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Data Suggests US Inflation Firmly Entrenched. Sorry.
US labor costs increased more than expected in Q1, according to crucial quarterly compensation figures released on Friday.
The Employment Cost Index rose 1.2% during the period, the BLS said. That was ahead of estimates and matched the highest guess from 54 economists surveyed. The prior quarter was revised up.
As a reminder, this is the series which, according to his own dramatized retelling, compelled Jerome Powell to change his mind about the likely trajectory of inflation in the US.
Bot
The data I am seeing is a mixed bag. It isn’t great mind you, but it is not uniform. As the supply problems unspool the jury on inflation is undecided. Saying it is entrenched is not necessarily true.
Yeah, but here’s the thing: You’ve been saying inflation wasn’t entrenched for at least 14 (going on 15) months, and if you thought it wasn’t entrenched 14 months ago, that pretty much by definition means you didn’t think it was entrenched before that. So, we can fairly say you’ve been saying (to yourself, at least) that inflation wasn’t entrenched for 24 straight months — i.e., since inflation took off.
See the problem there? Even if you’re right now (i.e., going forward), you weren’t right then. At some point, you’re going to have to come to terms with being wrong about this. There’s no way you manage money using this same mentality. If you did, you’d have been out of business. I’d encourage you to apply whatever thought process keeps you above water for clients to your personal macro musings. When a trade goes bad, and stays bad, you gotta cut your losses eventually. Ask Bill Ackman. He’s still “right” about Herbalife, but if he’d kept on with that, it might’ve ruined his career eventually. So he gave it up. As he should’ve.
Right or wrong (mostly right, and admittedly wrong when not), Mr. H is probably unmatched in his attention to the commentary on his musings, and his responsiveness to meaningful messaging. He kudos good thinking, calls out weaknesses, does not pull punches but seems never abusive of his overlord position. And responds kindly and helpfully himself to technical or other issues raised via email, where appropriate. That’s all lagniappe on top of his macro insights. Kudos, Mr. H.
Tuesday’s WSJ had a startling piece on how much diesel prices have cratered in the last year. High diesel prices were/are a commonly cited factor driving up distribution and operating expenses for many industries and small businesses. Like your local plumber, for example. Of course, every firm which has tacked on egregious fuel cost surcharges will quickly reverse those, right?
It’s increasingly obvious to this old guy that the greedflation inherent in our economic system is the root cause of the inflation pressure we see. Along with the crackdown on immigration. As our DL has noted, labor is simply responding.
So it can be rationally argued that the Fed is focused on the symptom rather than the root causes of inflation, collateral damage be damned. Fed apologists will respond that they lack the granular tools to stifle corporate pricing behavior, which makes sense. But why keep pushing a “cure” which appears to be having little impact with many nasty side effects? Because that’s what some outdated models dictate?
Just musing because we have to play the cards we are dealt, not the hand we wish we were holding.
It’s going to zero at least. The question is how much below zero. And how much before the economy finds its footing? But the Fed seems to want to avoid heavy-handed moves. I hope they can keep that balance.
The future in 2×2 matrix:
A. Inflation declines with recession.
B. Inflation declines with no recession.
C. Inflation stays high with recession.
D. Inflation stays high with no recession.
A, C, D are bad, B is good.
Probabilities? “No idea” might be the Humble Answer.
Is probability of B higher than combined probabilities of A+C+D? “Seems unlikely” might be the H.A.
I certainly understand the desire and preference to see a more direct, linear and timely relationship between FOMC policy and inflation. But just as most of us were surprised how long a LACK of inflation was “entrenched,” perhaps we should take away a lesson that rising or elevated inflation won’t be “unentrenched” quickly either and give policy sufficient time and patience to work before overreacting. Higher for longer may very well constitute a policy mistake, and we may do well to temper that prescription to “relatively high” for “relatively long,” meaning perhaps a stretch of coasting is called for here rather than mashing the gas and then the brakes until we see the whites of inflation’s or the economy’s eyes.
While I see the point here, again I also see a failure to consider context. Hospitality wages led the way, up 5.9%. They had to. This industry sports the lowest pay in our entire service sector. The average pay, in spite of increases, is still under $35k (including tips). This is also one of the tightest sectors in terms of hiring. No one wants to work for lousy wages. Even though MacDonald’s decided to raise its pay scale to a level offering nearly a living wage, it seemingly hasn’t hurt the company much as the stock has climbed to ~$300. The point is, like it or not,. we are going to be putting up with a fair bit of wage inflation until some of the most marginalized workers get the deal they deserve.
Or tech workers start getting desperate and take service jobs…