How much longer will inflation be a problem, even with the Ukraine invasion and soaring gas prices? Retail sales can tell us something about inflation because it powers a major part of economic activity.
February retail sales increased just 0.3 percent, after rising 4.9 percent in January, because consumers cut back on spending. This is what consumers tend to do when things get more expensive, which helps to bring down overall inflation.
Retail sales have risen 15.9 percent YoY, as consumers with lots of savings have been demanding more than supply-chains can provide, hence the soaring inflation rate of late. But, sure enough, once consumers felt pinched, they cut back in February, which should cause inflation to fall below the current 7.5 percent annual rate that is making everything more expensive.
In fact, the wholesale Producer Price Index of materials that go into finished products in the Consumer Price Index has weakened. The so-called core rate without surging gas and auto prices rose just 0.2 percent in February, the lowest climb in 15 months, which might be a sign that supply chains are opening up.
This should also dampen speculation of an abrupt halt to economic growth, which some pundits believe will occur because the Fed is beginning to raise interest rates at the same time as the Ukraine invasion sanctions on everything Russian-owned are also boosting commodity prices.
Consumers believe prices will continue to rise sharply over the next year, which should continue to restrain spending, with inflation averaging 6 percent, according to a survey by the New York Federal Reserve. That’s up from 5.8 percent in January and matches the highest level on record.
But median three-year ahead inflation expectations ticked up just 0.3 percentage point to 3.8 percent, while remaining below its November and December 2021 levels of 4.2 percent and 4.0 percent, per the NY Fed
So how could the incoming sanctions bring on another recession, so soon after the pandemic recovery? Former Treasury Secretary Larry Summers believes the Federal Reserve has waited too long to raise interest rates, and so must now overreact to play catch up and bring down soaring inflation, but also halt economic growth. And Canadian economist David Rosenberg believes Fed Chair Powell will turn into another Paul Volcker, who raised interest rates into double digits in the early 1980s that brought on two recessions.
However, I am in former Fed Chair Ben Bernanke’s camp, who successfully led us out of the Great Recession in 2009 by not raising interest rates too quickly, and in fact increased liquidity for businesses and individuals with the various Quantitative Easing programs while keeping inflation in the 2 percent range.
So who is right? Should we be tightening credit with the looming commodity shortages and even higher prices? I don’t think so, as it only lessens demand rather than stimulating the supply side shortage that is the core problem.
We must find replacements for the loss of Russian oil and commodities, such as wheat and corn. It means following Ben Bernanke’s lead by keeping interest rates low to give consumers and businesses the cushion they will need to weather the latest economic storm
Harlan Green © 2022
Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen
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