Where's the Inflation?

Financial FAQs

“Economic activity is expanding at a solid pace despite elevated uncertainty that owes, in part, to the conflict in the Middle East…Inflation remains elevated relative to the Committee's 2 percent goal, in part reflecting supply shocks that have driven price increases in certain sectors, including energy.” FOMC

MarketWatch

New Fed Chair Kevin Warsh wouldn’t say when the Fed would join the chorus calling for a rate hike at his June press conference. He was waiting to hear from task forces studying problem! When have we heard this before?

The U.S. and Iran keep bombing each other, and Iran has just said they are in no hurry to negotiate another ceasefire, while Trump just found another way to keep tariffs high.

And the bond market and inflation indicators are showing higher inflation ahead. Is there any doubt that the Fed’s Fed Funds rate is going higher, as well, with the Fed’s FOMC statement mentioning “elevated uncertainty” re the Middle East conflict?

The financial markets didn’t like the Fed’s inaction, which is why the market indexes plunged after the FOMC statement—the DOW ended the day down by -1150 pts.

Yet economic disaster is staring Americans in the face, if Trump keeps raising tariffs and can’t stop his Gulf war. It cuts into consumer spending, raising the cost of everything when debt at all levels—national, corporate, and consumers are already at record levels.

Raising the Fed’s interest rate will slow rising inflation by slowing economic growth. The Fed FOMC conclusion that economic activity is “expanding at a solid case” was because of over investment in the AI build out of data centers, almost all of it borrowed money. And many of the AI investors are borrowing from and investing in each other, like Japan’s keiretsu system of interlocking ownerships that impeded them from writing off bad debts when their decades long economic stagnation occurred.

One ‘tell’ of the possibility of a US. recession is that huge new orders for computers and related products jumped 3.1% in June, the government said Monday in its monthly report on durable goods.

The last time there was such a surge in goods investment was during the dot-com era, according to MarketWatch’s Jeffry Bartash. “Over the past year, orders for the AI-related hardware have surged 17%, a level last sustained during the dot-com era more than a quarter of a century ago,” he said.

But the dot-com investments didn’t begin to show enough profit for decades to pay for the investments, hence the 2000 dot-com recession that Alan Greenspan and Nobel Laureate Robert Shiller predicted with their warning that irrational exuberance was blinding investors from reality.

Yet the Fed must act to raise rates sooner or later, since higher inflation is already embedded in consumer surveys, according to the University of Michigan’s sentiment survey:

“Year-ahead inflation expectations ticked down from 4.6% in June to a still-elevated 4.2% this month. The current reading substantially exceeds the 3.4% seen in February before the Iran conflict began, (my bold) along with all 2024 readings. Long-run inflation expectations held steady from last month at 3.3%, remaining a bit higher than the 2.8% to 3.2% range seen in 2024.”

The advance second quarter GDP growth estimate was just 1.5 percent, another casualty of the tariffs and Mideast wars despite the AI investment surge. It’s no wonder the Fed’s Governors are avoiding the obvious; when to begin to restrict credit before inflation becomes entrenched longer term, as it did in the 1970s.

What were the conditions then? Energy supplies were restricted, inflation soared, and economic growth stagnated. Hence the decade of stagflation. Is this a repeat?

Harlan Green © 2026

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

 

Stagflation Isn't Going Away

Financial FAQs

“The number of job openings was unchanged at 6.9 million in March, the U.S. Bureau of Labor Statistics reported today. Over the month, hires increased to 5.6 million while total separations changed little at 5.4 million. Within separations, both quits (3.2 million) and layoffs and discharges (1.9 million) were little changed.’ BLS.gov

FREDjolts

The FRED graph of the JOLTS report (U.S. Job Openings and Labor Turnover Survey) shows the sharp decline in the number of job openings from its high of 12 million openings in 2022 at the end of the COVID-19 pandemic. This is another sign of stagnating growth. And though stocks continue to rally to new highs, interest rates are also rising, a sign of higher inflation.

Now combine no new job growth with rising inflation and we have further signs of stagflation, the combination that stopped economic growth for most of the 1970s. It has hovered around 7 million job openings during Trump’s second term because of Donald Trump’s almost single-minded job-killing policies.

It’s not just the illegal on-again, off-again tariffs that disrupt supply chains, but the immigration sweeps taking tens of thousands of workers out of their jobs and off the streets. And most of them pay taxes that would help in reducing our record federal debt.

