Retail Sales Will Save Us

Posted on October 18, 2023 by Popular Economics Weekly

Financial FAQs

The debate is raging on when the Fed will begin to lower their short-term rates in time to prevent a recession. A number of pundits and economists, such as Nobel Laureate Paul Krugman, have said the inflation battle has been won. And most Fed Governors are now saying they should not raise interest rates any higher.

The problem is the bond market doesn’t’ believe so, even believes the latest robust economic data show growth not slowing enough to pacify the Fed, hence 10-year and 30-year bond yields are soaring above 4 percent and fixed mortgage rates above 7 percent in the expectation that the Fed will cause a recession.

Well, retail sales might save us from a recesssion. Sales are surging, far above consensus estimates, recovering from negative sales growth in February and March 2023. Consumers are supposed to slow spending when the Fed raises the cost of borrowing, aren’t they? What is going on?

FREDretail

“Advance estimates of U.S. retail and food services sales for September 2023, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $704.9 billion, up 0.7 percent (±0.5 percent) from the previous month, and up 3.8 percent (±0.7 percent) above September 2022,” said the Census Bureau’s press release.

I said last week economic growth is increasing because there has been a huge surge in job formation—336,000 new jobs in September alone with higher revisions in the past two months. And wages are now rising faster than inflation for the first time in years, so why wouldn’t consumers want to spend with the upcoming holidays?

And we have the Atlanta Fed in its latest forecast saying, “The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the third quarter of 2023 is 5.1 percent on October 10, up from 4.9 percent on October 5. The consensus for Q3 economic GDP growth is a bit lower, probably in the 3-4 percent range.

I maintain there’s also another reason, a rise in what is called multifactor productivity, which measures capital inputs (machines, new technologies) as well as labor productivity, and it is soaring per the below FRED graph. It rose to 3.6 percent in 2021 from zero in 2020. This will create a greater supply of things, which puts downward pressure on prices, as do more workers producing more.

FREDproductivity

Is it because of the increased use of AI, which is a capital input? That’s too soon to know, but Doctors are already reporting more accurate diagnoses using AI to quickly find bad genes to determine what should be done with a cancer tumor.

“Over the last decade, the supply chain landscape has witnessed a transformative evolution, largely propelled by technological advancements. Such innovations as AI, the Internet of Things (IoT), blockchain and sophisticated data analytics have automated and optimized various aspects of supply management,” said an Institute for Supply Management article on automation.

The real key to staying fully employed while taming inflationary surges is also to avoid too much geopolitical uncertainty (wars), and preparing better for future pandemics that disrupt said supply chains.

Harlan Green © 2023

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Too Low Inflation a Danger

Posted on October 12, 2023 by Popular Economics Weekly

Popular Economics Weekly

Rather than worry about too much inflation still in the pipeline, we should worry about too little inflation going forward. The Producer Price Index of wholesale goods and services in September was 2.2 percent. It hit the Fed’s 2 percent target rate sometime between April-May this year. It then plunged to a zero inflation rate in June 2023 before rising to the current 2.2 percent inflation rate.

FREDppi

Too low inflation was the worry in 2009 after the Great Recession and the reason former Fed Chair Ben Bernanke instituted the Quantitative Easing (QE) policies that injected enough money into the system to bring the inflation rate back to its 2 percent target.

Today’s 2.2 percent PPI tells us the cost of wholesale goods and services has reached the Fed’s target rate and is a reason the Fed may have gone too far in suppressing wholesale prices. It means the supply chains have recovered and could even be over producing, which would continue to depress prices.

Why be worried when prices have risen so much in just two years? Final Demand Producer prices peaked in March 2022 at 12 percent. Consumers want prices to come down, after all.

But it’s a very dangerous monetary policy to suppress demand with such high interest rates for a prolonged period as Fed officials are saying they want to do.

Companies and consumers can quickly change course should there be more unforeseen consequences, such as a wider Middle East war creating scarcities that push prices up again. The 3.3 percent rise in final demand energy prices was the major culprit of the September PPI report.

The retail Consumer Price Index for September was a bit higher because of rising shelter costs and gas prices. But the headline all items annual inflation rate remained at 3.7 percent as in August.

“The index for shelter was the largest contributor to the monthly all items increase, accounting for over half of the increase. An increase in the gasoline index was also a major contributor to the all items monthly rise,” said the BLS.

So which index is more accurate?

The other Personal Consumption Expenditure Index (PCE) is rising at 3.5 percent over 12 months, right in the middle, and is probably the best picture of overall inflation. It shows the same bell curve and has also flattened of late.

“It’s the latest encouraging sign for Fed policymakers, who have been raising interest rates since March 2022 in a campaign to slow the economy and cool price increases,’ said NYTimes Jeanna Smialek. “While economic momentum has held up better than expected, a less ebullient housing market and a grinding return to normalcy in the car market have helped key prices — like automobile and rents — to fade.”

Unfortunately, the release of the Fed’s September FOMC minutes showed Fed officials aren’t yet getting the message that their credit policy may be too restrictive.

MarketWatch reporter Greg Robb summed it up: “The 12 voting Fed officials were unanimous in their decision to keep interest rates at a 22-year high, between 5.25% and 5.5 while penciling an additional rate hike before the end of the year to bring down inflation. “Almost all” of the 19 Fed officials supported holding rates steady, the minutes said.”

I’m hoping circumstances will convince them a more dovish stance on inflation is warranted.

Harlan Green © 2023

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Higher Growth Ahead!

Posted on October 10, 2023 by Popular Economics Weekly

Financial FAQs

Why have stocks and bonds been gyrating so much this year? It’s partly because a confused Federal Reserve doubts inflation is approaching their 2 percent target, and so won’t signal when they might begin to reduce their sky high interest rates.

Financial markets are confused as well because they still don’t know if we will have higher growth, or a recession. That’s difficult to understand since we have been at historically low unemployment for more than one year, which is hardly a sign of looming inflation.

At least one GDP growth optimist, the Atlanta Federal Reserve, has been putting what it calls its GDPNow estimate of future economic growth very high, predicting a 5.1 percent growth rate in the third quarter, more than double the first two quarters.

AtlantaFed

Why? It’s mainly because there has been a huge surge in job formation—336,000 new jobs in September alone and higher revisions in the past two months.

The Atlanta Fed in its latest forecast said, “The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the third quarter of 2023 is 5.1 percent on October 10, up from 4.9 percent on October 5. After last week’s employment situation release from the US Bureau of Labor Statistics and this morning’s wholesale trade report from the US Census Bureau, the nowcasts of third-quarter real gross private domestic investment growth and third-quarter real government spending growth increased from 5.9 percent and 2.2 percent, respectively, to 6.7 percent and 3.0 percent.”

That’s a mouthful to comprehend but other forecasters are also revising their Q3 GDP growth estimates as high as 4 percent.

Another indicator of robust job growth is the JOLTS report on job openings, a measure of labor demand. The number of job openings rose 690,000 to 9.610 million job vacancies on the last day of August. That was the biggest jump in two years. And data for July was also revised higher to show 8.920 million job openings instead of the 8.827 million previously reported, as I reported last week.

Meanwhile, the number of so-called dovish Fed Governors that want to halt further rate increases is growing. Atlanta Fed President Raphael Bostic said the Fed can afford to be patient if inflation continues to slow, speaking at an event in Atlanta.

The goal of the Fed is to reduce inflation to 2 percent a year, Bostic said, but the central bank doesn’t have to get there “tomorrow,” reported MarketWatch.

“I think our policy is sufficiently restrictive at this point to get us to the 2% target,” Bostic said later in a call with reporters.

Another dove is the Minneapolis Fed President Neil Kashkari. Kashkari, who is a voting member of the Fed’s interest-rate committee this year, said the job market has remained resilient even with all the Fed’s rate hikes over the past year and a half.

“We feel like we’re on track for a soft landing,” Kashkari said, with inflation coming down and avoiding a deep recession. “So far, things are looking hopeful, but it’s too soon to declare victory.”

Whereas many Fed officials are being coy about future inflation trends because they fear the economy could overheat once again, leading the Fed to raise interest rates even higher, hance the recession fears.

But what could cause another recession unless we have another pandemic—wars and soaring energy prices? It is not happening at present. But this uncertainty will keep Wall Street in a tither for months, and the Fed from reducing their interest rates anytime soon, unfortunately.

Harlan Green © 2023

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Hot Labor Market and Lower Inflation Possible?

Posted on October 7, 2023 by Popular Economics Weekly

 Popular Economics Weekly

Total nonfarm payrolls rose by 336,000 in September, and the unemployment rate was unchanged at 3.8 percent, the U.S. Bureau of Labor Statistics reported today. Job gains occurred in leisure and hospitality; government; health care; professional, scientific, and technical services; and social assistance. Whereas wage growth continued to decline.

MarketWatch

The real truth from this very strong unemployment report is that consumers in a full-employment economy will keep spending. Why? Because their wages are increasing faster than the inflation rate, which is now nearing the Fed’s 2 percent target.

Every sector except Information services added jobs, beginning with Leisure and Hospitality (96,000), Government (73,000), Education & Health (70,000), which is a sure sign that economic growth is picking up. The government also raised its estimate of job gains in August to 227,000 from 187,000, and July was revised up to 236,000 from 157,000.

This should indicate third quarter GDP growth estimates as high as 4 percent are accurate, double the first two quarters, yet average hourly wage growth is slowing, probably because most new jobs are in the lower-paying service sector.

conferenceboard.org

We can understand why consumers are a bit confused. They still feel good about the present but worry about higher prices and yet continue to worry about a possible upcoming recession, which is reflected in the Conference Board’s Consumer Confidence survey.

“September’s disappointing headline number reflected another decline in the Expectations Index, as the Present Situation Index was little changed,” said Dana Peterson, Chief Economist at The Conference Board. “Write-in responses showed that consumers continued to be preoccupied with rising prices in general, and for groceries and gasoline in particular.”

So why then the recession fears? I believe this is largely the fault of Federal Reserve officials who continue to confuse both the public and financial markets about their intentions when signs are now indicating that we can have higher economic growth and lower inflation.

Why is lower inflation possible? More job creation means more is being produced, giving consumers more choices with some help from newer technologies (such as AI?) that should boost labor productivity.

Harlan Green © 2023

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Why the Labor Shortage?

Posted on October 5, 2023 by Popular Economics Weekly

Financial FAQs

Once again, we begin the countdown to the unemployment report by parsing the Job Openings and Labor Turnover Survey (JOLTS) report on the number of job vacancies in the U.S. economy. The August report shows an extremely tight labor market.

Firstly, the JOLTS report tells us there is a definite worker shortage at a time of record employment. This has given labor unions the upper hand in negotiating new labor contracts.

CalculatedRisk/BLS

Job openings, a measure of labor demand, were up 690,000 to 9.610 million on the last day of August. That was the biggest jump in two years, reported Reuters. Data for July was revised higher to show 8.920 million job openings instead of the 8.827 million previously reported.

“Over the month, the number of hires (blue line in graph) and total separations (light blue bar) changed little at 5.9 million and 5.7 million, respectively,” said the Bureau of Labor Statistics (BLS). “Within separations, quits (3.6 million) and layoffs and discharges (1.7 million) changed little.”

This means the unemployment rate and nonfarm payroll count due out Friday may change little as well. The difference in the JOLTS report between hires and separations was 200,000 (5.9m-5.7m). The consensus for Friday’s unemployment report is an increase of 150,000 to 170,000 nonfarm payroll jobs with the unemployment rate holding at 3.8 percent.

FREDunemployment

To give us an idea of its significance, the unemployment rate has been below 4 percent since January 2022, and just five times since the 1950s. Why so low currently? Because all the post-pandemic government recovery and development aid is priming economic activity. Never since World War Two has government spent so much on modernizing our economy.

