first examine the reasons for inflation optimism contained in the new Commerce Department numbers (which are one of two data sets on consumer price trends produced by the federal government, the other being the Labor Department’s Consumer Price Index, or CPI).

The biggest is the steep drop in the monthly overall PCE inflation rate in April. It fell last month to 0.2 percent from 0.9 percent in March. That was the weakest such figure since the 0.1 percent increase in November, 2020 – when the CCP Virus’ first winter rebound was gathering steam, and the torrid economic recovery from the pandemic’s initial arrival earlier that year was slowing dramatically.

Even more impressive, the fall-off between March and April overall PCE inflation (0.7 percentage points) was the steepest since December, 2011 and January, 2012 (0.8 percentage points).

Oddly, though, no change was recorded in the monthly rate of core PCE inflation (which, like its CPI counterpart, strips out food and energy prices because they’re supposedly volatile for reasons unrelated to the economy’s fundamental inflation prone-ness). April’s sequential rise was the same as March’s – 0.3 percent. Still, it’s down from the 0.5 percent neighborhood in which core PCE stayed from October, 2021 and this past January.

The year-on-year PCE inflation rates weren’t devoid of good news, either, but it was less impressive than the latest monthly overall PCE result precisely because of that baseline effect and because of the overall economy’s dreary recent performance.

As known by RealityChek regulars, the annual figures are followed more closely than the monthlies because they show trends over a longer period of time, and therefore are less likely to be thrown off by random short-term fluctuations. As also known by the regulars, the high annual inflation figures of all kinds for much of last year were somewhat misleading because their point of comparison – i.e., their baseline – was the set of annual figures for pandemic-depressed 2020. And these were so unusually low. For many months, therefore, even a simple return to normal price increases was bound to show up as a major jump.

But the baseline for this year’s annual figures is no longer 2020 – when inflation was practically gone and even turned into deflation for a stretch – but 2021, and its artificially high (but still high) inflation rates.

So the slowdown in last month’s annual overall PCE inflation (from 6.6 percent to 6.3 percent) shouldn’t be overlooked. But it’s crucial to keep in mind that it’s coming off an April, 2020-2021 overall PCE increase of an already elevated 3.6 percent. Moreover, that April, 2020-21 rate was not only lofty, but accelerating. It’s March counterpart was only 2.5 percent.

Ditto for the slowdown in annual core PCE inflation from 5.2 percent in May to 4.9 percent in April. It’s certainly better than a speed up! But its baseline figure is last April’s warm-ish 3.1 percent, and that figure was much warmer than March’s two percent even – a pace the Fed views as ideal.

Now for the second reason for caution in cheering the new PCE results: They’re surely coming down because the economy’s growth rate has downshifted significantly. In the fourth quarter of last year, it shot up by 6.9 percent at annual rates after inflation. In the first quarter of this year, the gross domestic product (GDP) actually shrank – by 1.5 percent annualized in real terms. And the pretty reliable forecasters of the Atlanta Federal Reserve Bank believe growth in the second quarter will rebound only to 1.9 percent by the same measure.

Students of the economy call the combination of sluggish growth and strong inflation “stagflation.” Unfortunately, I think that’s the likeliest outcome for America’s foreseeable future being signaled by the new PCE results.

