A ‘Healthy Level’

“A healthy level of inflation is a sign the economy is healthy,” Raphael Bostic said Monday.

He’s right. But the key word when it comes to inflation is “healthy.”

And even that admits of nuance. From a common sense perspective, even “healthy” (i.e., subdued) inflation is only “healthy” if wage gains for everyday people are commensurate. If that’s not the case, working folks become progressively worse off economically.

With that as the brief lead-in, the prices paid gauge on the Empire survey printed a new record high for May. It now stands at an eye-watering 83.5 (figure below).

This evidences further price pressures and suggests that bottlenecks, supply chain issues and various disruptions persist in an environment of increasingly robust demand. The read-through for consumers is clear enough — or at least if you think margins matter.

“New orders and shipments continued to expand strongly, and unfilled orders increased,” the color accompanying the report read. “Delivery times lengthened significantly [while] both input prices and selling prices rose at a record-setting pace.”

The prices received index rose to 37.1. The spread is now approaching a record (figure below).

The headline general business conditions gauge came in ahead of estimates, but mentioning it last isn’t an attempt to bury the lede. The story is (and will continue to be) the inflation evident in these surveys.

“Stop me if you’ve heard this one before,” Bloomberg’s Cameron Crise wrote, noting the record high on the price gauges. “At this point it’s kind of a waiting game to see how all of this resolves itself.”

If it doesn’t “resolve itself” soon, the Fed may be compelled to stop saying things like Bostic said in the same Monday remarks referenced here at the outset. “It’ll be hard to judge the underlying trend for a couple of months,” he reiterated.


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4 thoughts on “A ‘Healthy Level’

  1. If I am understanding what you have been saying about inflation, it is this:
    If we do not want the “bubble” to pop, the US has to inflate its way out of the bubble. Hopefully, slowly and controlled or else….. POP!
    This probably means unskilled, low income labor will be worse off because corporate America is not going to all of the sudden decide to pay a living wage.
    Even if Corporate America is told to pay a living wage to its workers, corporations will essentially say “no” to the US government by threatening to replace unskilled workers with screens and robots.
    The US government will “cave”, not force corporations to pay a living wage and alternatively, will supplement the low income worker’s wages with more social, UI, tax relief, government provided child care etc. to effectively get those workers to a living wage. Or the US government will pay for college, so they are now “skilled” laborers.
    This will cause even more inflation – so the “fix” has to happen slowly over time, giving the economy and the markets time to digest.
    Sounds like this will be a good time to be a trader, which I am not. If you don’t think you can trade, then get your dividend/interest income as high as possible and don’t look at the value of your account too often because it is going to be “choppy”. Choppy, I (think) I can handle.

  2. One data point supportive of “temporary” inflation: lumber may have actually peaked in early May, as the supply chain sorts itself out. The front month CME contract has dropped about 25% in a week, which is more than casual; it looks more like a “pop” than a “correction”. It’s hope for some sanity in the housing market, if nothing else.

  3. I am sympathetic to Joe and Jane Everyman. Keep in mind that part of the spike in prices can be sourced from the payouts recently sent out- family of four just got $5600- so that helps with the price of everyday items and may have caused some of the spike too. Price levels probably will go up rapidly for a short time- the Fed’s new policy regime is different this time around and their reaction function is purposely going to be behind the curve. They would like to see prices go up somewhat in excess of 2% for a reasonable time to catch up with the short falls. Using this regime, the bar will be high for pulling back stimulus. So you can safely ignore a lot of the commentary coming out of the Street. This recession is unusual in that demand is bouncing back faster so it is stressing the supply chain. Markets are not perfect but producers of goods along the value chain will get the message and increase production. The Fed does not want to snuff out the reopening with a premature pull back and get whipsawed. They have a thesis on what is going on in the economy and you have to admire them for sticking to their plans at this point. Remember they can always pull back q/e and raise rates easily to slow the economy. It is a lot harder for them to stimulate the economoy with any reasonable effect at the zero bound.

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