The press presentation of the inflation number for August is misleading. Year over year inflation, which is what the media reports as the headline number, is useless as a planning number. That is like saying what I weighed a year ago is relevant to whether I need to skip the trip to Dairy Queen tonight. In the past, the monthly inflation number would be annualized and reported as one of the headline numbers, but that is not done anymore because it resulted in volatile numbers. So the headline is that Inflation is 8.3%, which is a huge number, but inflation isn’t really 8.3% anymore.
July over June inflation was 0.0% and August over July was 0.1%. One month could be an anomaly, two months is a trend. If September comes in around 0.0% to maybe 0.3%, that makes it three months, and we have a new reality. Even annualizing the last two months, shows an inflation rate under 1.0%. I don’t think that is where inflation actually is, but it is certainly not 8.3% either. Digging deep inside the numbers, non-gasoline and food numbers are up 0.6% month over month, which is not great, but wholesale numbers, which are a leading indicator of future inflation, were down 0.1% month over month. Hard to tell what is normal volatility among components, but the sky is not falling either.
We are also just seeing the beginnings of tapering Quantitative Easing on the mortgage and other credit markets, and the Fed has a LONG, LONG way to go there. The Fed is going to pull over a trillion of cash out of circulation each of the next few years. That is going to have a big impact on inflation.
While no one is listening to me, I don’t think 0.75% rate increases are necessary anymore. I think the Fed needs to pick a target rate, and then keep moving rates to that target at a 0.5% to 0.25% clip. A target Fed Funds rate of 3.5% or 4.0% seems about right. Powell’s speeches where he talks about how “pain” is necessary to fight inflation is irresponsible and honestly just narcissism on his part. I get that he may think it is fun playing God, but his job is to maintain stability of markets and fight inflation, not play economic tough guy on CNBC. Powell is the one that left rates at 0.0% WAY TOO LONG and he is also the one that let the Fed balance sheet grow to $9.0 trillion while lecturing us that inflation was just transitory. Powell may be the worst Fed Chair of my lifetime, and he just keeps getting worse.
May and June had month-over-month inflation of 1.0% and 1.3%, basically a 14% annualized inflation rate. I made the post above on June 24, and July and August had month-over-month inflation of 0.1% in total. Powell created a flash flood of liquidity in 2021 and the waters receded pretty quickly once he pointed the Fed policy even in the direction of normal. I don’t think we are done with inflation yet, and I think there is some stubborn, structural inflation in wages that the Fed should probably just stay out of but probably won’t, but we are no longer anywhere near double digit inflation.
I would like a Fed Funds rate of about 3.5% to 4.0%, which the fed would get to with 0.25% to 0.5% hikes over the remainder of the year, continued unwinding of QE, and then for the Fed to go on a 6 month vacation. They are doing more harm than good right now.
Two things. First, I think you meant to say that the cost of the raw material is a leading indicator. Second, I can absolutely say that the price of the raw material and the price of the underlying finished product are related. I can say this because they have been related for about 50 years.
I can also say this because the biggest problem with collusion is that people “cheat” on the collusion. If the big producers are fixing prices, small producers will try to sell as much as possible at the high prices, which will drive the price down when enough of them do it. Once some start, everyone will pile in because they are better off selling now than in a week. Major, unexplained price moves are often indications that collusion is happening or that it did happen, because the input prices were not the primary drivers of their prices to their customers. Collusion is usually hard to maintain over a long period of time in a fragmented market.
You made the point that the inputs for today’s prices were purchased weeks early. Is 2 months a fair lag? When I made that assertion, the price of gas was $4.98 nationwide, but the price of a barrel of oil 60 days before that was $98.54. That is a ratio of the price of a barrel to a gallon of gas of 19.8x. Today, a gallon of gas is $3.70 a gallon, and a price of a barrel of oil on July 15 was $97.59, for a ratio of 26.4x. Assuming you are right, and some of the inputs of refining have increased in price, then maybe the new ratio should be about 30x or maybe in the high 20’s, which is where the relationship is now.
While there has been some volatility in oil prices from our earlier discussion, there has not been a seismic change. Oil is a little expensive by historical terms now, as it was in the spring. Yet gas prices have dropped 25%. I feel pretty comfortable saying that there is some evidence of collusion having occurred in the spring.
While I do think you make some astute points I don’t attribute the lower prices at the pump to nefarious actions such as collusion. All markets hate uncertainty and tend to overreact directionally. Futures markets (and in particular commodities) will typically price in the best or worse case scenarios in step like fashion and then reprice gradually as the situation becomes “normalized” or steady state.
That is what we have experienced with gasoline as the parameters of supply demand imbalances have become understood. The initial spikes were likely in part speculative in nature which is opportunistic not collusive.
FYI the current or spot cost of a commodity is in large part a lagging indicator in a volatile market while the futures market is a leading indicator. I should have been clearer.
My concern is the way it’s being handled. Higher interest rates worked during 2008 because the inflation was demand driven from debt…it worked too well. Today’s inflation is supply driven. Interest rate rises have been able to slow the economy enough to bring oil demand down to equilibrium of supply. But for how long? Unless the shortages are addressed, the moment the economy starts growing again, oil, food, etc. are just going to go right back into inflation.
I think the inflation from the first half of the year was mostly Fed driven through irresponsibly flooding the market with liquidity. My flash flood metaphor is a good way to look at what was happening to the economy. There was so much liquidity and no place for it to go, so prices spiked everywhere. I guess you could say that flooding the market with cash creates demand so, ergo, it was demand driven, but it was not organic demand. With stock prices adjusted downward and home prices dropping, there is going to be a big wealth effect shift that will put downward pressure on all prices.
The economy is “slowing”, but I think what is actually happening is price declines do to the liquidity draining out of the economy. We are kind of in an uncharted territory given how terrible Powell is at his job, because we have never had a primarily Fed driven price spike followed by decline in my lifetime. These price declines will mathematically indicate a shrinking economy because price is one of the factors driving economic activity, but I would be surprised if unit economic activity slows that much. The economy is still healthy, it just needs to reset its prices post-Fed bubble.
I am definitely not in the know on such things but I have to imagine that release of our strategic oil reserve might have something to do with the prices we see now along with coming of fall?
Jeremy Siegel at Wharton is saying the same thing. He has been spot on on this issue so far. Officials tend to be reactive rather than proactive. No good comes out of that.
Oil prices have not moved nearly as much as gasoline prices have. Oil is a commodity that can be transported and sold anywhere, and so its prices are set on a world market. Gasoline is more regional, and its pricing is more susceptible to manipulation. Ultimately, the market will usually break any collusion because the incentives are high for the colluders to cheat on their collusion.
I think old school economists like Powell think that the only way to bring down inflation is to throw a few million people out of work. It is a regressive and frankly anti-capitalist approach to managing an economy.
I think the Fed should set a reasonable fed funds rate, have a modest balance sheet, and then get out of the way. The market has to set the price of products and services, including wages, and the rise or fall of those prices, within reason, is simply the normal workings of a capitalist economy. The labor force is going to be shrinking in all developed countries over the next few decades, and that is going to create inflationary pressure on wages. I think we are seeing this beginning in the U.S. now. It is not something the Fed needs to intervene on every month.
Don’t agree with lots of causes on this thread re: inflation. But I will say that I’ve never really been personally concerned about inflation. But I am now. Very concerned. Just came back from Europe, where they have seen prices rise for gas and electricity by 80-120% and they are VERY worried about heating and energy this winter. That’s across the board in all European nations ( except maybe Poland and Hungary). People are worried there because the breakpoint is lower ( wages are lower than in the US and energy prices are far higher). How will they get to work? Feed their kids? News articles in the UK are talking about 25% of people going without heat this winter. Now it’s not as cold there as where I live. But still. Indicates a huge contraction in production.
Today, I paid $22.00 for a salad from Whole Foods!! Should I be worried about inflation? Yes. Even if I can afford to pay, inflation eats wealth and savings and often has dire consequences for jobs and GDP growth. It’s a terrible force and something that needs to be dealt with in order to ensure people don’t suffer in any nation.
