According to the latest Federal Reserve survey of US consumers, most Americans expect inflation to moderate somewhat in the next few months. I hope they’re right, but I don’t see any evidence they are. Maybe, just maybe, US inflation peaked in March, as most consumers seem to think in the latest Fed survey of expectations, but I don’t see any evidence of that either.
Let’s quickly review the most recent data on US inflation and see what conclusions we might glean. The widely-followed Consumer Price Index soared to a 40-year high in March, showing the annual inflation rated spiked to 8.5% for the last 12 months. The CPI backed off just a little in April with an annual rate of 8.3%, but that is hardly compelling evidence inflation has peaked.
Consumer Price Index (Monthly % Change)
Source: US Labor Department
Some analysts believe it’s better to look at trends in wholesale prices which manufacturers pay each other for the materials they buy to produce their products. This data is not encouraging either. The Producer Price Index (PPI), our best indicator of wholesale prices, rose at an annual rate of 11.0% in April after soaring 11.5% in March, both the highest levels since the 1980s.
Producer Price Index (% Change)
Source: Labor Department – Red Line = Total Increase; Blue Line = Less Food & Energy
These wholesale price increases will undoubtably be passed along to consumers in the next 2-3 months, which is hardly an indication inflation has peaked. No one knows, of course, when inflation will peak, but the latest sharp increase in the PPI is not encouraging.
The economy, as you know, decelerated sharply in the 1Q with GDP falling to -1.4% (annual rate) after surging 5.7% in 2021, its strongest showing in decades, as we recovered from the COVID-19 recession. Most forecasters expect GDP growth to return to a 2-3% annual growth rate in the remainder of this year, but that remains to be seen.
There is no doubt rising prices are crimping consumers’ pocketbooks. While consumer spending remains robust, thanks to people saving some money during the coronavirus lockdowns, Americans are having to make some adjustments in where they spend their money.
Gas and groceries have been responsible for much of the inflation surge, with indexes tracking the two sectors up a respective 1.7% and 1.5% in April, according to the PPI data. On an annualized basis, those are huge increases. The national average price of a gallon of gasoline has now climbed above $4.50 and has risen to a new record high in each of the last nine days.
Auto prices, particularly for used vehicles, also have been a major inflation component. As you’ve no doubt noticed, the PPI index for used motor vehicles exploded by over 35% for the 12 months ended March – assuming you can find what you’re looking for. Inventory on most car dealer lots is a fraction of what it normally is.
The whole car buying experience has changed. In the past, we went to the dealership, found the car we wanted and negotiated down from the sticker price on the window. You usually ended-up several thousand dollars below the MSRP. Now it’s just the opposite at most dealerships – you typically negotiate up from the sticker price.
Due to the continued chip shortage, dealers have far fewer cars in inventory, and they can charge pretty much what they want. Automakers and dealerships don’t seem to have any idea when things will get back to normal – if ever. Americans are keeping their cars longer than ever, but this can only postpone demand for newer vehicles.
Bottom line: Car prices keep pushing inflation higher, and I don’t see this moderating anytime soon. This doesn’t mean inflation will continue trending higher, but it doesn’t suggest prices will come down significantly either.
The Fed is convinced it can get inflation under control by raising short-term interest rates. It hiked its Fed Funds rate by 50 basis points (0.5%) at its May 3-4 policy meeting earlier this month. The Fed has made it clear it intends to raise short-term rates by a similar amount at each of the remaining five policy meetings between now and yearend.
Federal Funds Rate (Percent)
Source: Federal Reserve; chart courtesy of MacroTrends.net
If it follows through, this will push the Fed Funds rate to the highest level since 2008, just before the financial crisis. The Fed hopes it can accomplish this without sending the economy into a recession. That, of course, remains to be seen.
The stock markets are not happy about any of this. We’re in the midst of what increasingly looks to be more than a “correction.” The S&P 500 Index is down 17.7% from the peak in January. The NASDAQ Index is down just over 27% from its recent highs.
Going forward, much depends on whether the economy goes into a recession or not. Most forecasters I read do not believe that’s the most likely outcome, but we all know they tend to be overly optimistic. So, time will tell.
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A recession alone is not enough to tame inflation. Look at the 1970s. It will take both a halt on excessive government spending, good tax policy, and an increase in the fed funds rate. And maybe the accompanying market decline (more to come, I’m sure) will also help to put a damper on growth. Once inflation gets its grip on the economy, it is a viscous cycle. The Fed, as usual, did nothing when they first saw evidence of this. Did nothing for a long time. We would be better off without them.
Not to mention the sabotage of this country by “Mr Global” as Catherine Austin Fitts states. I don’t think we’ll come out of this…more lockdown’s and authoritarian/fascist rule. The left has played their game to perfection.