The Fed met last week and after a good lunch of weenies and baked beans they spilled the beans and said that they no longer believed that inflation would require them to leave interest rates at zero until 2024. They pushed up the date when they might maybe perhaps would possibly raise interest rates above zero to 2023. The markets swooned and left-wing commentators drooled.
Geez guys. Have you looked at a calendar lately? Some folks are worried about inflation NOW...and the Fed is going to quell inflation by raising interest rates a smidge in 2023. The last time I looked, 2023 is two years from now. This is like me telling you all that since I gained thirty pounds recently, I am going to cut out bacon on my baked cheese-soaked potatoes in 2023. Recall that money is supposed to hit inflation with a lag. So if they start putting the brake on in 2023 then inflation will begin to come down in 2024?
How dumb do they think we are? Never mind.
My last post was pretty long and pedagogical. The summary mainly suggested we wait and see as to how long inflation stays high.
I wasn't happy with that result so I looked at some CPI numbers -- focusing on each May from 2015 to 2021. Doing that suggests to me that the recent bout of inflation is more than temporary.
Below are the May CPI figures from 2015 to 2021. The last column is the change from May of one year to the next year.
Year CPI* Change
2015 237
2016 240 3
2017 244 4
2018 251 7
2019 255 4
2020 256 1
2021 269 13
*The numbers below are CPI index numbers. You calculate inflation by taking percentage changes in the index numbers.
Wow. The 13 point change from May of 2020 to May of 2021 is huge compared to the changes before. It is true that 2020 showed a very small increase. But the change of 13 in 2021 more than makes up for that one year.
The average change from 2015 to 2019 was 4.5 points. Even if you bring in the two extreme points, the average from 2015 to 2021 is 5.3. Either way, the 13 point increase in 2121 looks very large.
Prices generally rise year after year. They rose by very little in 2020 mostly because the Covid change was minus 3 from February 2020 to May of 2020. But guess what? By July of 2020, prices had already returned to the number attained in February 2020.
So the huge 13 point swing in 2021 is not just a temporary bounce back from a Covid induced drop in prices. There is a lot more going on there.
Could that 13 have something to do with the Fed and the government stimulus? Might these impacts be lasting if the FED and government don't remove that stimulus?
Even without the stimulus, you have millions of Americans who have been saving up during the recovery. These aren't the folks who were at the most economic risk during the pandemic; they're people like myself who had the financial stability to weather an 18-month crisis. These are the spenders who will influence inflation in the near term, and they would be in the same cash-flush position at this moment whether they received the stimulus or not. Remove the stimulus from this story, and wouldn't we still be in a volatile period marked by inflation scares?
ReplyDeleteGood point. Accumulated saving will and should play a role in the economic recovery and inflation. But zero interest rates, huge inflows of money from the Fed, and government deficits are all extremely large parts of the economic environment. They need to normalize policy. The longer government and the Fed wait, the more is the potential to overstimulate and create durable and dangerous inflation. How volatile will the economy be when policy normalizes? I think it will be much more volatile the longer they wait to begin.
DeleteOne of the issues I struggle with in looking at year over year changes such as those that are presented is that the underlying components contributing to the change are naturally not always the same. I think there is no question that the "13" has to raise the specter of "something being rotten in (economic) Denmark" but I wonder if this current round doesn't have a lot more "Supply side delay" than is usual and so the sudden uptick in Demand is presenting an imbalanced, and possibly temporary, picture--at least in some industries. Clearly we have a problem with import blockages at our ports as a consequence of labor shortages. Where I live, there is a significant resort/vacation community and the restaurant traffic took a hit although it is becoming clearer that owners who adjusted to the take-out and delivery model suffered a bit but nowhere like the wait staffs did who were simply not needed in that revised business model. Add this issue to the wealth gap. Similarly, the resort rental world--with the exception of the first month of Covid ( March of 2020)broke all records for revenue increase--something that they were absolutely sure would never occur. So new cars are likely delayed not disappearing, used cars are increasing in price to fill the gap, clothing is switching back from sweats and PJ's to nicer but continued casual wear, no one wants to return to the office if they can avoid it and productivity measures seem generally on target. My wandering point is that while the stimulus and its size and longevity, are clearly issues, I am wondering if we are not in a period of so much unusual change--some temporary, some lasting, that the "13" may well always be an anomaly.
ReplyDeleteThanks Ed. That's the $64,000 question these days. Which is it? The crazy variable Covid world playing out or is there something equally real coming from macro policies? If it is Covid craziness then I still think that moderation in policy is the best idea. We have what I would consider to be a very extreme policy. Moving decidedly but gradually to something more normal has fewer risks that continuing an extreme.
DeleteStill going back to my post in the last inflation thread. Inflation helps borrowers. Who has the biggest say in how much inflation there is, the US government with buying paper and creating money out of thin air and giving away to their good buddies. So riddle me this who is the biggest borrower; not to mention who is expected to be borrowing lots more for the for seeable future; you guessed it the US government.
ReplyDeleteThe US government has every reason to want to see inflation continue and even if all the stuff like the "supply side delay" were cured the federal government could still tilt the scales with more paper buying and free money to voters; not to mention reparations that could cost who knows what.
Seems to me like the fix is in and inflation will be here for a while.
Thanks Rage. I agree. Inflation will probably keep rising. But I have to lecture on one point which has to do with the separate roles played by the government and the Fed. The Fed is an independent agency -- independent from the Treasury and the Congress. It is within the Fed's purview to not monetize the government deficits and debt. While it would be hard to not monetize, a good Fed would tell the government not to have so much stimulus and not play along with that policy. It is sad that the Fed is equal if not worse than the government with their expansionary policy. The Fed has essentially abdicated its proper role. Inflation and instability will be the Fed's fault.
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