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Oh, Look: Another Disastrous US Inflation Report
Market participants and policymakers hoping for additional evidence of cooling inflation in the US were dealt a grievous blow Tuesday, when data showed core price growth ran at twice the expected rate in August.
Excluding food and energy, consumer prices rose 0.6% from July, double the expected rate (figure below).
It was a bitter disappointment. Although analysts, economists and most traders expected core price growth to remain firm, the acceleration was unexpected and decidedly unwelcome.
Perhaps we get to the soft landing by strengthening the dollar so much that the rest of the world gets put out of work, but not here.
“Some readers will point to the chart and say “Clearly there is, considering rate hikes cured the situation four decades ago.” ”
I am no food inflation expert but I hope the fed is doing a deep dive into what is driving the increases in this sector. If these increases are driven primarily by droughts and the war as many suggest then I cannot see what they are hoping to accomplish with a 75bps hike? Demand destruction for an inelastic good?
While I don’t know if the Fed can do much with food or energy inflation, you could argue that food substitution can be part of the equation (e.g. store brand instead of name brand, rice instead of meat, etc.). Similarly with electricity, people might opt to turn down the heat and add an extra layer of clothing. I’d say demand destruction is more of a factor in services and consumer goods.
Sources of food inflation
Number one with a bullet: energy costs. The raw material for fertilizer is natural gas. NG is doing this: https://quotes.ino.com/charting/?s=NYMEX_NG.V22
Harvesters, shipping, processing, it all runs on diesel and electricity.
Number two: shipping costs (so supply chain constraints).
Number three: climate change. The best exmple is from India/Pakistan. This spring saw all-time record heat (>120 degrees), which reduced spring crop yields by >15%. Even with ample water, plants grow slower and smaller when it’s too hot. Now Pakistan is underwater, and it’s primarily agricultural areas that are affected.
Labor costs are a bigger deal for end-product costs. A sack of flour or rice doesn’t have a big labor component, but a packaged frozen meal does. Plus, the grocery store has to pay their employees (and their electricity bill).
Finally, the Ukraine war is just icing on the cake.
#3 may wax and wane but it ain’t going away in our life times, the stabilization reservoir is still practically empty.
Energy inflation won’t go down till we are already in a recession , but like Walt said few people are going to higher thermostats in summer and lower them in winter. A long term solution is to increase tax break for solar to 75% for solar panels and heat pumps. This will reduce dependence on oil and gas permanently.