Cap that with all the DOGE job cuts that have eviscerated the Labor Department responsible for enforcing OSHA worker safety laws and union wage negotiations. Millions have also lost their insurance coverage because Republicans blocked renewal of subsidies that made it affordable to ordinary non-seniors.

Job formation is now at a standstill because of Trump’s anti-labor antics. It’s mostly pure greed that motivates Republicans these days who have cut social services to the bone to pay for their tax cuts.

And there is plenty of time for stagflation to worsen as a semi-permanent feature of Trumponomics, his version of Reagonomics trickle-down economic policies, since Trump has three more years.

Inflation doesn’t disappear when economic growth picks up that is inflating stock prices. All the AI investing will ultimately increase productivity in factories that make cheaper products and need fewer workers. But who will buy its products with fewer employed workers, hence consumers, to buy its products?

Nobel Laureate economist Paul Krugman has pointed out the damage Republican economic policies have done to the health and welfare of Americans and American workers, as well that lessens their productivity because more sick days means time lost from the workplace.

“There is a strong correlation between right-wing politics and increased mortality — stronger than many of the statistical associations that guide public health policy. Deep red states like Alabama and West Virginia have life expectancy comparable to, say, Kazakhstan.”

I’ve written in the past about the dumbing down of the Republican electorate that is causing this; its refusal to rely on scientific knowledge, or support vaccines and publicly funded healthcare.

“We’re seeing the forces that keep U.S. life expectancy far below that in other rich countries, that cause Texans (for instance) to die younger than residents of Massachusetts, go into overdrive at a national level.”

This will cause the death of more Americans, further shrinking our available supply of workers. It’s already happened—just 15,000 new jobs per month were created in 2025. Professor Krugman warns the carnage will continue while inflation is soaring because of his many missteps.

“The consequences will be grim,” he warns.

Harlan Green © 2026

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It's Trump's Economy Now--Part II

 Financial FAQs

“Despite the strong economic growth we saw in the second quarter, this month's release further validates what we've been seeing in the labor market, that U.S. employers have been cautious with hiring. ADP

That’s one way to characterize the U.S. Economy. But it’s Trump and his Republicans’ economy now, no matter what happens next. The government shutdown that began on October 1 will have little effect on economic growth, regardless of who is blamed for it, according to most economists.

ADP, a private payrolls processor, reported September was the third month in a row that businesses eliminated jobs. Small and medium-sized companies lost jobs, while companies with more than 500 employees gained 33,000 jobs, mostly in healthcare and education.

It is the only employment report we may have for a while, since the Labor Department says that September’s official US unemployment report will be postponed because of the government shutdown.

Conferenceboard.org

The decline in job availability is beginning to affect consumers, reports the Conference Board’s Consumer Confidence Survey:

“Consumer confidence weakened in September, declining to the lowest level since April 2025,” said Stephanie Guichard, Senior Economist, Global Indicators at The Conference Board. “Consumers’ assessment of business conditions was much less positive than in recent months, while their appraisal of current job availability fell for the ninth straight month to reach a new multiyear low.”

It’s no wonder the Federal Reserve finally cut interest rates two weeks ago for the first time since last December, and two more cuts are scheduled for this year.

The government shutdown will make things even worse, since employees will be either furloughed, or must work without pay in its most essential functions like the military, social security, Medicare, and Medicaid.

About 750,000 federal employees could be furloughed every day, according to a Congressional Budget Office estimate out Tuesday, cited my MarketWatch’s Victor Reklaitis. “The number of furloughed employees could vary by the day because some agencies might furlough more employees the longer a shutdown persists and others might recall some initially furloughed employees,” the CBO said.

Yet inflation continues to rise with the latest Personal Consumption Expenditures (PCE) core index reporting a 2.9% inflation rate, up from its low of 2.4% in the spring.

And the manufacturing sector has been contracting for seven months, reports the Institute for Supply Management (ISM). The index of future sales orders has declined in seven of the last eight months.

“We believe we are in a stagflation period where prices are up but orders are down due to tariff policy, and, again, customers are not willing to pay the higher prices, so they are just not buying,” said one executive in the transportation sector, also cited by MarketWatch.

So, the stagflation term is rearing its ugly head once again. What a time for another government shutdown as happened during Trump and Republicans first term! It lasted 37 days and this one will create even more uncertainty with the looming tariffs.