Another jobs report by payroll processor ADP said U.S. private-sector employment rose by a tepid 89,000 in September, perhaps a sign the labor market is catching a chill in the early fall, said one commentator. That’s the smallest increase in two and a half years.

The ADP payroll estimate can offer clues on the strength of the labor market, but it’s not an accurate predictor of the government’s official employment report that follows. The two reports often vary widely from month to month, as was the case during the summer, even if they move in the same direction over time.

There is a solution to the labor shortage and such a tight labor market. More workers are entering the workforce, which is the best solution to the worker shortage. An additional 736,000 entered the workforce in July, including an influx of immigrants.

That is another reason the Fed might want to pause any further rate hikes.

Harlan Green © 2023

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It’s the Pandemic Stupid!

Posted on September 29, 2023 by Popular Economics Weekly

Popular Economics Weekly

Economists are beginning to say enough is enough. The Fed might continue to pause from another rate hike in their November FOMC meeting because the latest inflation data show a continued decline, but not in December.

“Although inflation has come down from the peak reached last year, it is still too high,” New York Fed President John Williams said in a prepared speech. “We still have a ways to go to fully restore price stability.”

To borrow from some economists who fear the Fed is getting the causes of inflation wrong and thereby keeping interest rates too high, the current inflation surge was caused by the COVID pandemic, stupid!

Yet listening to Fed Chair Powell, you would think most of the Fed Governors believe it was caused by higher wages, since Econ 101 postulates that wages comprise some two-thirds of product costs, therefore costs will rise or fall in line with wages.

That has been an economic truism since the 1970s, even though there was an Arab oil embargo in 1973 that brought shortages and sky-high gas prices leading to the so-called wage-price spiral that has traumatized the Fed since then.

Major economists such as former White House Chief Economist Jason Furman and Nobel laureate Paul Krugman have spoken about the dangers of prolonging higher interest rates, despite the rapid inflation decline.

“The question now is whether we’ll get a recession anyway — basically, whether Fed tightening will produce an unnecessary recession,” says Krugman. “And the picture there is very muddy. Milton Friedman’s famous line about “long and variable lags” has come in for a lot of questioning lately, with some suggestions that the lags may have gotten a lot shorter. If the lags are long, we may stumble into a recession; if not, not.”

@JasonFurman

Furman’s assertion is that wage growth can’t be a major determinate of inflation as it was in the 1970s, since it is still below the longer-term trend line.

“How are real wages doing? Most measures show they are up since prior to the pandemic but are still 3-5% below their immediate pre-pandemic trajectory.”

The real question should be why are so many meetings necessary to make the point that inflation should come down further?

The Federal Reserve Governors convene eight official vote-taking meetings per year after which they broadcast their intentions for policy—whether to raise, lower rates, or stand pat. This is really interfering with Wall Street’s own internal processes and the actual time lag needed for policy actions to take effect that determine the direction of inflation, causing the wild price fluctuations we see today.

Would the markets behave differently with fewer Fed pronouncements? Fed officials have been acting preemptively before seeing the results of their policies for decades, which let us not forget includes maximizing employment as well as price stability.

Today we have the COVID pandemic causing the product shortages that led to the current inflation spike, followed by the Ukraine-Russian war causing further shortages. But inflation has been declining anyway, much quicker than in the 1970s.

FREDpce

The favored measure of inflation, the Personal Consumption Expenditure Index (PCE) that measures a broad spectrum of products and services, has been declining fast. From the same month one year ago, the latest PCE price index for August increased 3.5 percent, per the FRED (St. Lous Fed) graph, down from its 7.1 percent peak in June 2022.

The danger with comparing it to the only analogy the Fed seems to come up with, the 1970s and the Arab oil embargo, is the damage it causes to wage and salary earners which comprise almost 80 percent of the adult work force.

Could the fear of not being taken seriously be the reason for so much Federal Reserve jawboning and unnecessarily high interest rates? Raising interest rates too high for too long has precipitated at least eight of the ten recessions since 1960, harming economic growth as well as household incomes.

Harlan Green © 2023

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What is Normal Inflation?

