Implications of Central Bank Rule Changes for Inflationary Rates in the Eurozone: The Rise of Energy and Food Prices in August
Inflation is much, much higher than pre-pandemic norm. Beneath those headline figures there are signs that the fight against steep price rises is not over, and that it is hard to eradicate elevated inflation in areas where it is hard to eradicate.
The Bureau of Economic Analysis said Friday the Personal Consumption Expenditures price index for August rose by 6.2% from a year ago, following a revised July reading of 6.4%. That was viewed as a driver behind the central bank’s decision to raise its benchmark rate by three-quarters of a percentage point for the third time in a row earlier this month.
The core inflation measure, which excludes the volatile categories of food and energy and is the number watched most closely by Fed policymakers, rose by 4.9% on a year-over-year basis in August, up from 4.7% in July. Core PCE surged by 0.6% for the month, a spike from July’s revised 0%.
The latest inflation data puts more pressure on Fed Chair Jerome Powell, who has vowed to make taming inflation the central bank’s “overarching focus.”
Energy prices, which rose at an annual rate of 40.8 percent in September, were again the main contributor to accelerating inflation in the eurozone, driven higher by the invasion of Ukraine by Russia, which previously supplied most of Europe’s natural gas. Food prices rose 11.8 percent in September, from 10.6 percent in August.
This week, the European Commission lowered its outlook for headline inflation as a result. The euro will bring about a 2.5% drop in inflation among 20 countries that use it in the next two years.
Estonia, Lithuania and Latvia all registered inflation rates above 22 percent. Beata Javorcik, a chief economist at the European Bank for Reconstruction and Development, said the increase in retail prices has been caused by the increase in wholesale energy prices. The Netherlands, at 17.1 percent in September, up from below 14 percent the previous month, and Slovakia, at 13.6 percent, were also in the unfortunate group of nations with higher-than-average rates.
After stripping out fuel and food, prices went up by a larger-than- expected 6.6 percent, and the core index rose by a better-than-forecast 1.9 percent to make up for the decline in the inflation reading.
Still, Fed officials and Wall Street analysts will be more closely watching the monthly figures, including what happened between August and September. While the annual numbers reflect what has happened cumulatively over the past 12 months, the monthly data give a clearer snapshot of how prices are evolving in real time.
First, and most importantly, inflation is trending downward. After peaking at 9.1% last June over its year-earlier level, the growth of the Consumer Price Index fell to 6.4% in December.
The Federal Reserve has already raised interest rates by 4.5 percentage points since last March in an effort to curb inflation. Fed policymakers have hinted at two more rate hikes, totaling 0.5 percentage points, in the coming months.
In its seven meetings starting in March, the central bank’s policymaking arm raised its benchmark interest rate by a cumulative 4.25 percentage points. The sharp hike in rates has started to filter through the economy, its effects showing up first in areas such as real estate, where mortgage rates were 6.27% this week, more than double the rate seen last year at this time, according to Freddie Mac data.
The food at home index, a proxy for grocery store prices, increased 0.7% in September from the month prior and a stunning 13% over the last year, according to new government data released Thursday.
The war in Ukranian caused the global grain market to fall and high transportation costs led to a 24.9% price hike for flour. There was a 19.8% increase in crop disease in California.
“The environment clearly is still very inflationary with a lot of supply chain challenges across the industry,” Pepsi
(PEP)CEO Ramon Laguarta said on an earnings call Wednesday. The company’s prices increased 17% annually.
Demand is high. Consumers may be able to cut back on certain items, but they still have to eat. Many people are still working from home, and consuming more food at home than they used to.
Walmart
(WMT) said recently that high levels of food inflation are impacting customers’ ability to purchase discretionary goods such as clothing and furniture.
Rising food and energy costs drove UK inflation back to a 40-year high in September, but it could be nearing a peak as cash-strapped households pull back on spending amid broader economic turmoil.
The United States’ annual inflation rate decreased for the seventh consecutive month in January. Inflation is running at a rate of 8.5% in Europe, after peaking in October at 10.6%. In the United Kingdom, which faces weaker economic prospects than its peers, the rate of price increases is also falling: In January, annual inflation dipped to 10.1% from a recent high of 11.1% this past fall.
The Fed has been correct to raise interest rates aggressively, because of the damage inflation has done to households and the economy. These rate hikes have been necessary to cool the economy, rein in inflation expectations, and thus alleviate the pressures pushing prices upward.
The central bank will consider the rising price pressures against the government reversing its position on unfunded tax cuts, which could ease inflation in the coming months.
Hunt said on Monday that the government wouldn’t universally cap prices until April. More targeted support after that could trigger a fresh spike in energy bills for many households, fanning inflation once again in the spring.
If the government changes it could push inflation up to 11.9% year-over-year in April, and stay higher over the course of the next eight years.