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

Tags

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

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

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

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

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

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

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

Jan.             0.3

Feb.            0.3

March         0.6

April           0.6

May            0.5

June            0.5

July            0.4

Aug.           0.4

Sept.           0.3

Oct.            0.6 

Nov.           0.6

Dec.           0.5

Jan.            0.5

Feb.           0.6 revised to 0.5

March       0.9

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

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

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

Jan.             0.2

Feb.            0.1

March        0.4

April          0.6

May           0.6

June           0.5

July            0.3

Aug.           0.3

Sept.           0.2

Oct.            0.5

Nov.           0.5

Dec.           0.5

Jan.            0.5

Feb.           0.4 revised to 0.3

March        0.3

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

Jan.            1.4

Feb.           1.6

March        2.5

April          3.6

May           4.0

June           4.0

July            4.1

Aug.           4.2

Sept.           4.4

Oct.            5.1

Nov.           5.6

Dec.           5.8

Jan.  21-22           6..0

Feb. 21-22           6.4 revised to 6.3

March 21-22        6.6

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

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

Jan.             1.8

Feb.            1.8

March        1.3

April          0.6

May          0.5

June          0.9

July          1.0

Aug.         1.2

Sept.         1.4

Oct.          1.2

Nov.         1.2

Dec.         1.3

Jan. 20-21           1.4

Feb. 20-21          1.6

March 20-21       2.5

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

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

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

Jan.            1.5

Feb.           1.5

March        2.0

April          3.1

May           3.5

June           3.5

July            3.6

Aug.          3.6

Sept.          3.7

Oct.           4.2

Nov.          4.7

Dec.          4.9

Jan. 21-22             5.2

Feb. 21-22            5.4 revised to 5.3

March 21-22        5.2

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

And here are the annual core figures for the preceding year

Jan.             1.7

Feb.            1.9

March        1.7

April          0.9

May           1.0

June           1.1

July           1.3

Aug.          1.4

Sept.          1.5

Oct.           1.4

Nov.          1.3

Dec.          1.4

Jan. 20-21             1.4

Feb. 20-21            1.5

March 20-21         2.0

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

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

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

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

(What’s Left of) Our Economy: Why Inflation Now Looks More Confounding Than Ever

Tags

baseline effect, Commerce Department, consumer price index, CPI, Federal Reserve, global financial crisis, inflation, Labor Department, monetary policy, moral hazard, PCE, personal consumption expenditures index, recession, {What's Left of) Our Economy

Thanks to the Ukraine War, the challenge of figuring out whether and exactly how greatly inflation-prone the U.S. economy has become – and therefore what to do about it – has become more complicated than ever. In fact, it might have become impossible, at least for the foreseeable future. And the latest evidence comes from the most recent official report on the Federal Reserve’s preferred measure of price changes – the price indexes for personal consumption expenditures (PCE) put out by the Commerce Department.

This quandary matters decisively because the main conflicting views of today’s inflation support two equally conflicting policy responses by Congress and the administration, but mainly by the Fed — which has the authority to put anti-inflation measures into effect faster than the rest of the federal government.

Simply put, let’s suppose that current, and multi-decade record, inflation mainly stems from government policies that injected too much money into the economy, through massive spending, rock-bottom interest rates, or some combination of the two. Then the remedy is starting to “tighten” such policies by raising interest rates further and selling the bonds bought by the Fed through its quantitative easing program, or by cutting federal spending, or some combination of all these. Strengthening this case is the magnitude of this policy support for the economy – which ballooned due to the emergency created by the CCP Virus pandemic that finally seems on the wane for good.

But if today’s inflation stems mainly from one-time shocks to the economy that by definition don’t have staying power (which is why for quite a while, the Fed was calling elevated inflation “transitory”), then such tightening moves either could have little effect whatever on prices, and/or backfire by dramatically slowing growth and even causing a recession.

To date, that’s been my interpretation, with the main one-time shock being the pandemic. First the virus produced abnormally low inflation readings when its spread and the lockdowns and behavioral changes that resulted crashed the economy briefly. The rapid recovery that followed wound up producing abnormally high inflation readings as economic activity – choppily – returned to quasi-normal (the “baseline effect” I keep writing about).

Moreover, that stop-start nature of the recovery – which stemmed from the fluctuations in CCP Virus waves and consequent mandates and business curbs – fouled up global supply chains that led to widespread shortages, and therefore pushed up prices, as companies struggled to figure out future demand for the goods and services they supplied.

Last month, I wrote that the baseline effect seemed to be disappearing for the Labor Department’s inflation measure — the Consumer Price Index, or CPI), and a few weeks later, predicted that it fading for the overall PCE in March and for core PCE in April.

But of course, since then have come more outside shocks – Russia’s invasion of Ukraine, the unexpectedly long conflict that’s followed, and the sanctions- and war-related disruptions in global supplies of fossil fuels and grain from both countries. All these closely related developments are certain to send prices to yet another level, and the effects will be felt throughout the entire economy, since more expensive fuels affect any business that transports its products or uses oil or gas to power its operations. As a result, the distinction drawn by both inflation measures between overall inflation rates and “core” inflation rates (which leave out food and energy prices because they’re so vulnerable to outside shocks) will become inceasingly academic.