Posted on September 23, 2023 by Popular Economics Weekly

Financial FAQs

I have found support for my contention that the Fed should be done with raising interest rates and in fact drop them sooner rather than later, or we will see a full-blown recession.

Campbell Harvey, a Duke University finance professor best known for developing the yield-curve recession indicator in an interview on MarketWatch, says the Federal Reserve’s read on inflation is out of whack. And, as a result, the likelihood that the U.S. slips into a recession is increasing.

FREDcpi

Why? Because, “Harvey said that if shelter inflation were normalized at around 1% or 1.5% (It’s longer term average), overall core inflation would measure closer to 1.5% or 2%. In other words, at — or substantially below — the Fed’s 2% target,” said MarketWatch’s Mark DeCambre. 

Shelter costs are a lagging indicator; rental costs lag other costs because rental contracts typically change annually.

That is why there isn’t an accurate measure of today’s retail CPI inflation in particular, which is still positive.

The inflation rate is declining, which is called disinflation in economists’ terms. Yet if prices actually begin to drift into negative territory, it means we are in a recession. And prices have fallen precipitously since June 2022 when it reach 7 percent (see CPI graph above), though rising from its low of 3 percent to 3.7 percent over the past two months.

This is a huge plunge that signaled supply chains wasted little time in catching up to demand. Consumer prices ex-shelter were up +1.9 percent on a year-over-year basis in August, up from +1 percent in July, according to the Labor Department.

That is a verly low inflation rate, and skirting an outright deflationary spiral if the trend continues, as prices are wont to behave during business cycles.

Professor Harvey says he was right in predicting eight of the last recessions when the yield curve inverted. That is a time when the yield curves of the 10-year and 3-month fixed rates are inverted from their normal relationship. The 10-year yield is normally higher than the 3-month yield because it is for a longer term (i.e., 10 years).

But when reversed, banks cannot profit when they must lend money at a lower rate (many lone rates are based on 10-yr yield) than they borrow (e.g., at 1-3 mos.) when inverted, hence credit conditions are tightened, if it is prolonged.

And adding to the possibility of recession are the Fed’s credit-tightening rate hikes for more than one year.

It’s a dicey time when Fed officials seem to believe prolonged inflation is right around the corner. They just lowered their rate-reduction schedule from four to two times next year at last week’s FOMC meeting.

@paulkrugman

Nobel Laureate Paul Krugman has been saying this for months. His ‘supercore’ CPI with consumer prices excluding more volatile food, energy, used cars and shelter is at 2 percent.

Yet we know what can happen when rate hikes are prolonged for too long. When former Fed Chairman Alan Greenspan and his Governors raised interest rates from 1 percent to 5.25 percent with 16 consecutive rate hikes from May 2004 to June 2006—the Great Recession followed.

Harlan Green © 2023

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When a Return to Normal?

Posted on September 19, 2023 by Popular Economics Weekly

Financial FAQs

FREDfedfunds

There is so much confusion in the financial markets, as well as with consumers, over what comes next and little history to compare because we are recovering from a world-wide pandemic, the first one since the Spanish flu pandemic of the 1920s.

So, it is useful to look at interest rates as an indicator of what is normal—namely the Fed Funds rate that the Fed has jacked up to 5.25 percent (per above graph) and the Bank Prime Loan rate—which controls consumer spending and therefore economic growth and job formation—to determine what the U.S. economy might look like over next few years.

The Wall Street Prime Rate which moves in tandem to the Fed Funds rate (see below FRED graph), is used by most banks to set both short-term credit card as well as longer-term installment loan interest rates for such as autos and appliances. And a high Prime Rate really puts a damper on consumers’ pocketbooks.

It is currently 8.50 percent in the second graph dating from the 1950s, up from its pandemic low of 3.25 percent, which ignited so much consumer spending and the mortgage refinance binge in 2020-21.

FREDprimerate

That is too high for any sustained growth. The Bank Prime Loan Rate fluctuated from 7.5 to 10 percent in the 1970s to 2000, as did a higher unemployment rate, before unemployment descended to its current 3 percent lows after the Great Recession (2009), and which is causing the current growth spurt.

