Super Bad Inflation Feeling
3 reasons to worry about a double-digit summer
Tomorrow morning, we will find out if inflation in the United States is super bad. And yes, I am channeling some Elon Musk vibes who recently told managers at Tesla that he has a “super bad feeling” about the economy. I promise to write some analysis of the CPI data upon its release at 8:30 AM Eastern (which is 5:30 AM Tim Time), but a value that you and I share is that we put our money where out mouth is. I want to make a claim about inflation and be judged by it, just as we should all be judging (harshly), the leaders at the Fed and Treasury who so boldly and wrongly said a year ago that inflation was nothing to worry about. Their Mea culpas in recent weeks do not impress.
There is a high probability that inflation in the United States will hit double digits by the end of 2022, and possibly as soon as tomorrow. The monetary and fiscal excesses of the past few years have been extreme, and corrective measures taken recently are too little and, more importantly, too late.
Three reasons why I anticipate double-digit inflation:
Inflation expectations are like the monster that has been released from Pandora’s box. Everyday Americans expect prices to be higher and are acting accordingly, which affects their savings behavior, house buying/selling, and hoarding. Expectations can be put back in the box, but at great cost (meaning super bad high interest rates) that I do not think our Central Bank has the courage to do as quickly as it should. I believe Fed chair Powell is worried he will spook the markets if he acts as strongly as the data says he should. So he won’t, and the expectations monster will get further out of hand.
Gasoline is galloping. The annual inflation rate for regular gas in the U.S. is 61%. Last month, it was 46%. Guys, these data are provided weekly by an agency known as the U.S. EIA. This means it is a preview of one of main ingredients in the overall monthly inflation that will be in tomorrow’s monthly CPI release for May.
I took an hour to really explore the gas inflation data. It’s bad. While the $5/gallon price is setting records and making headlines, the bigger problem is that energy inflation is one of the earliest warning signals for recession that economists have discovered. I disagree with people who point to “core” inflation that excludes food and energy. We should give extra attention to energy prices because it is the essential factor in all economic activity. Massive, long-term energy inflation causes massive disruptions and re-alignments in the great macro engine. As bad as year-over-year inflation seems, the 24-month period it’s double ungood. The cost of regular gasoline was 140% higher during the first week of June 2022 than it was 24 months ago.
For technical reasons, the monthly CPI report reflects the choppiness of the same month a year prior. For example, it was big news when inflation surged to 8.6%. That’s what the headlines said two months ago, in mid April, reporting the March 2022 CPI data. Well, the monthly CPI ticked up 1.2%, which is high, but it affected the annual (or year-over-year) rate of 8.6% because the previous March 2021 number was essentially dropped, and it was just 0.6%. My point is that if we assume a steady monthly rate of inflation of say 1% for the remainder of this year, the monthly releases will actually reflect ups and downs based on monthly movements last year.
Last May and June, CPI increased by 0.7 and 0.9. So, roughly speaking, the year-over-year CPI inflation rate may appear to hold steady in the 8-percent range. But the later summer months were considerably cooler last year. July and August 2021 CIP increased by 0.5 and 0.3. September was 0.4.
I think the annual rate is going to pop over 10% this year. My best guess is this will happen in late summer. If it happens any sooner, I won’t be surprised, but I will be alarmed. And so will the Fed.
Inflations expectations are unleashed and the Federal Reserve is restrained.
Gasoline is galloping. (Undiscussed: Will it slow?)
Technically, the inflation lull of summer 2021 is going to amplify this summer’s CPI increase in the annualized rate.
As you watch people discuss inflation tomorrow, discount anyone who talks about Russia invading Ukraine. They are making excuses. Anyone who talks about Covid as the problem is also making excuses. Yes, Covid was a challenge, but the supply-constraining policy overreaction to Covid is “the problem” — not the loss of life from a relatively mild endemic in the grand scheme of things. The larger lesson is that MMT is a bust. Monetary and fiscal excesses are own-goals by U.S. policymakers that were decades in the making.
See you tomorrow, my friends!