So where do the new PCE data fit in? In brief, they show that, only a monthly basis, overall inflation hit 0.6 percent in February, and core inflation came in at 0.4 percent. The former monthly inflation rate hasn’t risen since October, and January’s initially reported 0.6 percent result has been revised down to 0.5 percent. The latter figure, meanwhile, was the lowest since September. So no speed-up in inflation is apparent from these statistics.

The annual figures are where the acceleration can be seen. February’s year-on-year PCE inflation rate of 6.4 percent – the fastest rate since 1982, and a meaningful increase over January’s six percent. In fact, overall annual PCE inflation pierced the Fed’s two percent target last March and have risen every single month since.  Core PCE has followed an almost identical pattern, though at slightly lower absolute levels.

Yet as explained previously, both surging annual PCE inflation rates have much to do with the price increases of 2019-2020 that were pushed down so low by the virus’ arrival that they took more than a year to recover even as the economy bounced back (unevenly, to be sure).

Specifically, in February, 2021, the annual overall PCE inflation rate was only 1.6 percent, and the annual core rate was only 1.5 percent.

As mentioned above, the return of annual inflation rates above the Fed target – in March, 2021 for overall PCE and April for the core – meant that this baseline effect looked set to end soon. But the Ukraine war has upset these calculations.

As a result, the big question facing the Fed now is whether inflation – whatever its causes – has become so high, and could last so long, that it needs to be reduced significantly even at the risk of triggering recession. That seems to be the central bank’s stance right now, but color me skeptical. After all, slowing growth to a near-halt during an election year would look like an awfully political move, and one I have difficulty believing would be taken by an institution that touts itself as resolutely non-political.

BTW, as if all this wasn’t bewildering enough, there’s a school of thought that supports major Fed tightening even if recession does result – and has supported it for many years. It holds that the super-low interest rates of recent decades have dangerously distorted the economy and indeed sapped its productivity by creating “moral hazard” – incentivizing foolish and indeed wasteful investments by reducing the costs of failure, and leaving less capital over for spending that fosters greater efficiency and technological progress.

I’ve long found these arguments compelling, especially since the global financial crisis of 2007-09 made the dangers of such moral hazard clear. But there’s no sign of concern about this problem anywhere in Washington. The focus there is — somehow — coping with inflation. The next statistics will be out on Tuesday, and the only certainty is that they won’t make the task look any easier.         

(What’s Left of) Our Economy: Those Baseline Effects Keep Distorting the U.S. Inflation Picture

Tags

baseline effect, consumer price index, core inflation, CPI, Federal Reserve, inflation, PCE, personal consumption expenditures index, stimulus, {What's Left of) Our Economy

Earlier this month, my examination of one of the two main official U.S. measures of inflation concluded that even though it showed a recent month-to-month acceleration (especially in January), it was still too early to declare that it was close to spinning out of control, or even being sure to stay at current excessive levels. That was because, as I read these Consumer Price Index (CPI) data, the most important results (the annual figures) were being distorted by a “baseline effect.”

Specifically, the previous year’s inflation rate was so abnormally low (due to the depressing effect on the entire economy of the CCP Virus’ arrival and the lockdowns and behavioral changes it spurred) that any economic return to normality was bound to produce annual inflation rates that were abnormally high in comparison. Moreover, those 2019-2020 inflation rates made clear to me that the baseline effect would be with us through the February figures (which will come out next month).

Today, Washington released the other main set of inflation figures – the price indexes for Personal Consumption Expenditures (PCE). They’re of special interest because they’re the gauge preferred by the Federal Reserve, and the Fed’s reaction to inflation greatly influences how fast or slow the economy grows. 

And even more interesting: The PCE numbers also reveal a continuing baseline effect that’s got another month to run.

Let’s start, as always, with the monthly percentage changes in the overall PCE inflation rate going back to January, 2021:

Jan.             0.3

Feb.            0.3

March         0.6

April           0.6

May            0.5

June            0.5

July            0.4

Aug.           0.4

Sept.           0.3

Oct.            0.6 

Nov.           0.6

Dec.           0.5

Jan.            0.6

The acceleration in this inflation measure is obvious from looking at the first four months of last year. But then it stops. It’s true that some momentum was regained after summer and autumn slowdown, but since October, it’s remained steady. Moreover, recent revisions (downward for October, upward for December) have cancelled each other out.

