Like COVID, Americans will apparently need to “learn to live with” higher consumer prices.
Although it’s exceedingly unlikely that inflation will still be running at multi-decade highs a year from now, a combination of factors argue for the persistence of price pressures in the near-term.
December’s CPI report didn’t offer any real “shockers,” leaving markets free to trade an in-line print, but the read-through for regular people was less benign.
As noted, there was virtually no evidence that inflation pressures are abating, and more evidence that price increases are broadening out. The figure (below) highlights persistent price increases in autos and the hottest read on apparel since January of 2021.
The problem with this (beyond the obvious) is that it’s suggestive of the very same self-feeding dynamic that the Fed hopes doesn’t get traction.
Note that Tuesday’s NFIB report showed little in the way of moderation around small businesses’ price hikes and planned increases (figure below).
“22% of small business owners reported that inflation was [the] single most important problem encountered in operating their business,” the report said, noting that measures of price increases are at levels not seen in decades.
NFIB Chief Economist Bill Dunkelberg offered another lamentation. “Inflation is at the highest level since the 1980s and is having an overwhelming impact on owners’ ability to manage their businesses,” he said.
Weighing in Wednesday morning, following the December CPI report, ING’s James Knightley cited the NFIB price indexes. “The breadth of corporate pricing power must alarm the Fed, especially in an environment where labor costs are accelerating as firms desperately seek workers,” he said.
Speaking of workers, soaring inflation is eating away at wage gains. Although real average hourly earnings rose slightly from November to December, the YoY drop last month was the largest since May (figure below).
The situation was marginally better for production and nonsupervisory employees, but they still saw their net buying power eroded by nearly 2% versus December of 2020.
So, companies have pricing power and labor has leverage to press for higher wages. And that’s to say nothing of the prospects for additional supply chain bottlenecks associated with Omicron.
Inflation risks “are likely skewed towards higher for longer,” ING’s Knightley remarked. “After all, labor costs are accelerating, companies have pricing power, Asia lockdowns in response to a zero-COVID policy risk prolonging supply chain strains while inventory rebuilding could keep demand outstripping supply for a good while yet,” he added.
Unfortunately, there’s not a lot the Fed can do about some of those issues. Monetary policy can’t ease supply constraints.
“Independent of monetary policy tightening, which will mainly affect the demand side, [Jerome Powell] continues to expect upward pressure on inflation from supply-side disruptions to fade over time,” TD’s Jim O’Sullivan said Tuesday, following Powell’s confirmation hearing. “The implication is that the Fed will not need to depress demand dramatically with dramatic tightening of monetary policy.”
Commenting Wednesday on December’s CPI report, O’Sullivan wrote that, “We continue to expect significant slowing in the year ahead as the boosts from reopening and fiscal stimulus fade and COVID-related supply constraints eventually ease, but, for now, the data remain quite strong.”
Worried about used car prices fueling inflation even further? The much-maligned Cathie Wood has the opposite worry. I suspect she is right.
https://www.marketwatch.com/story/cathie-wood-is-expecting-a-bloodbath-in-this-segment-of-the-market-autos-are-one-exampleofmany-disturbances-out-there-in-the-world-order-11641932894?mod=home-page
Energy costs are rebounding quickly since December. Rents may have a ways to go before they top. Further wage gains seem likely.
Is ‘significant slowing’ the new transitory?
H-Man, it seems like we are walking up the gallows. Waiting for the hangman to deliver the noose.
What astonishes me is that no politician or various prominent talking head will introduce into the inflation debate the voracious amount of over-consumption of goods we are experiencing presently all over the world. Our demand has increased by at least 20% over comparable pre-pandemic periods. Due to the fact that we have a lot of cash, time and angst on our hands we are all buying much more than what our actual needs are at the moment in a kind of ‘I consume therefore I am’ frenzy. Near death experiences will do that.
This at a time when supply chains are tangled, goods producers are experiencing labour & parts shortages & we are trying to get fossil fuel producers to invest less in supply to cut carbon emissions. No supply system can deal with a 20% increase in demand in normal times and these are anything but.
None will suggest that we take a step back from our violent over-consumption & show some solidarity with everyone by questioning whether we indeed just have to have that latest shiny objet right now, versus maybe delaying or – horrors! – not buying it. I understand politicians are scared to ever suggest that our society over consumes as that is our secular religion. But all that means is that we have to risk bringing on a recession by hiking rates to curb that over consumption. Why not try persuasion before jumping to coercion?
Overconsumption was already occurring pre-covid.
In fact, starting about 12,000 years ago, when humans transitioned from nomadic hunter-gatherers to living in permanent settlements with the rise of agriculture, humans started stockpiling more than they needed.
I highly recommend “Goodbye, Things: The New Japanese Minimalism” by Fumio Sasaki.
Yes over comsumption has been a perennial problem since we first killed a large animal and had to eat as much as we could stuff into ourselves before it spoiled or the lions arrived. Nevertheless the very large percentage increase in consumption of goods over the last year should be discussed as a huge contributor to our inflation problem. And perhaps an appeal to voluntarily limit our consumption to neccessities for 6 months should be tried as an experiment in civic mindedness.