Economic growth is accelerating again but the Fed must begin to lower their rates sooner rather than later for growth to continue.

Avoiding another recession will be the miracle of miracles if they don’t lower interest rates soon, since every recession since the 1950s (10 at last count per gray bars in graphs) was mainly caused by the Fed jacking up their Fed Funds rate and hence the Bank Prime Loan Rate to ‘tame’ inflation, which drastically slowed both spending and lending, as I said.

GDP growth expanded 2.1 percent in Q2. And just last week S&P Global Market Intelligence raised its third-quarter GDP estimate by nearly two percentage points to an annualized rate of 4 percent, citing strong retail sales data. It moved its annual estimate up slightly to a historically strong 2.3 percent.

Inflation should continue to decline overall because of the Fed’s past rate hikes, though consumer prices rose again in August to reach a 3.7% yearly rate, based on last week’s release of the monthly consumer-price index. That marked its biggest jump in 14 months, up from 3.2 percent in July and a 27-month low of 3 percent in June.

If we want to avoid a recession then history tells us th e Fed needs to drop its shorter-term rates, so that the Bank Prime Loan Rate returns to its historic norm of 5-7 percent, and its Fed Funds rate in the neighborhood of 3.75 percent, which history says consumers and businesses can tolerate for sustained growth.

But that also depends on supply chains remaining healthy. What about the Ukraine-Russian war? It doesn’t seem to be affecting food and energy prices anymore, since food prices are back to normal and even OPEC had to reduce oil production to boost the price of crude oil which means oil supplies are plentiful.

Returning to a more normally functioning economy also means the Fed must return to a more normal Fed Funds rate to avoid another recession, which hasn’t been the case in the past.

Harlan Green © 2023

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No More Rate Hikes?

Posted on September 15, 2023 by Popular Economics Weekly

Popular Economics Weekly

NBER.org

The latest inflation data make it almost unanimous: Chairman Powell, leading economists and even his Fed Governors are saying the Federal Reserve Governors may not raise interest rates again this year, or even next year.

Why? Inflation has been tamed; except for gas prices, which have soared of late due to more positive economic growth and OPEC cutting oil production.

Second quarter GDP growth was 2.1 percent, and there are estimates of 4 percent or higher Q3 growth. It is a picture of the U.S. economy returning to a more normal growth pattern.

This is while the headlines are screaming that U.S. retail and wholesale prices have suddenly spiked. Wholesale PPI prices jumped 0.7 percent in August to mark the largest increase in 14 months, as did retail CPI prices the day before.

“The Producer Price Index for final demand increased 0.7 percent in August, seasonally adjusted, after rising 0.4 percent in July, the U.S. Bureau of Labor Statistics reported today. The August advance is the largest increase in final demand prices since moving up 0.9 percent in June 2022.

But note that on an unadjusted basis, the index for final demand rose (just) 1.6 percent for the 12 months ended in August.

So why isn’t retail CPI inflation following suit with its overall inflation rate rising to 3.7 percent?

An NBER working paper by noted economists Olivier Blanchard and former Fed Chair Ben Bernanke, accompanied by the above NBER graph, maintain rising wages are the culprit.

“Rising commodity prices and supply chain disruptions were the principal triggers of the recent burst of inflation. But, as these factors have faded, tight labor markets and wage pressures are becoming the main drivers of the lower, but still elevated, rate of price increase.”

But the above NBER graph shows that is not yet the case. The blue portion of the bar portraying energy prices has shrunk the most. The red and yellow portions portraying wage pressure and product shortages have shrunk the same amount bringing actual inflation (black line) below 4 percent. The gray portion is a pre-pandemic historical compendium of contributions to inflation (Don’t ask what that means, read the paper for further clarity).

So once again the fear of persistent wage inflation is driving their analysis, as many blamed for the 1970s era of stagflation. Yet they almost totally ignore the role of persistent supply shortages in the inflation equation, (oil shortages in the 1970s, Ukraine-Russian war shortages and trade sanctions today), as well as the profit-taking role of producers and distributers that padded their profits because of supply bottlenecks.