Since a prime reason inflation is viewed with such alarm is its tendency to feed on itself, a leveling off in the rate of increase indicates that the worst isn’t in store (although it’s crucial to remember that this doesn’t mean that prices have stopped rising – only that they’ve stopped rising at ever faster rates).

Looking even more stable lately have been the “core” PCE monthly inflation rates. These strip out food and energy data because prices in those sectors are considered volatile for reasons supposedly having little or nothing to do with the economy’s fundamental vulnerability to inflation (like weather events, or the policies of foreign cartels). In fact, as shown below, they’ve shown no monthly speed up at all since October, and only the same modest acceleration from an equally modest summer slowdown:

Jan.             0.2

Feb.            0.1

March        0.4

April          0.6

May           0.6

June           0.5

July            0.3

Aug.           0.3

Sept.           0.2

Oct.            0.5

Nov.           0.5

Dec.           0.5

Jan.            0.5

The annual percentage changes by month in the headine PCE inflation rate do show genuine and continued acceleration throughout the year:

Jan.            1.4

Feb.           1.6

March        2.5

April          3.6

May           4.0

June           4.0

July            4.1

Aug.           4.2

Sept.           4.4

Oct.            5.1

Nov.           5.6

Dec.           5.8

Jan.            6.1

But as has been the case for the entire year, the comparable annual PCE rate for the previous year was rock-bottom, as the below 2019-2020 (and for January, 2021, the January, 2020-21 year) statistics show. How do we know they were uusually low? Chiefly because they fell short of even (historically modest) two percent annual increases that the Federal Reserve has long viewed as a desirable inflation rate. The misses, moreover, were substantial:

Jan.            1.8

Feb.           1.8

March       1.3

April         0.6

May          0.5

June          0.9

July          1.0

Aug.         1.2

Sept.         1.4

Oct.          1.2

Nov.         1.2

Dec.         1.3

Jan. 20-21            1.4

Further, as noted above, the previous year’s inflation rate didn’t top two percent until March, 2021, and a further big spurt, which understandably started igniting inflation fears, only came in April. Here are those numbers:

Feb. 20-21          1.6

March 20-21       2.5

April 20-21         3.6

So that’s why I’m arguing that we’ll be seeing an important and distorting baseline effect for at least a month more, and that if the March numbers show no meaningful moderation in the annual inflation rate, that’s a sign of trouble. And this conclusion goes double for April.

The same analysis is warranted by the core inflation data, IMO. Here are those annual percentage changes going back to January, 2021, and extending through last month:

Jan.            1.5

Feb.           1.5

March        2.0

April          3.1

May           3.5

June           3.5

July            3.6

Aug.          3.6

Sept.          3.7

Oct.           4.2

Nov.          4.7

Dec.          4.9

Jan. 20-21           5.2

Again, taken in isolation, the picture they paint looks like worrisome inflation acceleration. But the previous year’s annual figures reveal a considerable baseline effect, too:

Jan.            1.7

Feb.           1.9

March       1.7

April         0.9

May         1.0

June         1.1

July          1.3

Aug.        1.4

Sept.       1.5

Oct.        1.4

Nov.       1.3

Dec.       1.4

Jan 20-21           1.4

As shown below, core PCE inflation began picking up at an annual rate more slowly last year than overall PCE. So in this case, the telltale month looks much more like April than March

Feb. 20-21          1.5

March 20-21      2.0

April 20-21        3.1

The baseline effect clearly isn’t responsible for all America’s recent inflation. The long-time stop-start nature of the CCP Virus-era economy (whose effects are still with us) and related supply chain snags and bottlenecks deserve much blame, too, along with the massive stimulus provided both by super-easy Federal Reserve monetary policies and generous pandemic relief provided by Congress and both the Trump and Biden administrations. But inflation’s failure to keep accelerating even as these approaches continued for much of last year is a major reason for keeping the baseline effect very much in mind – for at least a little while longer

(What’s Left of) Our Economy: U.S. Inflation Still Looks Transitory and Baseline-y – For Now

Tags

baseline effect, CCP Virus, consumer price index, core inflation, coronavirus, COVID 19, CPI, Federal Reserve, inflation, monetary policy, PCE, personal consumption expenditures index, semiconductors, shortages, stagflation, stimulus, supply chain, Wuhan virus, {What's Left of) Our Economy

Earlier this month, we learned from the latest official U.S. jobs report how dramatically revisions can change the picture of the economy’s performance. Today’s official inflation numbers – presenting the Consumer Price Index (CPI) – contained some interesting revisions, too, and they’re enough to keep me in the “transitory” camp on the future of price increases at least a month more – and specifically, as long as the ”baseline effect” will remain in place.

