It’s been awhile since I’ve been around here. I hope everyone is doing as well as can be expected in a world that continues to trend down the rabbit hole at a remarkable pace.
For most of this recovery, the Federal Reserve described inflation as transitory. There were good reasons for this characterization:
1.) There were signs that the simple process of stopping and restarting the global economy had created a supply and demand imbalance which would be naturally worked out over time.
2.) At first, there were very limited and fact-specific markets that were the causing price spikes (for example, used cars).
3.) There’s an old economic adage that the cure for high prices is high prices. This simply means that when prices increase two things are likely to happen: new suppliers enter the market seeking profits while demand is diminished.
4.) Problems associated with the global supply chain are a partial reason for the problems. Again, the Fed thought these would naturally work themselves out.
Supply chain issues haven’t gone away. In fact, they’re grown worse, as documented in this great summation from the NY Times.
Friday’s price report showed the problem is getting worse. Let’s start with this chart:
This is the Y/Y percentage change of the CPI headline (in blue) and core (in red) rate. Both continue to trend upward.
Let’s break the data down into the constituent parts of the index:
This is a 1-year chart of the Y/Y percentage change in the major sub-indexes of CPI. The above chart shows that five of the major sub-indexes are rising at a decent clip.
The above spreadsheet is the numerical data behind the previous chart. You’ll have to click on the image to get more detail. But, the five columns on the left all show rising price pressures (this was downloaded from the St. Louis FRED system).
Finally, there’s this chart:
This is a self-made chart courtesy of data from the FRED system. The FED uses average data rather than relying on a single report, which may contain outlier information. Above are simple averages of the 3, 6, and 12-month Y/Y percentage change in the headline and core CPI (please click for a larger image). If I’m a Fed governor looking at this, I’ll notice the following:
1.) All trends are moving higher
2.) The longer-term trends are now over 3%.
3.) There is no reason to think any of this will end anytime soon based on the trajectories.
So, what does this mean? A few things:
1.) We’re still in unprecedented economic territory. The global economy was essentially turned off and on for public health reasons. Two years in, the pandemic continues. There is no economic playbook for this; everyone is making this up as we go along. That will continue,
2.) The Fed will be hiking rates sooner than anticipated. But constraining this is the fact that the labor force participation rate is still low, meaning there’s labor market slack.
3.) There is legitimate reason to be concerned, largely because the shorter averages are above the longer averages and they are also rising, which means that longer averages will continue to rise for a bit.
Could this break all on its own? Sure. As I noted above, there are no economic policy rules for where we are right now. It’s possible that for unknown reasons, the supply side un-kinks faster than estimated and supply and demand again rebalance.
But, don’t be surprised if this continues for a bit, simply because that’s what the trend says is more likely to happen.