Guess what that means for more stagflation? Fewer jobs mean consumers have less purchasing power. They have continued buying until now because most tariffs are still being negotiated, hence the current effective tariff rate is still in the teens.

But sooner or later Trump will reach agreement on the tariffs, since they still must be ratified by congress.

The Trump administration has really little room to maneuver to keep the U.S. economy from shrinking. It has added an average of just 25,000 new jobs a month from May through August after the benchmark revisions, marking the weakest four-month stretch since 2010, ignoring the COVID-19 era.

We don’t need another prolonged government shutdown or another Great Recession, in other words. Nobody wins.

Harlan Green © 2025

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

Consumers Aren't Buying It

 Popular Economics Weekly

Photo: Emma Da Silva/Getty Images

MarketWatch

“Total U.S. consumer credit growth slowed to a $5.1 billion gain in May, down from a $16.9 billion rise in the prior month, the Federal Reserve said Tuesday.

That translates to a 1.2% annual rate in May, down from a 4% rise in the prior month.” Greg Robb, MarketWatch

President Trump waited for stocks to rally before announcing his latest tariff broadsides on world markets, such as the 50 percent tariff on Brazilian imports. But the result is consumers are shopping less and less. So Trump shouldn’t be paying attention just to the financial markets if he wants to know what might happen over the rest of his term.

Retail sales fell 0.9% in May, the biggest drop in two years. Car sales spiked earlier this year as consumers sought to avoid higher prices from planned tariffs. But sales have slowed sharply since April, said MarketWatch.

The labor market is also slowing. Initial unemployment claims, an early indicator of its direction, have been increasing. The number of people receiving unemployment benefits increased 10,000 to a seasonally adjusted 1.965 million during the week ending June 28, the highest level since November 2021.

Consumer spending drives most economic growth (70%), so if they falter economic growth will slow. And stagnant growth is the component of a possible stag-flation that will result, just as it did in the 1970s with the oil shortages.

We now must wait for the other shoe to drop, which is the effect of the tariff taxes on inflation, which will surely increase later this year, given the supply shortages to follow.

Everyone now knows that TACO Trump is using the shock and awe tactics of so-called reciprocal tariffs, which are blatantly illegal per the Foreign Trade Court ruling now on appeal, to get more concessions from trading partners.

Trump’s problem is that neither consumers nor businesses like uncertainty, yet this is the only way Trump has ever known how to negotiate. His long history of lawsuits and bankruptcies have been the result. And once again he leaves it to the courts to sort out the messes he is now creating for all Americans.

Will it be worth it to those that elected Trump, and will be the most affected by their incompetence?

Harlan Green © 2025

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

Consumers Are Unhappy

 Financial FAQs

“Consumer confidence declined for a fifth consecutive month in April, falling to levels not seen since the onset of the COVID pandemic,” said Stephanie Guichard, Senior Economist, Global Indicators at The Conference Board. “The decline was largely driven by consumers’ expectations. The three expectation components—business conditions, employment prospects, and future income—all deteriorated sharply, reflecting pervasive pessimism about the future.”

The University of Michigan’s Sentiment Survey Index has also declined for five consecutive months, from 74 to 50.8. It’s mainly about the growing inflation fears.

“Year-ahead inflation expectations surged from 6.5% last month to 7.3% this month. This month’s rise was seen among Democrats and Republicans alike. Long-run inflation expectations lifted from 4.4% in April to 4.6% in May, reflecting a particularly large monthly jump among Republicans.” Survey Director Joanne Hsu.

Why so much doom and gloom in surveys while consumers are still fully employed? Consumers don’t like uncertainty any more than businesses. and their lack of confidence could have an even larger impact on economic growth than uncertainty in the financial markets.

Consumer activity drives two-thirds of economic growth, and a recession begins when a majority begin to save more than they spend for a prolonged period. There are many ways to measure this, such as a growing cutback in retail sales.

Retail sales rose just 0.1% in April. That’s a big comedown from a 1.7% spike in March that marked the biggest increase in more than two years because consumers bought ahead of the April 2 tariff announcements that imports from all 180 countries in the world would be taxed at least 10 percent.

FREDretailsales

Retail sales account for one-third of consumer spending and and shoppers have been hunting for more bargains. Sales have declined in three of the past 13 months as portrayed in the FRED graph and were flat another three months, but are still 4.7 percent higher in a year.

