What if there’s too little inflation? That’s actually the definition of a recession. It seems unlikely at the moment and inflation is still a major upset for consumers. But it could happen if the Fed doesn’t ease up on its hawkish position that inflation has yet to be tamed.
It hasn’t happened yet, but if inflation should drop below the 2 percent Fed target, it has generally meant recession. The CPI plunged to -1.96 percent annually in July 2009 at the end of the Great Recession and dropped to +0.22 percent in May 2020 (gray bar in graph) at the end of the short-lived COVID recession.
Economists are becoming alarmed that the Fed has boosted interest rates too high and too fast. The Fed has raised short-term rates a record 11 times since early 2022, from effectively 0 percent to around 5.25 percent.
Another Nobel Laureate, Joseph Stiglitz, is now added to the list of major economists giving warning. In a study co-authored by Ira Regmi, he believes the Fed is in danger of precipitating another recession if it holds its interest rates too high for too long.
“The pandemic-induced inflation was exacerbated further by Russia’s invasion of Ukraine, which caused a spike in energy and food prices,” said Stiglitz. “But, again, it was clear that prices could not continue to rise at such a rate, and many of us predicted that there would be disinflation — or even deflation (a decline in prices) in the case of oil.”
And that is happening. The Consumer Price Index for All Urban Consumers (CPI-U) was unchanged in October on a seasonally adjusted basis, after increasing 0.4 percent in September, the U.S. Bureau of Labor Statistics reported today. It dropped to 3.2 percent from 3.7 percent in August. It was as high as 8.9 percent in June 2022.
In fact, the consensus of 34 economists surveyed by the Philadelphia Fed and released Monday is that there may not be any soft landing of the economy at all, but economic growth continuing into next year.
The Survey of Professional Forecasters is the oldest quarterly survey of macroeconomic forecasts in the U.S., having started in 1968.
“The outlook for the U.S. economy looks somewhat better now than it did three months ago,” the survey found, according to a MarketWatch article.
On an annual-average over annual average basis, the forecasters expect real GDP to increase at a 2.4 percent rate this year and slow only marginally to a 1.7 percent rate in 2024.
So the din is growing for the Fed to begin to cut rates early next year, though we wouldn’t know it from Fed Chair Powell’s remarks that the falling inflation numbers might be a ‘head fake’.
Why would Powell want to spoil the party celebrating continued growth? He must still have the 1970’s wage-price inflationary spiral in mind. It was a time of the Arab oil embargo and long lines at American gas stations, with unions attempting to keep up with the wildly fluctuating energy prices.
But Siglitz and Regmi addressed that as well in their study.
“We conclude that with nominal wages already tempered, this does not seem likely. Moreover, declining real wages are typically not a sign of a tight labor market. Weak unions, globalization, and changes in the structure of the economy provide part of the explanation for why wage-price dynamics today may be markedly different from 50 years ago.”
Stocks and bonds are rallying because of today’s good news on inflation, especially REITs (Real Estate Investment Trusts). This is a sign that the real estate market and housing in particular may be on the mend as well.
It also says there is growing optimism among investors that the Fed is done and will not want to obstruct future growth
Harlan Green © 2023
Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen
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