In plain English, this means that I still believe that inflation nowadays– which is unmistakably high by historic standards and painful for so many Americans – results mainly from major distortions in the economy created by the CCP Virus and related regulatory and behavioral curbs. Also affecting inflation’s annual rates of change throughout 2021 and into early 2022: the fact that the previous year’s inflation – the baseline – was so abnormally low. In fact, one of the key revelations of the revisions is that the baseline effect for “headline inflation” (the figure that tries to cover everything) has increased some in recent months, and therefore has played a moderately larger role in pushing up the latest numbers.

First, though, let’s look at the monthly changes in the overall inflation rate going back to January, 2021, along with the revisions (the number furthest to the right):

Dec-Jan:                          0.26 percent  now 0.24 percent

Jan-Feb:                          0.35 percent  now 0.44 percent

Feb-March:                     0.62 percent   now 0.64 percent

March-April:                  0.77 percent   now 0.64 percent

April-May:                     0.64 percent   now 0.70 percent

May-June:                      0.90 percent   now 0.88 percent

June-July:                      0.47 percent    now 0.45 percent

July-Aug:                      0.27 percent    now 0.33 percent

Aug-Sept:                      0.41 percent   unrevised

Sept-Oct:                       0.94 percent    now 0.87 percent

Oct-Nov:                       0.78 percent    now 0.69 percent

Nov-Dec:                      0.47 percent     now 0.58 percent

Dec-Jan:                        0.65 percent

There’s no doubt that a sequential speed-up took place between December and January. But even with the revisions, decelerations took place between October and November, and November and December. In fact, October remains the peak month for sequential inflation.

It’s important to note that these slowdowns in the inflation rate don’t mean that prices are actually falling. Instead, they mean that they’re not rising as quickly. And although that may sound like a pretty weak reason for encouragement, it counts for more because a major reason that inflation is considered so dangerous is that it tends to feed on itself – and actually grow at increasing rates.

So slowdowns are good news, even if they’re not good enough news. Moreover, the revisions for two of the last three months have been downgrades; in other words, since October, on net, headline inflation has been weaker than originally estimated.

Revisions haven’t had the same effect on so-called “core inflation” (which strips out food and energy prices because they’re viewed as unusually volatile for reasons having little or nothing to do with the economy’s supposed susceptability to inflation). But the absolute rates have been lower than those of headline inflation, and the rates of change have fallen on net since October, too.

Dec-Jan:                        0.03 percent   now 0.05 percent

Jan-Feb:                        0.10 percent    now 0.15 percent

Feb-March:                   0.34 percent    now 0.30 percent

March-April:                 0.92 percent    now 0.86 percent

April-May:                    0.74 percent    now 0.75 percent

May-June:                     0.88 percent    now 0.80 percent

June-July:                     0.33 percent     now 0.31 percent

July-Aug:                      0.10 percent    now 0.18 percent

Aug-Sept:                     0.24 percent     now 0.25 percent

Sept-Oct:                      0.60 percent     unrevised

Oct-Nov:                      0.53 percent     now 0.52 percent

Nov-Dec:                     0.55 percent     now 0.56 percent

Dec.-Jan:                     0.58 percent

But the real importance of those baseline effects and revisions come through in the annual inflation data. The table below shows the annual rates of change by month starting again in January, 2021. The left and center columns show the previous estimates and the revisions, and the right column shows the revisions of these rates for the last few months of baseline year 2019-2020:

Jan:                             1.37 percent    now 1.36 percent

Feb:                            1.68 percent    unrevised

March:                       2.64 percent     now 2.66 percent

April:                        4.16 percent      now 4.15 percent

May:                         4.93 percent      now 4.94 percent

June:                        5.32 percent       now 5.34 percent

July:                         5.28 percent      unrevised

Aug:                        5.20 percent       now 5.21 percent

Sept:                        5.38 percent      now 5.39 percent

Oct:                         6.24 percent      unrevised               2019-20 from 1.19 to 1.18

Nov:                        6.88 percent      now 6.83 percent  2019-20 still 1.14

Dec:                        7.12 percent      now 7.10 percent   2019-20 from 1.31 to 1.28

Jan:                         7.53 percent                                     2019-20 from 1.37 to 1.36

The big takeaway: The November and December annual inflation rates were both revised down by non-trivial degrees, and the baseline effects for October, December, and January have gotten bigger (because the annual inflation rates for 2019-2020 for these months have been revised down, too.

As with their monthly counterparts, the absolute annual core inflation rates are lower, the baseline effects aren’t quite as great, but they’re present anyway:

Jan:                        1.40 percent      now 1.39 percent

Feb:                       1.28 percent       now 1.29 percent

March:                   1.65 percent      now 1.66 percent

April:                     2.96 percent      now 2.97 percent

May:                      3.80 percent      now 3.81 percent

June:                      4.45 percent      unrevised

July:                       4.24 percent      now 4.20 percent

Aug:                      3.98 percent      now 3.96 percent

Sept:                      4.04 percent      unrevised

Oct:                       4.58 percent      now 4.59 percent

Nov:                      4.96 percent      now 4.95 percent    2019-20 from 1.63 to 1.64

Dec:                      5.49 percent      now 5.48 percent     2019-20 from 1.61 to 1.60

Jan:                       6.04 percent                                       2019-20 from 1.40 to 1.39

The baseline effect distortion of both sets of inflation figures should end when the February statistics come out (next month). Unless new revisions change the picture? But there are several other reasons inflation may moderate further going forward.

The economy’s widely predicted growth rate for the first quarter of this year is predicted to be wheezing and even negligible. As long as it lasts, much more sluggish economic activity should undercut price increases. (At the same time, what may be in store is stagflation – a punishing combination of weak growth and strong inflation.) The new CPI figures may well persuade the Federal Reserve to tighten monetary policy earlier and more vigorously than currently expected, which should also slow growth. (The Fed’s preferred measure of inflation, called the Personal Consumption Expenditures index, or PCE, will be updated later this month. It usually tracks the CPI pretty closely.) And rising prices seem to have put further economic stimulus off the table in Congress. 

Another (and maybe final?) V-shaped pandemic recovery, prompted by the fading of the Omicron CCP Virus variant, could always overcome all these growth obstacles. So could continuing supply chain snags and shortages – especially in industries like semiconductors, whose products are used in so many products. Or all these uncertainties and wildcards could keep the economy and inflation in a turbulent state, and keep complicating policymakers’ challenges in simultaneously fostering adequate growth and acceptable inflation.       

(What’s Left of) Our Economy: U.S. Inflation Still Looking High & (Yes) Transitory

Tags

consumer price index, core inflation, CPI, Federal Reserve, inflation, PCE, personal consumption expenditures index, transitory, {What's Left of) Our Economy

Nearly two weeks ago, in posting about the latest results for the U.S. Consumer Price Index (CPI), I wrote that the new data left the case for viewing current high inflation as “transitory” (to use a word now “retired” by the Federal Reserve) reasonably intact.

The main reason? What statisticians call “baseline effects.” That is, this year’s year-on-year inflation rates are so high at least partly because last year’s CCP Virus-induced inflation rates (the baseline for measuring this year’s prices and their annual changes) were unusually low. Therefore, as the economy has rebounded (however raggedly) from its steep pandemic-caused slump, demand for goods and services and therefore their prices, have been playing catch up.

Today, the U.S. government released the latest figures for another measure of inflation, the price indexes for Personal Consumption Expenditures (PCE). Even though this is the inflation gauge preferred by the Fed (whose monetary policy decisions greatly affect inflation rates), it oddly attracts less attention than the CPI.

But the big takeaway from the new numbers is that they strongly reenforce the baseline effect argument, and the conclusion that today’s strong price increases will end sooner rather than later.