The recent spike in retail CPI and wholesale Producer Price Index was also because the financial markets believe recession dangers are over and therefore the demand for gas and oil use will only increase, another indication that markets are functioning normally.

That is why Goldman Sachs chief economist Jan Hatzius is predicting no looming recession and better economic growth ahead, as I said last week.

We can also thank Bidenomics, the boost to growth that the infusion of $billions into renewal of the US economy in infrastructure, CHIPs manufacturing, and the conversion to more climate friendly policies has jump started.

Above all, we see consumers feeling prosperous enough to continue to shop and enjoy more leisure activities even with higher interest rates. The Fed has signaled they won’t be in any hurry to drop their interest rate. But that’s also a sign of interest rates returning to more normal levels that prevailed before the COVID pandemic.

Harlan Green © 2023

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Why the Inflation Confusion–Part II

Posted on September 13, 2023 by Popular Economics Weekly

Financial FAQs

FREDcpi

Americans want to blame someone for the post-pandemic inflation surge, according to most polls. Yet when in our history has it been a real problem affecting serious economic growth?

Consumer prices rose again in August to reach a 3.7% yearly rate, based on Wednesday’s release of the monthly consumer-price index. That marked its biggest jump in 14 months and a higher reading than the recent 3% low set in June (see chart) as the toll of the Fed’s rate hikes kicked in.

Horrors, according to some pundits! But it hasn’t affected economic growth which is again surging after the pandemic—up 2.1 percent in Q2. And just last week S&P Global Market Intelligence raised its third-quarter GDP estimate by nearly two percentage points to an annualized rate of 4%, citing strong retail sales data. It moved its annual estimate up slightly to a historically strong 2.3 percent.

What makes the above FRED consumer price index (CPI) chart more interesting is that I have dated it to World War I; yes, pre-1920 and World War I; to give inflation the proper historical perspective. It shows that inflation, in fact, has rarely been a problem in our up-and-down consumer-driven capitalist economy.

Why? We have seldom had a supply problem—i.e., not enough goods and services to balance out and keep inflation in check—because the US economy is very productive and able to quickly meet surging demand.

The 1970’s stagflation era when the CPI topped out at 14 percent in 1980 was an exception because we didn’t yet have the means to produce enough oil, and OPEC did, so they embargoed the supply to US because of our support of the Arab-Israeli War, which sent oil prices skyrocketing that we depended on.

The other major peak was 1947 when post-WWII consumers demanded more while our WWII economy was just beginning to shift out of war-mode and produce autos instead of tanks.

(The earlier 1917 to 1920 spikes were for the same reason—a WWI economy shifting back to a peacetime economy.)

Looking at the graph again, moderate inflation has been the norm—averaging around 2.5 percent and never more than 5 percent since 1980—until the post-pandemic spike, which again was mainly caused by another war, the war against the COVID-19 pandemic that paralyzed the world economy for a time, until supply chains began to catch up.

It is difficult to imagine another time when wild animals wandered in the empty streets of major cities under lockdown.

In the words of CNN senior business reporter Alison Morrow, “Demand went from zero to 100, but supplies couldn’t bounce back so easily. Factories were on lockdown or navigating Covid-19 restrictions, and raw materials were harder to get because of the sudden swell in demand. Shortages of just about everything cropped up, especially workers to unload goods and drive them to their destination. We’re still untangling the mess at ports around the world.”

And there is another war going on, the Ukraine-Russia war, which is affecting the current spike in energy prices, and is the main reason for this month’s uptick in inflation.

West Texas Intermediate Crude, the U.S. benchmark, was near $88.58 a barrel on Wednesday, with traders focused on supply concerns following decisions by Saudi Arabia and Russia to cut crude supplies through year-end. WTI was trading at a low for the year below $65 a barrel in May.

So we shouldn’t forget such historical events do occur, but also that they have never lasted for long.

Harlan Green © 2023

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