This month’s Consumer Price index looked hotter at first glance, but it wasn’t. It was slightly cooler, so there was no real reason for the DOW’s 500 pt. plunge.
That’s where the debate is raging these days. Looks matter more than substance in the financial markets. The CPI inflation data had actually improved. So why the market pessimism?
“The all items index rose 3.1 percent for the 12 months ending January (red bar in graph), a smaller increase than the 3.4-percent increase for the 12 months ending December, said the Bureau of Labor Services. The all items less food and energy index rose 3.9 percent over the last 12 months (green bar), the same increase as for the 12 months ending December. The energy index decreased 4.6 percent for the 12 months ending January (black bar), while the food index increased 2.6 percent over the last year (blue bar). “(bold emphasis mine)
This indicates inflation that continues to trend down, rather than “stubborn” inflation. And that is puzzling many economists, because the CPI focuses on rents, some 40 percent of it, thus making an outsize influence on the inflation index, when there are other more balanced inflation indicators that we will talk about later.
This particularly irks Realtors and the National Association of Realtors since high interest rates are the main cause of the housing shortage, with housing barely out of its own recession.
“One big source of stubbornness to further calmness is that housing shelter inflation is rising at 6% (per the CPI). That’s a bit of a mystery since apartment rents are no longer rising and single-family rent growth is at low single-digits,” said Lawrence Yun, chief economist at the National Association of Realtors, in a statement.
The US economy has landed with the huge Q4 GDP growth spurt of 3.3 percent and 335,000 nonfarm payroll jobs created, and inflation that’s approaching the Fed’s 2% target rate.
And the Atlanta Fed GDPNow Q1 2024 growth prediction is now 3.5 percent, so growth continues this year.
What may irk Fed officials who are particularly recalcitrant to call victory over inflation is that wages continue to rise higher, even as inflation is falling. A majority of Fed officials seem to subscribe to former Fed Chair Paul Volcker’s edict that strong wage growth and a 2% inflation target can’t coexist. But that has been happening for the past two years.
Another misconception is what happens when inflation is ‘held’ at 2 percent. The post-Great Recession era of 2009-2020 was called the era of ‘great moderation’ because the inflation rate averaged 2 percent over that time. But what was the cost?
The unemployment rate had skyrocketed to 10 percent at the end of the Great Recession, and didn’t go below 4 percent until August 2018, averaging between 5-6 percent during that decade.
Job growth and wage growth were muted because the Obama administration emphasized policies that paid down the debt rather than higher growth when Republicans engineered a total government shutdown . The result was Hilary Clinton and the Democrats losing in 2016, as they were hammered on the weak growth and employment numbers.
Another economist, Duke Finance Professor Campbell Harvey, gave a more dire prediction if the Fed didn’t move faster to cut interest rates.
“All the hikes in 2023 were justified by inflation being outside the comfort zone. … It’s the same mistake and we know that higher rates are not good for economic growth,” Harvey said in a MarketWatch interview.
“It increases the cost of capital, it means less investment, it means higher borrowing costs. All of this is anti-growth,” he added. “So we need to snap out of it.”
Two other inflation indexes, for Personal Consumption Expenditures (PCE), and Producer Prices (PPI) are already in the 2 percent target range or below.
It means the Fed would rather look tough and endanger a recession than recognize that decent growth and a fully employed economy paying good wages can coexist without causing a recession.
Harlan Green © 2024
Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen
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