Admittedly, lampooning “transitory” or otherwise reiterating just how wrong policymakers turned out to be on the inflation front feels gratuitous at this point.
That said, you could legitimately argue that no amount of ridicule is too much when it comes to developed market central banks’ collective failure to recognize the severity of the inflation threat. Multi-faceted mandates and mission creep notwithstanding, their raison d’être is price stability.
If you’re feeling especially irritable about the situation, you might note that thanks to a familiar list of embedded disinflationary dynamics, central bankers in advanced economies have never really been tested when it comes to inflation in the modern era — assuming, of course, you date modernity from the “Great Moderation.” Rather, they just took credit for something that would’ve happened anyway.
In any case, I’d be remiss not to highlight the figure (below) from BofA’s Michael Hartnett. He’s done similar charts for Europe and the UK.
The message is straightforward: MoM inflation needs to moderate quickly and sustainably if core CPI has any hope of ending 2022 near 3%. And 3%, you’re reminded, is still a mile above target. Currently, MoM gains are triple what’s needed to get the job done.
I’m sure every economist on Wall Street can give you a mathematical map for how core inflation ends 2022 materially lower than where it sits today. Numbers don’t lie, but forecasts rely on assumptions that can turn out to be woefully misguided, especially if we (humans) persist in goal-seeking outcomes based on what we’d prefer to see happen or what’s “supposed” to happen based on what we don’t recognize as recency bias.
That simplest of simple visuals makes a total mockery of anyone willing to suggest the situation is surely on the verge of improving. It very well might be. But folks have been saying that for months. At this point, the debate about what was likely to happen following the initial spike is settled. Benign assumptions were dead wrong. It’s time to concede as much and flip the page.
Unfortunately for many of the more benign forecasts, some inflationary forces are now structural, while others are just starting to show up in the official data on a lag, and aren’t likely to fade in the very near-term.
For example, Hartnett went on to point out that capex in the energy industry is down by a third since 2017. That’s a structural problem, and it’s only going to get worse. Meanwhile, it’s still not clear when (or even if) workers in the US are going to come off the proverbial sidelines. The JOLTS data has been a funhouse mirror for 12 straight months (figure on the left, below), and NFIB surveys continue to suggest there’s no end in sight to labor shortages and the attendant pressure on wages and prices (figure on the right).
I’m not sure when rational people are compelled to stop pretending, but as I made clear in a pre-dawn article on Friday morning, I’m not inclined to argue anymore. The US is experiencing the early stages of a wage-price spiral. Whether it’s too late to short circuit it is an open question. I’d venture there’s still time given longer-term inflation expectations remain at least a semblance of anchored. But we’re running out of leeway.
“Food’s up 20% YoY, house prices/rent are up 10-20% YoY, energy (gas/oil) is up 40-50% and the wage surge continues [with] small business compensation at all-time highs,” BofA’s Hartnett went on to say, adding that you can “call it what you will [but] it ain’t transitory.”
Looks like a deep recession is the only cure.
Raising rates will only make inflation worse…until they get too high and choke demand by causing unemployment and recession. That is what Volcker did…first made inflation worse, then choked the economy which killed demand. And everyone thinks he was a hero. Like throwing gasoline on a frying-pan fire, and when the house burns down and stops burning, you say “see, I put out the fire”.
Everything we do consumes energy, including pecking on a computer keyboard. Food production and construction require a great deal of energy to get products from the field, forest or mine to the consumer. Increase the cost of energy (gas/oil) 40-50% and that increase will ripple through the economy like an inflationary wave, gaining mass until it’s a tsunami. I find it interesting that oil stocks are at a five year low but we are exporting oil and natural gas at record levels. The U.S.Energy Information Administration’s website https://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=MCREXUS1&f=M has a very good graph of our oil export history. The point is: make it impossible or too costly to export our energy and inflation will indeed be transitory. Ignore oil exports, wring your hands and raise interest rates to the moon, we get the 1980s redux. Considering the political power of the oil and gas lobbies, it’s probably time to regrow a mullet.
Would it not take a retooling of refineries in order to make any use of the crude that we export to countries that need that composition of oil? Are not such retooling massive time consuming undertakings that would materially restrict domestic supply?
I only pay attention because my service included serving this sector indirectly in the desert whilst unknowingly at the time serving the macro too. Man.
Thank you for a very good question. The answer can be found on the eia website. https://www.eia.gov/dnav/pet/PET_PNP_WIUP_A_(NA)_YUP_PCT_W.htm Select US and click the graph button. You will see that recent refinery utilization was 88% indicating that production could be increased 10% without retooling. My data for oil and gasoline stocks ( as in inventory ) can be found in the current https://oilprice.com/ newsletter. So, US oil and gasoline stocks/inventories are at a five year low, US refineries are running at 88% capacity, oil exports have gone exponential and per H, the cost of energy (gas/oil) has gone up 40-50%. This should not surprise anyone familiar with the simple supply/demand/price relationship that dictates domestic energy prices go up when domestic supply goes down. This is just one of many reasons that we have higher prices. tRump’s tariffs on Chineseium, shipping delays due to stricter monitoring of OTR truckers, a YOY 42% increase in LNG exports exposing the domestic market to higher global gas prices and the effect that loosening state marihuana laws has on people’s ability to pass a pre-employment whiz quiz are a few of the recent changes that drive consumer prices higher. An informed public should be aware of all this. But instead of sanely discussing all the reasons we have price inflation, we dwell on the Fed and Biden whose best efforts can only make it worse.
We are exporting the light crude compositions of oil for which we are not effectively set up to refine for our domestic purposes. I am not for big oil or wanton abuse of the little guy by their powerful lobby, but i do not see that anything has changed in regards to the major problems associated with your suggested export pathway since the last time i looked into the topic.
Not to mention Trump and his dingleberries creating artificial protests which fan the flames of inflation further and put more money into their pockets.
And Europe is threatening Russia with stopping the new gas pipeline that would supply a lot of badly needed fuel for their heating demands. Who is supposed to replace this heat energy if indeed Russia invades Ukraine and they cut off the Russian gas? In the short term…good question. France is back in the nuclear energy business and the other European countries like Germany will not be far behind. The problem being it would take 6 to 10 years to bring on all this nuclear power. If Putin insists on becoming the next Hitler the cost of Energy will be high. (I expect to see a lot of Putin images with a Hitler mustache shortly.)
“…. if indeed Russia invades Ukraine and they cut off the Russian gas?” The where will Russia sell all that gas Europe doesn’t buy? I think Gazprom is Russia’s biggest single commercial enterprise. My mom used to refer to this as cutting off one’s nose to spite one’s face.