Depending on your perspective, March’s report on consumer prices in the US was no worse than expected.
Core prices rose less on a monthly basis than economists predicted, and the 12-month increases on both the main gauge and the core index were consistent with expectations.
It could’ve been worse. And when it comes to inflation in developed economies these days, that counts as a “win” in some people’s books.
For the most part, that interpretation is the market’s perspective. All that matters for investors (and especially traders) is incremental evidence to support (or not) expectations for aggressive Fed tightening. Those expectations, in turn, dictate the path of asset prices. In that context, I’d argue March’s CPI report was already “in the price,” so to speak.
But that’s Wall Street. For Main Street, March’s inflation report was nothing short of a disaster.
Grocery prices, for example, logged their biggest 12-month increase in 41 years (figure below). There’s no “context” that mitigates a 10% annual increase in the price of cooking a meal in your own home in an advanced economy.
That simple chart indicates that something has gone awry, and when it’s time to cook dinner, the average household doesn’t care what that something is.
You may argue they should care — after all, Europe is facing the most serious security threat since World War II, and the US is one errant missile in Poland away from direct, military conflict with Vladimir Putin’s Russia. But that’s a separate discussion. Currently, the “blame Putin” talking point isn’t likely to resonate.
Note that the monthly increase on the energy index for March was the second largest in American history (figure below).
Here again, the average household doesn’t care too much about the “why?” Americans love a scapegoat, but almost by definition, scapegoating is an exercise that gives nuance short shrift. If Americans don’t care to understand the conflict in Ukraine or the intricacies of monetary policy, they’ll simply blame politicians.
Of course, bitter partisanship means Republicans will universally blame Democrats and in the most caustic terms they can possibly conjure. Democrats, on the other hand, will be more inclined to seek out a reason not to blame their party, which in this case will lead them to the (mostly correct) conclusion that lingering supply chain problems and the war are the proximate cause of surging prices.
Irrespective of party affiliation, though, the bite of inflation hurts if you’re a low- or middle-income household. Even those who correctly identify the source of the problem (and in the process conclude that fiscal and monetary policy play a supporting role, not necessarily a starring role, in this ongoing economic drama), won’t be comforted.
The figure (above) is familiar to regular readers. Generally speaking, the less income you have, the higher the percentage of your income you’re compelled to spend on the goods and services for which prices are rising the most.
Currently, energy, food and shelter are all rising at what count among the briskest rates ever. The richest Americans spend just 4.4% on energy, 12.7% on food and 33.7% on shelter. Those figures for the least fortunate Americans are more than 7%, 16% and nearly 40%, respectively.
Note also that lower- and middle-income households typically buy what they need in terms of food and housing. Those figures are sticky unless prices fall. Rich Americans, by contrast, could downgrade to modest homes and start shopping at Walmart. What percentage of a million-dollar annual income would go towards food if such a household eschewed nice restaurants and Whole Foods for discount grocery shopping? I doubt it would come anywhere near 12%.
In addition to sharply higher food and energy costs in March, the government’s shelter index rose 5% on a 12-month basis. That was the largest increase in more than three decades (figure below).
The index for household furnishings and operations rose double-digits. The YoY increase in March was the largest since July 1975.
If this is the injury for Main Street, the insult will be a recession. “US inflation has hit a new 40-year high, but we are approaching the peak,” ING’s James Knightley said Tuesday.
“Unfortunately, the descent will be long and slow given lingering supply chain issues, significant tightness in the labor market and ongoing corporate pricing power,” he added. “This means the Fed needs to raise rates rapidly, with a growing chance a sharp slowdown will result.”
As Christopher Waller put it Monday, aggressive rate hikes to curb inflation may result in “collateral damage.” He wasn’t talking about the stock market. He was talking about Main Street.
Note also that lower- and middle-income households typically buy what they need in terms of food and housing.
I’m European so naturally left leaning compared to Americans. And I’m left of center by most definitions in a European context. Yet when it comes to the American poor, I got to wonder sometimes. If they are so stretched, why didn’t they save any of the stymie checks they got and why do we have inflation? There’s plenty of evidence that most of the bottlenecks we’re experiencing/experienced were due to very unusual levels of demand for goods (rather than services).
Either that was driven by otherwise employed (and earning) middle class people (or above) who simply didn’t need the checks and were able to burn them on, essentially, new toys or the lower 50% weren’t suffering from the COVID slowdown nearly as much as anticipated?
I mean, what am I missing here?
You’re missing a trip to any large American city, where, very much contrary to the nice skylines you see on Google images, you’ll observe homeless people sleeping on the sidewalk every few steps.
America’s social safety net is not up to European standards by any stretch of the imagination. As unfortunate as this is, we have almost Third World-style poverty in this country in certain places. And I’m not (necessarily) talking about inner-city housing projects. Go to Appalachia sometime. Or take a tour through West Virginia. Millions upon millions of Americans have nothing. In some cases, they don’t have running water.
Also, this… “there’s plenty of evidence that most of the bottlenecks we’re experiencing/experienced were due to very unusual levels of demand for goods,” isn’t really true. Certainly goods demand has been elevated, but there are only so many refrigerators a $1,400 stimulus check can buy.
