Nobel Prize-winner Joe Stiglitz has weighed in once more against Chairman Powell’s Federal Reserve further boost of short-term interest rates; because said rates have almost returned to the 2 percent target range—if we consider what has occurred since the Fed began raising their rates.
And raising rates any higher harms wage-earners in the bottom income range, as well as homeowners and homebuyers watching soaring mortgage rates.
In March 2022, when the Fed first raised rates, inflation was accelerating. From January to March, the CPI had risen at an 11.3% annual rate. But then the Fed raised interest rates at six straight meetings, going from near zero to near 4% (see MarketWatch graph above) and now inflation is decelerating. From September to November, inflation rose at a 3.7% annual rate.
Professor Stiglitz highlights a new Roosevelt Institute report he co-authored that shows any benefits from the extra interest-rate-driven reduction in inflation will be minimal, compared to what would have happened anyway.
So, if the ‘real’ inflation rate has fallen so fast due to Fed actions, what is keeping prices high? Excessive corporate profits, in a nutshell, due to their pricing power; particularly in the petroleum sector that is dominated by just five major U.S. oil companies.
The Roosevelt report dispenses with the argument that today’s inflation is due to excessive pandemic spending, he said, and that bringing it back down requires a long period of high unemployment. Demand-driven inflation occurs when aggregate demand exceeds potential aggregate supply. But that, for the most part, has not been happening, as consumers have spent much of their savings and wage gains haven’t kept up with inflation.
Instead, the pandemic gave rise to numerous sectoral supply constraints and demand shifts that became the primary drivers of price growth, said the report.
Reproducing and updating the analysis of Jan De Loecker, Jan Eeckhout, and Gabriel Unger’s The Rise of Market Power and the Macroeconomic Implications,” Stiglitz said, “we find that markups and profits skyrocketed in 2021 to their highest recorded level since the 1950s. Further, firms in the US increased their markups and profits in 2021 at the fastest annual pace since 1955.”
Inflation has been easing, in other words, even though food prices remain elevated with Russia’s war in Ukraine, and auto prices caused by a shortage of computer chips. But auto prices have been falling as car inventories have been rising.
MarketWatch economist Rex Nutting maintains actual inflation has fallen even further. If rental rates, which make up 40 percent of the Consumer Price Index and lag other CPI data because rental rates are usually fixed one year in advance, are removed from the retail inflation report, CPI inflation will have risen just 1.3 percent annually.
“Using rents to measure homeowners’ costs might be an acceptable methodology in normal times, but not now,” says Nutting. “Based on the increase in rents, the CPI showed that shelter costs for homeowners rose at a 8% annual rate in November. No one believes that’s true. Most homeowners have a fixed-rate mortgage, so their principal and interest payments haven’t gone up at all.”
So, we don’t need more rate hikes to vanquish the headline inflation rate broadcast to the public that masks its underlying cause, and which isn’t allowing the Fed Governors to ease up on their credit tightening, thus harming future economic growth.
Look to those companies taking advantage of the inflation surge (and suffering it is causing) to fatten their own profit margins.
Harlan Green © 2022
Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen
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