Motor vehicle and parts dealers were up 9.4 percent (±1.8 percent) from last year because consumers knew that motor vehicle import taxes (i.e., tariffs) of at least 25 percent had already been announced, while food service and drinking places were up 7.8 percent (±1.8 percent) from April 2024.

The Conference Board’s Index of Leading Economic Indicators (LEI), another growth indicator that attempts to predict future growth, showed more weakness.

“The US LEI for March pointed to slowing economic activity ahead,” said Justyna Zabinska-La Monica, Senior Manager, Business Cycle Indicators, at The Conference Board. “March’s decline was concentrated among three components that weakened amid soaring economic uncertainty ahead of pending tariff announcements: 1) consumer expectations dropped further, 2) stock prices recorded their largest monthly decline since September 2022, and 3) new orders in manufacturing softened.

Manufacturing will be hardest hit, because Trump’s tariffs will bring higher inflation and interest rates, which especially hurts manufacturers because they need to borrow lots of money to build their factories. The LEI survey reported new manufacturing orders were already softening.

This will defeat what he says is the main reason for tariffs—bringing manufacturers home—as will the immigration crackdown, which reduces the working age population at a time of worker shortage. The Manufacturing Institute and Deloitte accounting firm have projected that manufacturing will need an additional 3.8 million workers by 2033. Where will they come from?

In fact, this tells us it’s not the real reason for his tariffs, since he is more concerned about cutting taxes and federal spending that would also disincentivize more domestic manufacturing investment.

No, it looks like Trump’s chaotic tariff war will create bottlenecks last seen during the COVID-19 pandemic or worse, unless he relents.

We know what those supply interruptions did to economic growth during the pandemic and why it took the succeeding Biden administration four years to fix with its bipartisan New, New Deal legislation.

Harlan Green © 2025

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What's Next?

 Financial FAQs

“The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the second quarter of 2025 is 1.1 percent on May 1, down from 2.4 percent on April 30.”

AtFedGDPNow

What’s next for economic growth? Predictions for Q2 are all over the map since the first quarter GDP went negative with -0.3% GDP growth because businesses boosted their imports ahead of future price hikes caused by the tariffs, and imports are subtracted from exports in the Gross Domestic Product calculation.

The Atlanta Fed’s GDPNow Q2 growth estimate of +1.1 percent gives us an idea of what’s to come. It has already fallen sharply from +2.4 percent because of the negative Q1 surprise, as well as the drop in consumer spending (PCE) and real private fixed investment (e.g., factories), all signs of further slowing.

I see stagflation on the economic horizon, rather than an actual recession since wherever the import taxes being negotiated end up to be, it will raise prices. And the service sector of our economy is still expanding, that includes the leisure, healthcare and transportation sectors.

The Institute for Supply Management said that its service-sector PMI rose to 51.6% in April from 50.8% in the prior month in the largest sector of our economy. The measure of new orders rose to 52.3% in April from 50.4 in the prior month. And the measure of prices paid for services for inputs jumped to 65.1 from 60.9 in the prior month, which is the inflation component of stagflation.

However, Q2 growth is uncertain because no one knows what the tariffs will be (i.e., import taxes). If Q2 GDP should also contract it could indicate we are in a recession, since two consecutive quarters of negative GDP growth have been one tell of a recession.

Torsten Slok, Apollo Global’s chief economist interviewed on CNBC’s Squawk Box predicts if the high tariffs that were. put in place earlier this month remain in effect, odds of a two-quarter contraction in economic output stand at 90 percent, with gross domestic product dropping by 4 percentage points.

But Trump knows this so he will probably bring the tariffs down to the 10 percent minimum already being levied on all 180 countries in the world (that include penguin only islands).

Trump has probably calculated this will ultimately bring in enough tax revenues to enable the tax cuts he wants enacted for his Oligarchs. The rest of Americans will suffer, however, as the budget negotiations will demand spending cuts to everything else except the military and immigration services

So we shouldn’t ignore a recession possibility, since China is the elephant in the room, and could derail everything, since it accounts for most of the holiday season imports, for starters. And any manufacturing renaissance will be years in the offing.

Declining Gross Domestic Product growth isn’t the only measure of recession. The National Bureau of Economic Research (NBER), the official caller of recessions, adds several other indicators, such as when nonfarm payrolls, personal incomes, and industrial production have peaked in a business cycle.