As with the CPI statistics, as of last month, the sequential changes in overall PCE inflation contain some good news, too. Specifically, they show some signs of easing, or at least plateauing. That’s comforting in and of itself since one reason inflation prompts such fear is its potential for feeding on itself and greatly worsening over time. Here are those monthly percentage increases for this calendar year so far.

Jan.             0.3

Feb.            0.3

March         0.6

April           0.6

May            0.5

June            0.5

July            0.4

Aug.           0.4

Sept.           0.3

Oct.            0.7

Nov.           0.6

These figures incorporate two revisions that cancel each other out (September’s initially reported 0.4 percent monthly increase is now judged to have been 0.3 percent, and October’s is now pegged at 0.7 percent instead of 0.6 percent.) But since March, there’s been no net minimal speed-up so far.

The picture looks similar with the so-called core PCE. Like the core CPI, it strips out food and energy costs because they supposedly can be volatile for reasons having little or nothing to do with the economy’s overall inflation prone-ness. Here are its monthly changes for 2020 to date:

Feb.           0.1

March       0.4

April         0.6

May          0.6

June          0.5

July           0.3

Aug.          0.3

Sept.          0.2

Oct.           0.5

Nov.          0.5

October saw an upward revision here, too – from 0.4 percent. But otherwise we see a plateauing – at most – since April.

Now for the annual percentage change figures – the ones that make clear that baseline effect. Here they are, by month, for the current year so far:

Jan.           1.4

Feb.          1.6

March       2.5

April         3.6

May          4.0

June          4.0

July           4.1

Aug.          4.2

Sept.          4.4

Oct.           5.1

Nov.          5.7

Both the October and November numbers represent major acceleration following a slower speed-up since April. And to add (a little) insult to injury, the October annual overall PCE increase was revised up from five percent.

But before deciding that a strong inflationary spiral has now kicked in, take a look at the annual overall inflation percentage changes by month for 2019-2020:

Jan.           1.90

Feb.          1.87

March      1.34

April        0.41

May         0.51

June         0.91

July         1.04

Aug.        1.30

Sept.        1.38

Oct.         1.17

Nov.        1.11

What sticks out to me is that not only did these annual inflation rates crater starting in March (because of the virus-induced downturn). But after reviving (weakly) in the summer and early fall, they sagged again in…October and November! So this year’s strong annual increases for those months surely result at least to some significant extent from that comparison.

And as with the overall CPI annual increases from 2019-2020, these overall annual PCE percentage changes stayed pretty feeble in November and, as shown below, for one and arguably two months afterwards. Therefore, it’s not until March – when, not so coincidentally, the monthly increase finally exceeded the pre-virus rates of January and February, 2021 – that the baseline distortion will be gone.

Dec.          1.29

Jan.           1.40

Feb.          1.63

March      2.45

April        3.58

When it comes to the core PCE, the 2019-2020 absolute numbers are higher, and the October and November sags less pronounced. In fact, the annual rate bounced back up some in November. But it fell again in December, and even further in January, 2021, and stayed at only about half the rate of the previous January until March and especially April.

Jan.           2.71

Feb.          1.91

March      1.70

April        0.91

May        1.00

June        1.13

July        1.30

Aug.       1.50

Sept.       1.57

Oct.        1.42

Nov.       1.65

And just as with the overall CPI, as shown below, the pre-pandemic January and February, 2020 annual inflation rates weren’t topped again till this past March and April. As a result, the baseline distortion could continue here, too, for the next few months: 

Dec.       1.48

Jan.        1.27

Feb.       1.49

March    1.97

April      3.08

As I’ve written previously, indications that inflation has peaked are rightly no comfort to Americans suffering from burgeoning prices, and don’t mean that the cost of living won’t be rising excessively for many more months. But if inflation isn’t actually out of control, and may return to normal by, say, late next year or thereabouts, then the wisdom of the faster tightening of monetary policy announced by the Fed, and of government spending cuts generally speaking, come into question – at least if policymakers are determined to prop up short-term growth.

The trouble, as I suggested in the last CPI post, is that such supports could keep the economy addicted to artificial stimulus and further from genuinely healthy growth based on economic fundamentals than ever – a story that I continue believing ends badly, however surprised I remain that this high-wire act has lasted as long as it has.

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

Tags

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.