Markets scarcely needed another reason to fret about inflation after June’s harrowing CPI report, but when it rains, it pours.
Producer prices rose far more than expected last month, data out Thursday showed. The final demand gauge printed an 11.3% YoY increase, the second largest annual gain on record (figure below).
It marked an unwelcome re-acceleration following two consecutive months of marginally cooler annual prints. A smattering of slight upward revisions were insult to injury.
The ex-food and energy print, 8.2%, was in line. Excluding food, energy and trade services, final demand prices rose 6.4% YoY, the slowest pace since October.
Obviously, the culprit was energy. Goods accounted for three-quarters of the rise in the headline final demand gauge, and 90% of last month’s jump in the final demand goods index was attributable to a ridiculous 10% increase in the energy component. It was the largest monthly advance on record (figure below).
An even higher resolution view showed half of the advance in the goods index was explainable by way of a near 19% jump in gasoline prices. Indexes for electricity and residential gas also rose.
Invariably, consumers will be told to “look through” these numbers. After all, they’re out of date (as Joe Biden suggested Wednesday, while editorializing around June’s CPI report). Gas prices have retreated and commodities are on the back foot thanks to an unstoppable dollar rally and recession fears. That should spell relief.
But that’s not just “small comfort” to households — it’s mostly irrelevant. Prices are higher for everything compared to this time last year. And not by a little bit either. Wall Street needs nuance to map the Fed’s reaction function. Here’s what Main Street needs: Lower prices and specifically, a decline in prices to pre-pandemic levels for all critical goods and services. Absent that, excuses and sundry nuance — from policymakers, politicians or economists — are tantamount to gaslighting.
The final demand services index increased 0.4% in June from the prior month, far slower than the 2.4% advance on the goods gauge. The MoM print on the headline index was 1.1%, considerably hotter than the 0.8% advance consensus expected (figure below).
Previous prints were revised higher. Taken in conjunction with the hot read on CPI, the Fed has every reason to opt for a full percentage point rate hike later this month.
Some readers will dispute the idea that the Fed should “overreact” to energy-driven price increases, wherever they manifest. That may be true, but, as discussed here at length on innumerable occasions in 2022, somebody, somewhere has to do something, or at least offer the public a concise accounting of why nothing can be done.
Handing out money, suspending tax collection and other palliatives are counterproductive. People need lower prices. If they want coupons, they can clip them from the newspaper or check the mail. All kinds of stores still send all kinds of paper promotions all the time, much to my chagrin whenever I venture down to the mailbox.
The bottom line is quite simple: If political solutions aren’t forthcoming and the Fed isn’t willing to publicly reconcile the glaring discrepancy between Jerome Powell’s admission that monetary policy can’t affect commodity prices and the fact that the Fed is, nevertheless, statutorily responsible for headline inflation, then the public won’t be blamed for being confused, angry or, more likely, both.
Would it be counter productive to give money to folks who don’t “make enough” money from their employer?
Targeted stimulus would seem to make sense at this juncture. Or, adjusting the maximum income required for basic necessity social programs would probably be just as effective.
America needs to overhaul its social safety net, where “overhaul” means align it with every other rich, advanced nation on the planet. But that’s not forthcoming. We gave up on structural fixes for problems decades ago in favor of brinksmanship, partisan rancor and political expediency.
Speaking directly to your question, obviously low-income households need all the help they can get, but at the same time, chasing this thing (inflation) higher is perilous. I mean, commodities have come off the boil, and it’s highly unlikely that 2022 is the year of our reckoning as a species, so I’d expect things to cool down. But the risk is that you perpetuate the situation with palliatives. This isn’t a Middle Eastern monarchy. You can’t really subsidize “stuff” effectively. It doesn’t work well for a variety of reasons, some obvious, others not, and could have unintended consequences.
It is always better to backstop income rather than subsidize, except when there are externalities and public goods. Public goods with positive externalies like health care and public health should be subsidized. So should education (public good and positive externalities). Items to help with global warming such as grids, electric vehicles (public good/externalities), national defense (public good), infrastructure (public good) etc. We have made no progress in this country in 40 years on this subject – if anything we have gone backwards.
I like your comment, Ria, and I agree with you. Thank you. Like Heisenberg noted above, “We gave up on structural fixes for problems decades ago in favor of brinksmanship, partisan rancor and political expediency.” The brinksmanship and the rancor Heisenberg references suggests to me the willfully created blockages by the likes of the House and Senate republicans, which began in the 1990s with Newt Gingrich. It persisted through the Bush presidency. And Mitch McConnell carried the torch (so to speak) of rancor and brinksmanship during the presidency of Barack Obama.
