The latest inflation data make it almost unanimous: Chairman Powell, leading economists and even his Fed Governors are saying the Federal Reserve Governors may not raise interest rates again this year, or maybe into next year as well.
Why? Inflation has been tamed; except for gas prices, which have soared of late due to more positive economic growth and OPEC cutting oil production.
Second quarter GDP growth was 2.1 percent, and there are estimates of 4 percent or higher Q3 growth. It is a picture of the U.S. economy returning to a more normal growth pattern.
This is while the headlines are screaming that U.S. retail and wholesale prices have suddenly spiked. Wholesale PPI prices jumped 0.7 percent in August to mark the largest increase in 14 months, as did retail CPI prices the day before.
“The Producer Price Index for final demand increased 0.7 percent in August, seasonally adjusted, after rising 0.4 percent in July, the U.S. Bureau of Labor Statistics reported today. The August advance is the largest increase in final demand prices since moving up 0.9 percent in June 2022.
But note that on an unadjusted basis, the index for final demand rose (just) 1.6 percent for the 12 months ended in August.
So why isn’t retail CPI inflation following suit with its overall inflation rate rising to 3.7 percent?
An NBER working paper by noted economists Olivier Blanchard and former Fed Chair Ben Bernanke, accompanied by the above NBER graph, maintain rising wages are the culprit.
“Rising commodity prices and supply chain disruptions were the principal triggers of the recent burst of inflation. But, as these factors have faded, tight labor markets and wage pressures are becoming the main drivers of the lower, but still elevated, rate of price increase.”
But the above NBER graph shows that is not yet the case. The blue portion of the bar portraying energy prices has shrunk the most. The red and yellow portions portraying wage pressure and product shortages have shrunk the same amount bringing actual inflation (black line) below 4 percent. The gray portion is a pre-pandemic historical compendium of contributions to inflation (Don’t ask what that means, read the paper for further clarity).
So once again the fear of persistent wage inflation is driving their analysis, as many blamed for the 1970s era of stagflation. Yet they almost totally ignore the role of persistent supply shortages in the inflation equation, (oil shortages in the 1970s, Ukraine-Russian war shortages and trade sanctions today), as well as the profit-taking role of producers and distributers that padded their profits because of supply bottlenecks.
The recent spike in retail CPI and wholesale Producer Price Index was also because the financial markets believe recession dangers are over and therefore the demand for gas and oil use will only increase, another indication that markets are functioning normally.
That is why Goldman Sachs chief economist Jan Hatzius is predicting no looming recession and better economic growth ahead, as I said last week.
We can also thank Bidenomics, the boost to growth that the infusion of $billions into renewal of the US economy in infrastructure, CHIPs manufacturing, and the conversion to more climate friendly policies has jump started.
Above all, we see consumers feeling prosperous enough to continue to shop and enjoy more leisure activities even with higher interest rates. The Fed has signaled they won’t be in any hurry to drop their interest rate. But that’s also a sign of interest rates returning to more normal levels that prevailed before the COVID pandemic.
Harlan Green © 2023
Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen
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