The Whitehouse Council of Economic Advisors (CEA) has come out with a study that compares US inflation to European inflation, and finds that ours has come down faster, much faster, in fact.
It found that so-called ‘harmonized’ headline inflation in the US rose earlier & generally peaked earlier in the pandemic than in other G7 nations. As of April 2023, inflation is also lower in the US on a 12-month basis than in the rest of the G7. US inflation declined again in May.
“In May, Consumer Price Index (CPI) inflation in the United States was four percent year-on-year,” said the CEA. “Inflation in the U.S. has declined substantially since last summer, when its yearly growth peaked at over nine percent. One common question this raises is how U.S. inflation compares to inflation in other advanced countries. Due to a variety of measurement issues, such a comparison is harder than is commonly recognized.”
We first saw the dramatic decline in US inflation in the latest wholesale, PPI numbers that showed raw material prices and final demand services have an almost zero inflation rate.
“In May, the decline in the final demand index can be traced to prices for final demand goods, which fell 1.6 percent. The index for final demand services increased 0.2 percent,” said the BLS. “Prices for final demand less foods, energy, and trade services were unchanged in May after inching up 0.1 percent in April.”
Part of why the U.S. is now seeing lower inflation than the other G7 nations, said the report, is due to the omission of owner-occupied housing costs. Another important factor for headline inflation is the war in Ukraine, which has affected food and energy prices globally but especially in Europe, which has had the broadest exposure to the consequences of the conflict.
These factors should count us lucky to have an ocean between us and the G7 countries, but Chairman Powell and the US Fed needs to acknowledge this. He is now tying himself in knots attempting to justify the Fed’s hawkish stance on inflation when there’s no reason to.
As Powell said just today at an ECB economic conference in Sintra, Portugal, he believes that a soft landing is possible, but will wait to see it confirmed by upcoming inflation data.
I am optimistic of his more dovish outlook because of an oft-forgotten factor—the Fed is also responsible for the soundness of commercial banks, and therefore wants to prevent the failure of more US banks in the modern digital age, where it can happen overnight.
In an Outside the Box MarketWatch opinion piece Laura Veldkamp opined that bank failures were infrequent and tended to happen in waves; until today.
“Between 1941 and 1979, an average of 5.3 banks failed each year. According to Pew, the SVB and Signature failures were the first in more than two years. Yet, the magnitude of this year’s three bank failures surpassed the 25 that occurred during the global financial crisis in 2008.”
Hence my belief that the Fed Governors will perhaps allow a tighter labor market to flourish while they continue to crunch the numbers on inflation, rather than allow further rate increases. Let us hope so.
Harlan Green © 2023
Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen
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