I call it a recession flipped upside down. Instead of wages going down, everything else goes up. It has the same effect on wealth by wiping out disposable income.
Yes, we are fortunate in that we’re able to pay our bills and aren’t retired. At the same time, wages and invoices aren’t rising fast enough for most people to outpace inflation. Our income which hasn’t changed much is worth maybe 20% less. We don’t have debt so we’re not winning in that space.
We know lots of people who run businesses. Most can’t get workers ( even at higher wages) and they are also faced with higher prices for raw materials and prices are very high. Most companies cannot raise their prices of their customers are still recovering from Covid related things. Plus prices went up a lot during Covid. It’s dire. And incomes are not going to keep up.
In the last 30 years, the economy right now IMO is the worst ever. 2008 was bad but more limited in scope to the financial markets. Throw in even more supply chain issues, a pending union thing with the trains, energy prices through the roof and low unemployment. It’s structurally broken, in multiple places. Going in the wrong direction, IMO.
Unlike 2008, we haven’t seen people being thrown out of work and losing their homes because of ARM resets. The overwhelming majority of homeowners have a fixed rate mortgage from before rates went up, and can find another job very easily. Unless and until unemployment surges, the pain is going to be fairly dispersed (and therefore more manageable), not concentrated on a limited number of people. And stock market losses mostly affect the rich (at least in the short term).
I think we will see huge drop in job activity and job losses in the next year. Yes, many are in at lower mortgage rates after so many years of low interest rates and qualifications for mortgages are harder to obtain ( that’s good). But many young people are priced out of buying a home. That’s very bad.
Won’t be dispersed or manageable if energy and food prices rise much more. We are in top tier income and I can’t believe the amount of $ we’re spending on food. For some people this is already unmanageable. Esp in the wake of prices for basic things you can’t avoid rising, like cars. For me an extra 20K for a car I’ll keep maybe 10 years is a wow. But for someone who needs a car for work and can’t afford one, it’s a bigger issue.
I think you are forgetting the millions of baby boomers who retired without a pension and rely on their 401K’s for most of their income. My Dad, who is 86 is really feeling the effect of the higher oil prices. Dipping into savings to pay for basic things isn’t manageable long term or even short term.
Restaurant prices in England and Spain are still very affordable, unlike the USA or California to be specific. I don’t know about energy prices because I don’t pay for them when I travel.
The proposed rail worker union contract has wages increasing 14% immediately and 24% over the next 5 years among other provisions such as yearly bonuses and no hikes in co-pays or deductibles. Those costs will now be passed along….another factor in supply chain and business costs to consider in connection with inflation.
Yes, restaurants are IMO less expensive in Europe. Watching the news in Europe last week, I learned that people there (UK and Ireland) pay for energy on a contract basis. When the contract renews the price can change. There was one story of a lady who had a coffee shop, her bill went from 900 Euros to 9,000 Euros. That’s almost $5,000. per month. IF that kind of rate increase starts hitting us, we’re in for real inflation.
The news was loaded with stories of people’s rates changing over the last few weeks as the contract periods are ending.
The world is so global these days, that inflation in one place can hit supply chains elsewhere. I’m hoping for resolution on the energy front and someone to start addressing inflation (beyond rate % adjustments).
I took over the shopping at the start of Covid. So I have been at this full-time for over 2 years. I also did plenty before Covid. I know my local grocery store like the back of my hand. Of course I have seen prices rise on things. I fight it with going after the sales. Back at the beginning of Summer they had strip steaks buy one get one free. Guess what I was loading up on them. Then recently they had slabs of ribs buy one get two free. Labor day we had ribs along with ears of corn at $0.07 each limit 5.
Sure there are few things I cut out or cut way back but we make do.
I will say if retired folks are still heavily invested in equities they are running a risk that they might not be able to bounce back from.
I look at these times similar to how I viewed sporting events years ago. When I was a kid I dreamed of going to sporting events all the time. I moved to a city that had everything. I did go to some degree when I first moved here. But over time their prices have gotten outrageous and I have resigned myself I really won’t go unless someone gives me free tickets. It sucks but that is reality. Things might change when my kids leave, but I am not sure.