The democrats do have their faults, but they’re not willfully destructive. How do we measure the expressed will and actions of the republicans? Unless Mitch McConnell is pushing through a tax cut that helps folks back in Kentucky, his actions and non-actions as Senate leader over the years have largely created a sense of loss for the American people.
How many times have we had our hopes dashed about the passage of a Senate bill that was quashed by Mitch McConnell? Today he stands in the way of Biden’s pared back infrastructure bill because that’s his only game. He does not wish to discuss the bill. He doesn’t want to play any part in rewriting the bill to improve it. He certainly would not want to compromise. He just wants to block it for his political purposes.
McConnell’s primary desire is to compel the alignment of the abundance of US politics with his own politics. He doesn’t want to support public health. If anything, he wants everyone to buy insurance from supporters that happen to own insurance companies.
I’m not an idealist. But McConnell’s leadership has undermined the power and veracity of the US Senate and its processes. He has single-handedly undermined the impartiality, integrity, and honor of the Supreme Court by blocking Merick Garland in 2014 and pushing through Trump’s choices in 2020. McConnell’s leadership has yielded a long list of activities and non-activities that have impaired the Senate, and the country has lost by his “country gentlemen” intolerance and illiberal belligerence. In my opinion, he cares not a bit about the work in the Senate or any compromise and cooperation across the parties unless it serves his purpose or is ceremonial. I think the conduct of his leadership in the United States Senate is ugly and has been utterly destructive to Senate productivity.
Ironically, watching oil drop another $4 today, I wonder if the Fed is unintentionally making an outsized contribution to defeating Russia. Given the choice of US strategic moves: A) implementing Yellen’s buyer cartel to cap Russian oil export prices or B) crush demand for oil in the world’s largest economy at the same time that many other CBs are doing pretty much the same with their own economies, I suppose A) may be less painful here at home but B) seems vastly more likely to actually end the war.
Waiting for a smart populist to point out that Main Street America is being to carry the whole load. They finally were able to put aside some savings. But now they are being asked to run those down to preserve corporate margins.
As well as stop asking for wage hikes, for the same reason.
The system is rigged!
Hypothetical – suppose that commodities, goods, asset prices, corporate profits, and housing did the brunt of the dis-inflationary work in the coming year(s) and left lower income Americans to get the wage growth that they need and have been denied for so long? Even if that left inflation somewhat above target for some year(s)? Would that be so bad?
A couple things to remember here as the situation changes. If and when the inflation rate cools, that doesn’t mean prices are falling. Only the rate of increase is falling. Once prices have reached the levels they have, any positive CPI change, no matter how small, means prices are still increasing. Only actual deflation, noted by a negative CPI, will mean prices are falling towards where they were when we only hated them a little. For those who like this stuff, go to the Bureau of Labor statistics website. Look at the pattern of CPI data. Deflation, a decline in the index has never been a common occurrence.
Nobody is gaslighting here. Inflation is bad, nobody is saying otherwise. Biden (accurately) is pointing out that some of the larger contributors to inflation such as energy are falling in price. He has not said the problem has been solved- but perhaps that things may get better soon. That is not gaslighting. And the Fed is going to slam on the brakes right before everything is unwinding. If they go big this time, that may be ok- as long as they stop before driving us deeper into the next ditch.
Everybody is gaslighting Main Street on everything, all the time. That’s how capitalism works. It’s literally in the blueprints. Lower-income cohorts would happily tell you as much, but they don’t understand the sheer scope of it because of the gaslighting. You know that thing about how anybody can be anything they want to be in America? Yeah, see that’s just not true. Inequality of opportunity, cheap labor and exploitation of workers is a feature of the system, not a bug. And the fact that virtually everyone in the country still believes some version of the fantasy that they too can be a millionaire is the hard evidence of gaslighting. Not a single economist, politician or Fed official is impacted by 9.1% headline inflation. 20% or 30% is when those folks would start to feel it too. And we aren’t going to get to 20% or 30%, which means the people talking to the public about inflation aren’t ever going to feel any pain from it. Not a single, solitary one of them. So how can they even speak to it? Why not just tell the truth, which is this: “You know what? We have no idea. We don’t have answers and while we care about this from roughly 7 AM to 8 PM, after that, we stop caring because it doesn’t affect us. As for you, Main Street, well, sorry that you’ll be awake at 2 AM worrying about gas. We’ll be happy to discuss again tomorrow once we’ve had a good night’s sleep.”