The NBER, a board of top economists, makes the recession call by looking at peaks and troughs of business activity. The last recession was caused by the COVID-19 pandemic shutdown and came after the longest post WWII expansion in history, said the NBER.

“The committee has determined that a peak in monthly economic activity occurred in the U.S. economy in February 2020. The peak marks the end of the expansion that began in June 2009 and the beginning of a recession. The expansion lasted 128 months, the longest in the history of U.S. business cycles dating back to 1854.”

And small businesses, who thought Trump would bring some relief from regulations as well as lower prices, do not like what they are seeing, I said last week. The National Federation of Independent Business on Tuesday said its Small Business Optimism Index dropped 3.3 points in March to 97.4, falling just below its 51-year average of 98.

Marketplace, a public radio show, said the U.S. Chamber of Commerce sent a letter to the Trump administration this week saying that tariffs pose “significant risks to U.S. employment” and may soon do “irreparable harm” to many small businesses. 

The Chamber, which represents businesses of all sizes, is asking the administration to lift tariffs on any goods that “cannot be made in the U.S.,” establish a tariff exclusion process and automatically exempt small business importers from tariffs.

The problem is that President Trump believes he can use tariffs to wall us off from our allies and trading partners. But wanna be autocrats, such as Trump, are terrible at running economies. The best examples are Turkey’s President Erdogan or Putin, whose economies still suffer from double-digit inflation.

They make decisions for the wrong reasons, because they don’t have to please everyone, just their Oligarchs. But an era of stagflation as happened in the 1970s could cause as much suffering, so stay tuned. Whether recession or prolonged stagflation, it won’t be pretty.

Harlan Green © 2025

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

Higher Inflation Doesn't Mean Stagflation

 Financial FAQs

The current headlines would have us believe the bipartisan $1.9 trillion American Rescue Plan and $1.2 trillion American Infrastructure Investment and Jobs Act approved overwhelmingly by both Democrats and Republicans in 2021 will cause prolonged inflation and perhaps lead to a recession.

What the twin 2021 bills have done instead is create record employment, with full employment achieved 26 months after the COVID recession, vs. the 76 months it took to reach full employment after the Great Recession, which was because congress shortchanged the prior recovery with too little aid.

EPI.org

Former Fed Chair Ben Bernanke said on Fareed Zakaria’s GPS Sunday that he doubts that the current inflation surge might turn into another stagflationary episode. The 1970’s stagflation was caused by 14 years of high inflation, whereas we are suffering from just 6 months of higher inflation, after 40 years with very low inflation since the 1970s.

A recurrence of the stagflation of the 1970s is only possible if rising interest rates engineered by the Fed cause a prolonged slowdown in business activity and consumers spending. The 1970’s inflationary spiral was caused by policies that enabled workers to push up wages every time there was a spike in inflation. 

Workers’ salaries today are barely keeping up with inflation and declining, rather than staying ahead of it, which means that wages, some two-thirds of product costs, won't be part of the inflation equation this time.

The rate of inflation over the past year, based on the more reliable PCE Index, slowed to 6.3 percent in April from a 40-year high of 6.6 percent in March, the first decline in a year and a half.

May’s U.S. CPI surge of 8.6 percent was concentrated in three categories: airfares, used car prices and shelter costs, all in the service industries. Most of the inflation to date is in the goods sector. Surging shelter costs will be the most worrisome trend and that the Fed will watch most closely.

Higher inflation is occurring all over the world from the same factors, which signals that it’s mostly about rising food and energy prices affected by panicky traders worried about food and energy shortages. For example, Russia’s inflation rate is currently18 percent, Turkey’s 70 percent and the EU inflation rate is 8 percent.

The Russian invasion of Ukraine and the sanctions that it triggered account for more than a third of the 40-year high CPI annual inflation of 8.6 percent, according to Mark Zandi, chief economist at Moody’s Analytics, as reported by MarketWatch.

The real question is whether longer term inflation is embedded in consumers’ expectations as happened in the 1970s. But that would mean the so-called ‘supply-shocks’ from COVID, China, and the Ukraine war that are the main cause of the current inflation rate don’t eventually subside.Why wouldn't they?

Harlan Green © 2022

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Consumers Disregard Inflation Data

 Financial FAQs

FREDpersonalconsumption

The Federal Reserve’s Personal Consumption Expenditures Index (PCE), its preferred inflation indicator, rose just 0.2 percent in April to mark the smallest increase in a year and a half, aided by a decline in gas prices.

The rise in the so-called personal consumption price index was the smallest since November 2020 and is cheering the financial markets as a first sign that the inflation burden may be easing.

The rate of inflation over the past year, based on the PCE, slowed to 6.3 percent in April from a 40-year high of 6.6 percent in March. It was also the first decline in a year and a half.

This is while consumers’ personal consumption expenditures have risen 6 percent in a year—see the above FRED graph. This graph in one picture shows how much consumer spending has skyrocketed since the pandemic—after just 2 percent average annual growth rates since the Great Recession. It is the highest spending increases since 1980 caused by the record inflation of the 1970s.

But maybe inflation will not be such a problem this time? If inflation continues to moderate—despite the Ukraine war and China’s slowdown—consumers could continue to be the engine of growth without the sky-high inflation of the 1970s that plagued Americans, then. Most of the supply shortages are temporary shocks caused by the pandemic and above-mentioned issues. The U.S. now leads even China (temporarily) as the world’s fastest growing economy while China wrestles with its own COVID crisis.

That is the big question. Corporations have been reporting record profits, and able to pass most of their increased product costs onto consumers. Will they continue to hire more workers at the torrid pace since the pandemic recovery, which will keep consumers happy and continuing their spending ways?

The number of Americans filing new claims for unemployment benefits fell more than expected last week as the labor market remains tight amid strong demand for workers despite rising interest rates and tightening financial conditions.

And with a record 11.5 million job openings at the end of March, layoffs are likely to be minimal and people who lose a job can easily find another one.

The minutes of the Fed's May 3-4 meeting published on Wednesday showed officials commenting that "demand for labor continued to outstrip available supply across many parts of the economy and that their business contacts continued to report difficulties in hiring and retaining workers." Many expected the labor market to remain tight and wage pressures to stay elevated for some time.

We must now wait to see what the Fed’s push to raise interest rates will do to future growth. Will it slow consumers spending and help to slow the prices rises further, averting the re-occurrence of a 1970’s-style stagflation?

Harlan Green © 2022

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What Caused Such A Terrible Inflation?

Popular Economics Weekly

FREDcpiindex

The St Louis Federal Reserve graph tells us what is going on with April’s plunge in the Consumer Price Index. It’s due to a moderation of soaring gas prices. But food, shelter, and supply shortages haven’t moderated that have also pushed prices higher. 

So, how long will such an inflation persist that is terrifying everyone?

The consumer price index rose just 0.3 percent last month, the government said Wednesday, matching the smallest increase in eight months. The yearly rate of U.S. inflation fell to 8.3 percent in April to mark the first decline in eight months.

Grocery prices have increased 10.8 percent in the past year, the biggest surge since 1981.The cost of rent and housing both rose sharply again in April and helped explain the big increase in the core rate of inflation.

Over the past year the cost of shelter has climbed 5.1 percent to mark the largest gain in 40 years. Shelter costs account for a third or more of a typical household budget. There are shortages everywhere, and such so-called ‘supply shocks’ are the cause of soaring inflation, mainly caused by the pandemic. Another ‘supply shock’ has been the reluctance of workers to return to work after the pandemic, causing a slowdown in production.

One year ago prices were at rock bottom, as were interest rates. Today, the demand by consumers and businesses (flush with cash and cheap loans) for goods and services has gotten ahead of supply chains, in other words. But sooner or later supply will catch up as businesses recover from the pandemic, and demand will slow because rising prices cause spending to slow.

So, is this panic time for the Fed to be jacking up interest rates drastically? No, as I said recently. The Ukraine war and China’s COVID are adding to the supply shocks as well, which is another temporary phenomenon.

Too much government aid that is putting too much money in consumers’ pockets is the conservative answer to bring down inflation, which means they really want to cut back on government spending, in spite of the voting for all the aid packages, including the latest infrastructure bill that will create more high wage jobs.

It is the wrong thing to do at this time, since more government spending is spurring higher production, as well. That’s why Fed Chair Powell said recently he was confident that just two rate hikes of 50 basis points each should be enough to slow inflation for the rest of this year. It should also tame fears about future rate increases, by assuring their predictability.

It also looks like the cost of wholesale goods and services has also peaked, as it rose a milder 0.5% in April vs the prior month. In March, wholesale prices had jumped 1.6% largely because of a surge in oil prices. The increase in wholesale prices over the past year, meanwhile, slowed to 11% from 11.5%, the government said Thursday.

So why the sudden recession fears? Such fears defy both logic and history. Serious recessions take a long time to manifest, as I also said recently.

It took two years under Chairman Greenspan to ring on a recession. The Fed raised its rates 16 times over that term after holding rates below the inflation rate for too long in early 2000, causing the Great Recession. The so-called stagflation wage-price spiral of the 1970s was 10-year period when energy prices soared. That took more years and multiple recessions before Fed Chair Volker brought down inflation by raising interest rates into the double digits.

No one wants that to happen now, of course. Even more important is the recovery from a lingering pandemic, and aiding Europeans in winning their war in Ukraine. Russia is in many ways a failed state with a steadily shrinking economy, a massive brain drain of its best and brightest, and a dictator who believes he is reviving a Czarist Empire from another century.

The world’s economies are still in rehabilitation, and the patient will require considerable longer-term care to bring it to a full recovery.

Harlan Green © 2022

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

 

What Stagflation?

 Financial FAQs

TradingEconomics

U.S. service sector activity that powers two-thirds of economic activity (above graph) is surging more than ever, according to the Institute of Supply Management non-manufacturing survey. It is growing per 58.3 percent of managers surveyed, with the index for employment and new orders even higher. New orders rose 4 points to 60.1 percent, and production activity also edged higher.

“In March, the Services PMI® registered 58.3 percent, a 1.8-percentage point increase compared to the February reading of 56.5 percent," said Anthony Neeves, Chair of the Institute for Supply Management^®. "The 12-month average is 62.3percent, which reflects consistently strong growth in the services sector. The March reading indicates the services sector grew for the 22nd consecutive month after two months of contraction and 122 months of growth before that. A reading above 50 percent indicates the services sector economy is generally expanding; below 50 percent indicates the services sector is generally contracting.”

So this doesn’t look like impending stagflation, the wage-price spiral that happened in the 1970s and pushed inflation to record highs, while growth came to a standstill.

Pundits and some banks that forecast a future wage-price spiral seem to have forgotten that it took consecutive Arab (OPEC) oil embargoes in the 1970s causing gasoline shortages and long lines at gas stations for almost a decade to make that happen.

Whereas the Ukraine war and its concomitant sanctions are less than two months old. Why should we even be worrying about prolonged inflation, and what the Fed might do to tame it, when we don’t know whether this war will last for months, or years, and what will be needed to win it?

Predictions of a looming recession are premature, so say the least. Both the service and manufacturing sectors are booming, while supply chains are struggling to catch up and replenish inventories.

This is while the jobs market is red hot with more returning to work. New U.S. jobless claims matched a 54-year low of 166,000 in early April, for instance — the second lowest reading in history— during a period of remarkably strong hiring and the lowest layoffs on record.

The ISM’s service sector employment index increased to 54% from 48.5%. Businesses got no relief from inflation, however. The prices-paid index moved up to 83.8% from 83.1%, just a tick below a record high.

What will help to tame the inflation tiger? More workers returning to work will increase production, replenishing inventories. And governments will be increasing their spending, as well, due to the Ukraine war. This will stimulate further production increases.

MarketWatch columnist Jeffry Bartash maintains what was called the “Great Resignation” is over, a time since the pandemic when workers were reluctant to return to work.

“To be sure, Americans have been saying “I quit” in record numbers,” said Bartash. “Almost 57 million people left jobs — many more than once — in the 14-month period from January 2021 to February 2022. That’s a 25% spike vs. a similar time span before the pandemic.”

The hiring wave began more than a year ago. The U.S. added 431,000 new jobs in March, the government said last week, extending a streak of large job gains going back to the start of 2021. The unemployment rate also sank to 3.6 percent last month — just a tick above a 53-year-low — from nearly 15 percent just two years ago.

“All of the hiring took place against the backdrop of high covid cases and the reluctance of millions of formerly employed people to return to the labor market. Hiring might have taken place even faster, economists say, if the pandemic had petered out and generous government unemployment benefits were ended sooner,” continued Bartash.

So maybe we can endure a bit more inflation if the red hot demand that’s causing it is bringing more people into the workforce and helping Ukraine to win its war?

Harlan Green © 2022

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