Why is inflation high (in some cases generationally so) in Europe, New Zealand, Australia, Canada, the UK, South Korea and on, and on, and on. A hyper-globalized, hyper-specialized world had no problem providing enough goods to sate even the most voracious demand until the pandemic severed supply chains and upended just-in-time, which had become a religion.
Also (consistent with the comment below), Americans by and large live paycheck to paycheck. This may be hard for some folks outside of the US to fathom given the whole “richest nation in the world” narrative, but for tens upon tens of millions of Americans, the reality is that the money runs out at the end of every month — as in, totally out. Gone. No more money. Nothing left anywhere and nobody to call to get more.
So, those checks you mentioned get spent. The myth of the lazy American welfare freeloader is mostly just that: A myth.
The vail that covers America’s not so greatness is mighty thin. I was fortunate to live in western europe for a few years (large cities) and the quality of doors, windows, buildings and public transit (to name a few things) is so much better. I live in Appalachia now. The natural landscape is incredible, the rural low income housing not so much – single wides perched on small landfills. And let’s not forget the 30 year lifespan of our ubiquitous malls. Like corporate execs hollowing out companies to cash in on stock options, we’ve hollowed out this country for all but the top few percent. We had it all after WWII and managed to squander it.
fredm421 asks “…and why do we have inflation?” My answer is because every product and service in the market requires an energy input. Agriculture, mining, manufacturing, communications, transportation and retail all require petroleum based inputs in some form. Even oil exploration and production require energy. So when the retail price of energy goes up, the price of everything goes up in a never ending cycle that is eventually broken by a dramatic drop in petroleum prices. The dramatic drop usually coincides with the election of a right wing government that is determined to gut federal environmental, tax and worker safety laws. That election is usually the result of our oligarchs’ application of Kissinger’s famous solution to the Salvador Allende problem in the 1970s i.e. “make the economy scream”. That is why we can simultaneously be energy independent and suffering from inflationary energy prices.
The safety net for folks is much weaker here than in Europe- the stymie checks were saved for awhile but most folks in the bottom half live month to month, so the checks got spent by now. There is probably a bit of a spendthrift attitude too- but that is not the real issue here for the most part.
and it doesn’t help that many of the poor and destitute vote against their own economic interests…if only that could change…imagine…
Seriously? The American voting system is purposely designed to make it as difficult as possible for the “poor and destitute” to even vote. Poll-taxes come in many forms. Ever try and get a vote by mail ballot delivered to ‘under the overpass at Main and Washington streets’? Good luck getting your vote by mail ballot delivered to a Democratic leaning zipcode in few years where the GOP controls the state legislature. Even little Estonia in the shadow of the Evil Empire has internet voting now. But in America voting is still on a work day (great way to suppress the vote back in the horse and buggy days) and by mail if you are lucky. Racism? You think that’s got something to do with it in ‘modern’ times? Patriarchal classism had something to do with it originally, as obviously, only white male property owners could vote back in the day.
But, for the sake of argument, I used to often hear how the average Chinese citizen had few social programs the equivalent of American social security and corporate for-profit health care, etc. So where are the hordes of homeless sleeping on the sidewalks of China’s cities? It is probably a work in progress over there,
https://www.npr.org/sections/goatsandsoda/2021/04/27/987618404/china-says-it-has-ended-poverty-is-that-true
And so ends yet another comment post, this time with a link for troubleshooting the Temsika comment suppression system.
I would suggest looking at the statements as both / and, instead of either / or…
I do think we need to call a little bullshit on all the extra money in the economy solely coming down to supply-chain issues and excessive fiscal stimulus (both of which are certainly contributors).
I was speaking with a mortgage lender in Los Angeles yesterday and she explained in matter of fact terms (ie. she was not casting any judgement on the specifics of what she was telling me), that all she spends all day doing 5/1 ARM cash out refis for wealthy and upper middleclass homeowners. She told me about one woman who lived in Orange County who takes out $150,000 each year, every year (her house is valued at 2 million). When asked why, she said she would rather have the “spendy cash.” Another individual bought a house for 1.5 million 6 months ago. Last she week she got them a 200k cash out.
These aren’t flippers. These aren’t people making material improvement on the houses. Some of these are for primary residences. I would say an even larger amount are for “vacation” homes (or more accurately, piggybacks). And these aren’t the lowly first time homebuyers, or the non-qualifying mortgage getters, naively taking creative financing they don’t understand. These are the best off in the country, taking sweet, sweet extra stimulus straight from the Fed. (Just as Bernanke had originally intended.)
And I think it is the secret to the housing supply crisis across the country. You don’t even need to find a renter to meet the mortgage if your aren’t actually using the house to live. Buy a house in Phoenix for 600K. Pull 75K out a few months later. Set aside 25k for the mortgage. 50k “risk free” profit — what could possibly go wrong?
An addendum: Unlike the 5.25% APR conforming loan the proletariat have to take out, the 5/1 ARM is still only 2.5%.
Read hot off the press. Come back 12 hours later for the comments :bow: