This Inflation Isn't Temporary--Part II

 Popular Economics Weekly

From the same month one year ago, the PCE price index for July increased 2.6 percent. Excluding food and energy, the PCE price index increased 2.9 percent from one year ago. BLS.gov

BLS.gov

The PCE price index is one of several inflation measures that the Fed will use to determine whether to cut the Fed Funds rate at their September FOMC meeting. The other measures include the unemployment report and Consumer Price Index that will be out before their next meeting.

Fed Chair Powell has recently implied at the Jackson Hole Conference that if the employment picture is as bad as that of the past three months, they might even cut it -0.50%.

That would help borrowers because the Prime Rate would drop to 7.0% (from 7.5%) that lenders use for credit card and car loan rates. Consumer spending would then most likely pick up and elevate prices on top of the higher prices already appearing from the tariff taxes that Trump has levied.

This highlights the incredible stupidity of Republicans that may come to haunt them, who have passed massive tax cuts while allowing Trump to create havoc with his tariff war. They are counting on an increase in economic growth next year from higher capital investment in such as AI to pay for it and keep stagflation from happening.

But the inflation part of stagflation is already happening, in spite of the Q2 jump in GDP to 3.1% that was mostly due to the drop in imports, as the tariff taxes have begun to kick in.

Consumers are already seeing rising inflation. The Personal Consumption Expenditures price index (PCE), the Federal Reserve’s preferred inflation gauge, rose 2.9% annually without volatile food and energy price changes. That’s too high for the Fed’s target rate of 2% inflation that prevailed until the COVID-19 pandemic threw a monkey wrench in supply lines that are still recovering for most of the world.

It is a huge miscalculation for Republicans to believe that allowing Trump’s massive tariffs without their consent has anything more to do than increasing his wealth, and that of the Oligarchs that support him.

How much of the investments promised by Japan and the EU in their new tariff agreements will materialize, and how will it be spent? How much manufacturing can return to the US that must still compete with cheaper foreign products?

We know how con men operate from experience. Prices weren’t reduced or a Ukraine peace deal negotiated on ‘Day 1” as Trump had promised.

It will mostly be more smoke and mirrors that the White House propaganda machine will attempt to make Americans believe there is very little inflation and the job market won’t further worsen. Trump already fired the Bureau of Labor Statistics (BLS) head that reported job growth slowed precipitously over the past three months because he didn’t like the numbers.

The above graph pictures how consumers have been behaving this year during the chaos. Their disposable incomes (blue bars) and savings (black line) had been rising faster than spending (outlays) until April when tax returns are due (and Trump’s retaliatory tariffs were first announced). Then it reversed. The spending rate has been increasing (brown bars) faster than savings since then as consumers are depleting their savings accounts once again.

Consumers spent more on cars, car parts and financial services (59%) of their Personal Consumption Expenditures, while gas and energy spending fell 12.1%. Their personal savings rate has hovered around 4% all year.

It’s an important indicator because personal savings rise sharply when consumers pocket their incomes if they fear something bad is about to happen, like higher unemployment. If the Fed also sees danger, then they will cut their interest rates.

And if President Trump succeeds in politicizing the Fed by firing Governor Lisa Cook and hiring another BLS head who will cook the job numbers for him, so that he can hide what is really happening in the job market, then all bets are off on just how bad the stagflation that results will be.

Harlan Green © 2025

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

What Happens Next?

 Financial FAQs

“In an interview with Fox News on Sunday, Trump refused to rule out a recession for the U.S. this year, implying his tariff strategy and attempts to cut government spending were part of a necessary transition that in the short term could cause problems for the world’s biggest economy.” MarketWatch

AtlantaFedGDPNow

I find it laughable that President Trump is now saying the ‘R’ word on a Sunday talk show, when one of his most famous campaign promises was that “Starting on day one, we will end inflation and make America affordable again, to bring down the prices of all goods.”

So the question to ask is, what happens next when and if he succeeds in enacting his agenda? We should know by now it isn’t words but his administration’s actions that will determine (or hinder) how much the economy and prices will grow (or shrink) this year.

In fact, Trump has inherited a fully employed and still growing economy. Prices and inflation can’t come down in such a situation because there is more demand (i.e., money in circulation) than goods available. It’s good old Economics 101 that is taught in business classes.

But economists do agree on what would bring prices down, a recession. Many economists and pundits have been looking at the Atlanta Fed’s estimates of first quarter GDP growth, and been seeing the possibility of the ‘R’ word.

Why? It’s mainly because consumers have been spending less since the holidays, in part because they are losing confidence that they may even have a job, or the ability to change jobs in the future. Why wouldn’t they lose confidence when “chainsaw Musk” cuts federal jobs with abandon and the newly jobless federal workers competing in the private sector?

That why first quarter growth estimates, such as the Atlanta Fed’s GDPNow estimate have fallen.

“The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the first quarter of 2025 is -2.4 percent on March 6, up from -2.8 percent on March 3,” is their latest

That’s also why the stubbornly high inflation and interest rates are making creation of a new fiscal budget so difficult. Republicans want the tax cuts they promised to spark more spending, which is inflationary, but need Democrats to agree. Yet Democrats don’t want the cuts to social security, Medicare, and Medicaid that Trump said would never happen, but must happen for any preservation of the tax cuts enacted during Trump’s first term.

Hence there will probably be a so-called continuing resolution to keep the existing budget until end of the fiscal year in September. This will avoid a possible government shutdown, but what then?

This week’s news will be mostly about inflation, since February’s Consumer Price Index and wholesale Producer Price Index will come out that may paint a clearer inflation picture, and whether the Fed might resume cutting interest rates.

