“Some” indicators of inflation are “clearly coming down,” one rates strategist told Bloomberg Television last week. Later this year, “so-called stickiness” in the other indicators will break, the same person said.
You can’t help but emit a wry chuckle. It’s all entertainment. Soundbites for the sake of them. It’d be refreshing if someone showed up on business television and told the unvarnished truth. Headline inflation has come down, but it was high enough, for long enough to be seared into the memories of a new generation, who can no longer persist in the fantasy that runaway price growth can’t occur in advanced economies. You can think of that as latent volatility in inflation expectations. Consumers have seen it now. They’ll forgive (e.g., year-ahead expectations are down to two-year lows), but they won’t soon forget (i.e., if they see inflation percolating again, their expectations for its trajectory are likely to be more dynamic and responsive).
As for core inflation (and various measures of trend, and sticky prices), progress is limited in the US. In the EU, core is still loitering near records. In the UK, core and services inflation are at 31-year highs and rising. The inanity is laid bare by the juxtaposition between, on one hand, the statistical gymnastics we employ in an endless effort to derive “clean” indexes of the “true” inflation trend and, on the other, the demonstrated ineffectiveness of policy tightening vis-à-vis those indexes.
If we’re trying to engineer evidence of disinflation the same way the Bank of Japan looked at increasingly narrow super-core measures to “find” inflation that wasn’t there (like Trump searching for votes in Georgia), we’re failing. If our pursuit is more noble, and we’re actually trying to isolate where the inflation still is so that we can vanquish it, we’re also failing, because at various intervals over the past six or so months, the narrow measures have have painted a more worrying picture than the broader, more familiar gauges.
In a testament to the absurdity of it all, the measures shown in the figure above don’t even count as “nuanced.” They’re pulled straight from regional Fed websites, which makes them too pedestrian. That’s where we are these days: If all you did was download the Atlanta Fed’s “core sticky ex-shelter” series, you’re guilty of lazy analysis. What you really need is the three-month annualized rate of super-core services, excluding shelter, bar tips, haircuts, Netflix, highway tolls, parking fees, babysitters and pet grooming, adjusted for seasonal trends around the summer solstice. Everyone on finance Twitter knows that.
Easy as it is for the fortunate among us to joke, we can’t lose track of what this all means for regular people. Here’s the simple reality: There won’t be deflation for many key services categories. The overall rate of change for prices across goods and services may eventually recede to tolerable levels, but there won’t be a sustained period of falling prices for services, nor are home prices going back near pre-pandemic levels.
So, for regular people, the pandemic represented a permanent reset higher in prices. Wage gains helped, but there’s a lot of catching up to do. Real wage growth was negative quarter after quarter after quarter. All political spin and talk of “excess” savings buffers aside, it’s harder now for families to afford things than it was before the pandemic. And that isn’t going to change unless and until wages and salaries outstrip inflation by a wide margin for a prolonged period of time. As ever, the tragic irony is that such a scenario would itself be inflationary to the extent a consumption-addicted society can’t be trusted with wage growth that runs too far out ahead of price growth.
This week in the US, markets (and policymakers) will get a look at spending data for May and also the PCE price gauges. Economists expect core PCE to post yet another 0.4% MoM increase. The YoY print is seen at 4.7%. So, no progress. Economists go on television and tell you better days are just around the corner, and yet the median of their own, published estimates reflects more of the same.
When May’s personal income and spending report is released on Friday, analysts, strategists, journalists and Fed officials will look at sundry measures of “underlying” price growth and hail progress. Or lament the opposite. Nobody on Main Street will care, but they will notice — because they’re the ones whose lives are impacted by this.
If you want to know about trends in “super-core” inflation, you could ask a family about their weekly expenses. I don’t care what any consumer sentiment survey says (and anyway, the surveys suggest American consumers are feeling some measure of glum), the on-the-ground reality is that casual conversations with households making less than, say, $75,000 per year, are guaranteed to include allusions to trouble making ends meet or, at the least, things not getting any easier.
That, to me, is evidence of policy failure, both fiscal and monetary, and it’s also evidence of a system that doesn’t work for the vast majority of people. Everyone can’t be rich, because if everyone’s rich, then no one’s rich. Maybe we can argue there shouldn’t be rich people at all (that every millionaire, not just every billionaire, is a policy failure), but assuming we don’t want to go that far, it’s surely fair to suggest there’s something profoundly wrong with a situation where, in the richest nation the world has ever known, a majority of gainfully employed people who by and large are doing everything “right” nevertheless have to live each and every day of their lives at least somewhat concerned about money.
I’ve said this on too many occasions to count: That situation won’t last forever. It’s not stable. Trump’s rise, and the social upheaval witnessed in 2020, proved that. Widespread public disaffection in the US finally crescendoed, but the country’s political duopoly managed to restore a semblance of order, paradoxically by fostering and perpetuating identity politics and culture wars. Anything to forestall the inevitable reckoning with a broken system. At some point, assuming climatic oblivion or war don’t intervene to make it all irrelevant, a real ideologue will come along in America and rally the masses around the only thing nearly everyone has in common: Economic precarity in a kleptocratic feudal state masquerading as democratic capitalism.
