Inflation Does Not Die Quite So Easily
Previously published on March 2, 2023 in
By Milton Ezrati, Chief Economist at Vested
Many, most especially the Biden White House, ran with the inflation moderation of last summer and fall. Federal Reserve (Fed) Board President Jerome Powell even suggested that he might not have been so wrong in 2021 when he declared the inflationary pressure as “transitory.” Now news for January contradicts this pleasant view of things. It reports that consumer prices rose 0.5% that month, 6.2% stated at an annual rate, and that producer prices rose by 0.7%, 8.7% stated at an annual rate. Neither says anything good about the inflation situation.
Although one month’s data does not a trend make, this news, set against the patterns of 2022 as well the detail behind the summary figure, gives ample reason to expect more such troublesome inflation in coming months. That situation will demand still more counter-inflationary policy from the Fed and, though it is a hopeless expectation, some support for such policies in Congress and from the White House.
One reason to expect future trouble lies in the pattern of energy prices. The January consumer price index (CPI) showed a 2.0% rise for the month, 26.8% stated at an annual rate. This jump reversed much of the relief reported in previous months. To be sure, energy prices always show great volatility, but the juxtaposition of this news with patterns in producer prices and Russia’s recent decision to reduce supplies looks ominous. At base, Russia’s moves have had less impact on inflation than the White House chronically suggests. After all, energy prices during this past year have waxed and waned even as Russia’s position and the fighting in Ukraine have continued uninterrupted. Nor does the recent price surge have anything to do with Russia. It predates the recent announcement of supply cuts. The same is true of the 5.0% January rise in producer energy prices. What this means is that any ill effects of Russian action will occur just as the recent surge at the producer level works through to retail pricing.
The picture that emerges from the major components of the CPI also suggests future trouble. Food prices, for instance – both groceries and restaurant meals and amounting to some 13.5% of the average household budget — rose 0.5% in January bringing the increase over the last 12 months to over 10%. The price of shelter – rent and ownership and more than one-third of the average household budget – rose 0.7% in January, bringing the rise over the previous 12 months to about 8.0%. Not every subcategory of the CPI rose. The prices of new cars and trucks rose a relatively moderate 0.2% in January, but most other important parts did rise too much. Apparel prices increased 0.8% in January, and the prices of transportation services rose some 0.9%.
Perhaps even more indicative of future price pressures is the pattern exhibited by what might be described as the pricing pipeline. As already indicated, the overall measure of producer prices in January outpaced the consumer measure. The producer picture does indicate some relief for groceries. Producer food prices declined 1.0% in January and even more at the farm level. Crude energy process also declined, some 16.2%, though with Russia’s decision to cut back production, prices on commodity markets are again on the rise. Otherwise, the prices of finished producer goods increased rapidly. Durable producer goods – appliances, cars, and the like – rose 0.5% in January, and the prices of non-durable goods – soap, cosmetics, and the like – rose some 0.9%. Construction costs rose 0.8%, suggesting little immediate relief in the cost of shelter.
On these bases, the inflation seems set to continue. It cannot lift easily because at base it has little to do with the usual excuses offered by Washington: corporate greed and Russia’s maneuvers. Instead, the nation will continue to suffer inflationary pressures for the time being because the Fed back in 2020 and 2021 orchestrated a huge surge in money creation, and whenever money growth exceeds the economy’s ability to respond, the result is inflation, if not immediately then ultimately. Between December 2019 and February 2022, the Fed’s broad M2 definition of money circulating in the economy rose almost 42%, almost 20% a year. No economy, especially one as large and well developed as that of the United States can keep up with that. This disparity lies at the root of today’s inflation and tomorrow’s, too, until the Fed’s otherwise admirable recent counter-inflationary policies remove it. That will require more effort over more time.