And we need not only to be talking about the prospects for higher prices from tariffs, but also the trade disruptions that tariff wars cause, because President Trump will antagonize both friend and foe in his flailing (and counterproductive) attempts to decree rather than negotiate a new foreign trade policy.

There is something seductive to many voters about a new foreign trade policy that promises to bring more jobs home. But firstly, it’s more expensive to make things in the U.S., which is why we import more than we export. And with Trump making enemies of our friends and closest allies, they will be sure to reciprocate with higher tariffs.

Trump has to know that is no way to do business from his history of bankruptcies and lawsuits. He has always chosen confrontation over cooperation to get what he wants, and the financial markets as well as consumers will soon figure this out. The only question is when, and what happens next.

Harlan Green © 2025

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

Higher Economic Growth Ahead--Part II

 Financial FAQs

AtlantaGDPNow

US economic growth could be accelerating—with manufacturing as well as consumers. It was consumers that provided most of the 2.4 percent increase in Gross Domestic Product (GDP) in the ‘advance’ (first of three) estimates of second quarter economic growth, but the manufacturing and construction industries may be taking over in the next phase of this economic recovery.

The Atlanta Federal Reserve’s advance estimate of third quarter economic growth just jumped to 5.8 percent, thought to be an almost unbelievable growth rate just weeks ago. This will confound pundits and economists alike as all those capital infrastructure projects shift into high gear.

GDP growth is soaring because private capital spending has also picked up, proving that governments must kick start many of those projects that don’t promise enough profits to bring in private investment, i.e., long term projects like roads, bridges that pay for future growth. This is the truth that Wall Street doesn’t want to hear, until it meets a worldwide catastrophe like the COVID pandemic.

This has been the case since the Great Depression but never in the scale that has been spurred by the post-pandemic recovery.

“The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the third quarter of 2023 is 5.8 percent on August 16, up from 5.0 percent on August 15. After this morning's housing starts report from the US Census Bureau and industrial production report from the Federal Reserve Board of Governors, the nowcasts of third-quarter real personal consumption expenditures growth and third-quarter real gross private domestic investment growth increased from 4.4 percent and 8.8 percent, respectively, to 4.8 percent and 11.4 percent,” said the Atlanta Fed.

The jump in housing starts was surprising in the face of higher mortgage rates as bond traders expect that more robust growth will push up longer term interest rates, like the benchmark 10-year Treasury yield now edging above 7 percent.

“With many homeowners choosing to stay in their existing home to preserve their low mortgage rate, demand for new home construction pushed up single-family starts in July even as builders continue to struggle with increased uncertainty stemming from rising rates,” said Alicia Huey, chairman of the National Association of Home Builders (NAHB).”

And manufacturing companies have added 100,000 clean energy jobs in wind and solar energy, EV manufacturing and other clean energy sectors across the country since the Inflation Reduction Act became law,, according to a report by the nonprofit Climate Power.

As of January 31, 2023, there are over 90 new clean energy projects in small towns and bigger cities nationwide totaling $89.5 billion in new investments, said their study.

This is what it means to pay for the future—our future health as well as creating better-paying jobs.

Harlan Green © 2023

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

No More Inflation?

 Financial FAQs

FREDppifinaldemand

The Federal Reserve has announced its first rate pause since it began to raise short term rates last year. But it threatened to raise rates twice more this year after a six week pause to study the impact of its policies to date.

Inflation may have all but disappeared by then, at least for wholesale goods and services that took a sudden plunge in May.

The Producer Price Index (PPI), the Federal Government’s wholesale inflation indicator, shows the Federal Reserve has already overreacted to the inflation surge. Its index for final demand plunged from 2.3 percent to 1.2 percent YoY in just one month, April to May 2023.

“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.”

These changes will also be reflected in the retail Consumer Price Index in coming months, and we could begin to experience a close to zero overall inflation rate if it continues its downward trend very soon.

Another inflation indicator is moving quickly downward, U.S. import prices, which fell 4.6 percent from March 2022 to March 2023. This was their largest over-the-year drop since import prices declined 6.3 percent from May 2019 to May 2020.

All signs are now pointing to lessening demand from consumers and businesses. So, do consumers and businesses want to live in a zero-inflation rate environment if the Fed keeps raising interest rates?

No, is the short answer because when prices stop rising they quickly begin to fall in such a consumer-oriented economy as ours. That's good, isn’t it? But not too much because it’s a sign of falling demand for products, and less demand means businesses see shrinking markets and soon begin to cut jobs.

This hasn’t happened yet but we have a good example in the last decade as it recovered from the Great Recession. PPI for Final Demand was at zero inflation from January 2015 to August 2016 YoY, and quarterly GDP growth was less than 1 percent during the period, per the St. Louis FRED.

It looks like Ian Shepherdson’s remarks are coming true that I quoted recently.

“The forces that drove up inflation since the onset of the Covid pandemic are reversing rapidly,” said Ian Shepherdson, chief economist at Pantheon Economics, in a recent Barron’s article. “Over the next year, both the headline and core rates—the latter excludes food and energy prices—will drop sharply. By the end of 2024, inflation is likely to be below the Federal Reserve’s 2% target, and policy makers will be trying to stop it falling too far.”

The irony is that Fed Chair Powell has said they may have to continue to raise rates even if it causes job losses, if they are to meet their 2 percent inflation target.

He just said inflation has not moved down as much as they would like at his latest press conference. What would it take to convince him and the Fed Governors otherwise, another recession?

Harlan Green © 2023

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen