Where is inflation present throughout the economy?
Inflation Is Popping Up in the Strangest Places
The Federal Open Market Committee this coming week holds its first meeting since Fed Chairman Jerome Powell unveiled the central bank’s new operating strategy last month. The idea is to let inflation average around 2%, allowing temporary overshoots to make up for previous shortfalls, to promote employment growth. With unemployment still high while nearly 30 million Americans receive jobless benefits, you would think that inflation would be nowhere to be found. But you’d be wrong. The consumer-price index rose by a larger-than-expected 0.4% in August, the Bureau of Labor Statistics reported Friday. It followed 0.6% jumps in the two preceding months. The core CPI, which excludes food and energy costs, also topped forecasts, with a 0.4% rise last month after a 0.6% increase in July. On a year-over-year basis, the overall CPI was up 1.3% in August, versus 1.0% in July, while the core CPI increase was 1.7%, versus 1.6%.
The pandemic’s impact on the economy was supposed to suppress consumer demand and therefore prices. The big culprit in the latest month’s jump in the CPI was a record surge in used automobile prices of 5.4%, possibly as an indirect result of the pandemic. With the widely reported flight from cities, families need at least one car and maybe two in the suburbs. And with workers beginning to trickle back to their offices, many apparently prefer to drive rather than risk taking mass transit where social distancing is all but impossible. Whatever the cause, the core CPI rose at an annual rate of 5.1% since May, the fastest rate for a three-month period since March 1991, John Ryding and Conrad DeQuadros, economic advisors to Brean Capital, write in a client note. “Even if you believe that prices were properly measured and weighted within the CPI during the pandemic—we do not—clearly any disinflationary impact from Covid-19 was very short-lived,” they add.
In that regard, a recent National Bureau of Economic Research working paper by Alberto Cavallo of the Harvard Business School found significantly higher rates of overall and core CPI increases after taking into account changes in consumers’ spending during the pandemic. For instance, we ate a lot more food at home and spent a lot less on transportation and eating out. Anybody who has been to the supermarket can see what’s happened to prices there, which the official CPI understates.Notwithstanding these data, minutes from the last two FOMC meetings pointed to the supposed disinflationary effects from the pandemic, the Brean economists note. That is also the prevailing view in the markets. The market for Treasury inflation-protected securities shows expected inflation rolling over since the announcement of the Fed’s new policy framework in anticipation of a more relaxed inflation policy, Scott Anderson, chief economist of the Bank of the West, writes in a research note. That may reflect signs of waning growth after an initial rebound from the record 31.7% annual contraction in second-quarter GDP, as well as the lack of new fiscal stimulus.
As noted, the so-called skinny bill, with just $650 billion, died this past week. Since talks between the White House and House Speaker Nancy Pelosi broke down on Aug. 7, there have been no signs of distress from the financial markets, says James Lucier, Capital Alpha Partners’ Washington watcher. With the S&P 500 index setting not one but two record highs since then, “the sense of any urgency to pass a Covid relief bill is entirely lacking,” Lucier writes in a client note. The lack of a Phase 4 deal will mean year-on-year disposable personal income growth will slow to just 3% by year end from 9.5% in July, according to Jefferies economists Aneta Markowska and Thomas Simons. But that average includes a wide range of individuals, including 20 million unemployed who will experience a 60% income falloff without a deal beginning in October. This may deflate any building inflation pressures, while causing real pain for those losing benefits.