Over the last 8 months, from July 2022 to February 2023, the Consumer Price Index (CPI) has grown by about 3.5% at a annual rate. In fact, during the last 6 months of 2022, the growth rate was only 2 percent, the Fed’s inflation target. But prices rose faster this January and February, mostly due to the “shelter” (rent) category, according to the monthly reports from the Bureau of Labor Statistics (BLS). The “headline” 12-month inflation rate is now 6 percent. Meanwhile, the Producer Price Index (PPI) fell in February, in part because of big reductions in egg prices, and Retail Sales fell as well, mostly because what goes up often comes down, a key economic insight.
Why the difference between 3.5% CPI inflation over the last 8 months and 6% over the last 12 months? Because the period from March to June of 2022 — the first 4 months of the last 12 — was sort of an inflationary disaster, mostly due to Putin’s invasion of Ukraine. But now the Putin price spike has faded, and now we’re just back in a period of modest inflation. While the 3.5% rate over the last 8 months remains above the Fed’s target rate of 2%, it’s not a broad national crisis anymore.
But the Fed’s drastic rate increases in 2022 and early 2023 have indeed become a crisis for some poorly-managed banks — Chairman Powell may finally be getting some lessons in the those “long and variable lags” associated with rapid changes in monetary policy. After 6 months of slow inflation in the last half of 2022, prices did jump in January, and the Fed started making statements about keeping a fast pace of rate increases. That certainly didn’t help the tech-bro banks!
I don’t think the Fed has much compassion for small business borrowers. I know lots of very important economists seem to hate the idea of student loan forgiveness. But at least now Wall Street thinks the Fed is done hiking rates, at least until the tech-bro bank crisis eases some more. As a small business borrower, I’m good with that — Whatever it takes! Here’s a graph of the prime lending rate, which is what we pay for inventory loans.
The Fed should have chosen a much slower path of raising interest rates last year. After all, much of our inflation problem is due to lingering supply issues and weak competition, not overmuch demand. The impact of higher interest rates on supply is ambiguous — how are manufacturers, housing builders, etc. going to increase supply as fast as we need if their financing costs go up?
I continue to think the Fed botched this pandemic, lurching from underreaction to overreaction and over-interpreting some pretty shaky data points. I think they’ve been reacting more to screeching pundits then making careful, sober analysis. And now their haste to raise interest rates so far so fast is starting to really break things they care about: banks.
I’m not sad for the loss of Silicon Valley Bank or Signature Bank or Credit Suisse — those guys’ clients are mostly tech assholes, crypto fools and money launderers. But at least they got the Fed’s attention!