Also on the US data docket this week: Updates on the national home price gauges, consumer confidence and the final read on University of Michigan sentiment for June, as well as new home sales and pending home sales.
Spot on article….I especially liked,
“What you really need is the three-month annualized rate of super-core services, excluding shelter, bar tips, haircuts, Netflix, highway tolls, parking fees, babysitters and pet grooming, adjusted for seasonal trends around the summer solstice. Everyone on finance Twitter knows that.”
I too am weary of all this tedious analysis,
Talk about not being able to see the forest for the trees…..
The problems are twofold. There was a deadweight loss from the pandemic and its after affects. No policy can combat that loss. It just has to unspool and over time the economic fabric will heal. The second problem is more long term and can be fixed if there is will. The safety net and public goods in the United States has been neglected since the dawn of Ronald Regan-except for national defense. Health care and government protections for the poor and lower middle class have been vastly reduced. This fuels the cries for nativism and protectionism and destroys confidence in the idea that we are one nation, that we take care of the vulnerable, and that nobody needs to be hungry, sick without care or homeless.
“there’s something profoundly wrong with a situation where, in the richest nation the world has ever known, a majority of gainfully employed people who by and large are doing everything “right” nevertheless have to live each and every day of their lives at least somewhat concerned about money.”
Well put and spot on, as is your warning that follows.
Kleptocratic feudal economy masquerading as democratic capitalism….definitely one of Ur best and most accurate phrases Mr H.
H, are you young enough to be the “real ideologue”?
Great finale! Thanks for using the “F” word.
if you think this is a feudal society, you are either uneducated or blinded by ideology. read up on history. find out what a feudal society really was like for the peasants.. and the nobility for that matter.
It’s modern day feudalism. And my education is formidable.
such pessimism. it will be fine. not joking. for all the trashing of USA, we are still #1 and will continue to be for a long time. All other major economic powers are much much much worse off than we are. In no way is our system anywhere even close to perfect, but it is way better than anywhere else by a long shot.
There are many aspects of inflation that my family has been able to mitigate. I am actually spending less of food and clothing than I did before the pandemic. I am willing to forego travel and restaurants and some streaming services. Sure is would like to enjoy all those things, and I could afford it, but to me the value is just not there so I decide to pass. Smart shopping is possible on many discretionary items. Where I am noticing the inflation coming now is from car and health insurance. Home repair is really getting outrageous. anything that I can remotely repair myself, I will do it. I was up on my roof last week doing repairs after a storm. the thought of paying someone a few hundred bucks just to show up and do a 20 minute repair was more than I could stomach. We have become a society of convenience and this costs a lot of money.
of course everyone’s situation is different. I don’t have children that need day care. I have a fixed rate mortgage, but taxes have been going up quite a bit. but my brother has 7 kids ages 1 -12 and he and his wife deal with the child care issue, but they manage on 2 teachers’ salaries with help from family but they do also pay for day care. They also made use of the child tax credits. He also takes some evening freelance work to earn extra money.
We can all complain about our lot in life. But that will never take us anywhere, or at least in any reasonable timeframe. Do what you can to improve your life given your circumstances and help out where you can. the system is not going to change. revolutions, except maybe the American revolution of 1775, almost never start before people are literally starving to death.
So, what do you suppise drove the MAGA/populist uprising? Satisfaction with all of the economic opportunity and rewards for thrifty hard workers like yourself?
Z
Number 1 in what, exactly? There are ten countries where people earn up to twice as much as the average American. Warriors? We couldn’t beat the Vietnamese and now they are a major trading partner. Half my clothes are made there. We could beat the North Koreans, aided by a vastly inferior Chinese army. After four years we got a stalemate and a divided country, with tens of thousands of our troops killed or wounded. We spent 20 years in Afghanistan, gaining nothing. Half our population is so poor they don’t even have to pay taxes. The can’t fix a flat tire without a payday loan. We do have lots of cellphones, lots of cars and lots of guns, a whole lot of guns. For the nth year in a row we lead the world in drunk drivers, auto deaths, and gun deaths. Our internal population growth is not enough to keep the population from shrinking without immigrants. Our education system is declining materially as every day goes by. If you think the US is #1 you are deluding yourself.
Well guess you know everything. You should bottle that ish and sell it!!
Other than incarceration, military spend and guns, what does the US rank number 1 in?
Certainly not life expectancy, literacy, numeracy, or quality of life.
Walt; SPOT ON! When I leave my forest compound in the southern Green Mountains and head for Walmuerto in North Adams, MA, I find the walking lower middle class zombie dead pushing their processed food ladened carts to their $70k, behind payments, starting to rust monster trucks. USA USA. We are stuck in a non-sustainable bad culture for sure.