Rising prices come as wage growth continues to decline in Britain. The average pay fell over the course of two months, after inflation is taken into account. That followed a decline of 3% between April and June, which was the biggest drop in real wages since records began more than 20 years ago.
The UK government is trying to get a handle on its debt load by proposing cuts to public spending.
Responding to the latest inflation figures, Hunt said the government “will prioritize help for the most vulnerable while delivering wider economic stability and driving long-term growth that will help everyone.”
The September Oil Price Flux: Implications for the U.S. Economy and the Recovery from the September 1929 Pandemic and the Great Recession
The price increases in September were partially offset by a fall in the price of gasoline and airline tickets. The director of economic statistics said that the costs facing businesses are starting to rise more slowly, with crude oil prices falling in September.
Even countries with bigger buffers from the supply shock are taking steps to address energy prices. The Department of Energy is planning to release 15 million more barrels of oil from strategic reserves.
Policymakers’ initial instinct during the pandemic was economic preservation. To prevent Covid from setting off a deep recession, they enacted relief measures. The point of theStimulus packages is to raise spending and demand, keeping the economy afloat. But if supply can’t keep up with the new demand, prices will rise.
The impact of global disasters like the swine flu caused central banks to be slow to respond. Inflation went up without warning.
Both problems caused the U.S. to suffer. America spent among the most of any country in the world on economic relief, likely leading to too much demand and then worse inflation. The Federal Reserve didn’t realize that inflation was lasting until late last year as it viewed rising prices as a temporary phenomenon.
The US had the highest inflation rate in the world until Russia invaded Ukranian.
The U.S. could still be worse off if it wasn’t for the war. America’s higher core inflation rate is a sign of its deeper problems than the global events that are driving up food and energy costs. The labor market in particular remains hot, with an unusually high number of job openings for each unemployed worker. The Fed is attempting to address these problems without causing a deep recession.
It is another sign of the high inflation that politicians and policymakers are facing. That is encouraging central bankers to go for steeper increases in interest rates, in an effort to send a firm message that they will get inflation back down and won’t let rapid price increases become entrenched in the economy.
The UK, US, and EU have recent inflation figures that indicate that the worst is over, and that some respite could be on the way.
Gas prices went up to a record high of just over $5 a gallon this summer, but rebounded to last year’s levels. For perspective, a gallon of regular has fallen by almost 50 cents in just a month, making it about $10 cheaper to fill up an average SUV today than a month ago.
Adobe stated that computers and electronics saw the largest year-over-year price cuts since 2014) when demand accelerated in November, due to falling prices. Toy prices fell 7.7% year over year and sporting goods prices dropped 5.7%.
Retailers awash with excess inventory are expected to keep marking down goods into the end of the year, as consumers shift from buying couches and clothes to spending on travel and experiences — where prices are not coming down for now.
The prices of a number of goods seem to be stabilizing as food and energy prices are notoriously volatile. The used car prices fell between October and November.
“The economy is moving in the right direction from the Federal Reserve’s perspective at the end of 2022, but not quickly enough,” Gus Faucher, chief economist for PNC Financial Services, said in a statement. “Higher interest rates are weighing on consumer spending, particularly for durable goods, and inflation is slowing.”
The Federal Reserve and economists are keeping a closer eye on prices for services. The price of buying car insurance, going to the movies or a concert and getting a haircut all climbed in January, both month-over-month and on an annual basis. That’s concerning, given the huge role services play in the US economy.
Finally, though the Fed has repeatedly signaled its concern that tight labor markets are boosting wage growth above levels consistent with its 2% inflation target, the risk of a wage-price spiral, where rising wages lead to rising prices, which in turn spur further wage demands, seems low.
That is where Fed policy could come in. Companies can only charge more if their customers are able — and willing — to pay more. The Fed can stop that chain reaction by lifting interest rates to slow demand.
Consumer prices last month were 6.4% higher than a year ago, according to a report from the Labor Department Tuesday. That’s the lowest annual inflation reading in nearly a decade.
The inflation figures for Tuesday were released by the Labor Department just as the Federal Reserve prepared to raise interest rates for the seventh time in nine months.
The Rise and Fall of the California Real Estate Market: Inflation, Housing Costs, and Unionization in the First Three Months of the Big Crunch
During October and November, the price of gasoline fell 2%, and the price of gas fell to less than a year ago.
A wholesale box of romaine lettuce that typically sells for $25 to $30 on the east coast is costing up to $100, as a result of growing problems in California and high transportation costs.
An insect-borne virus curbed lettuce production in the Salinas Valley this fall. The diesel fuel used to truck vegetables still costs more than $5 a gallon, despite the recent fall in gasoline prices.
The average cost of a single- family home in April was more than 14 percent higher than a year earlier, according to CoreLogic. The increase had dropped to 10% by September due to softer demand.
“People are now, as a result of high rent, doubling up again, so we’re seeing an increase in the number of people moving in with roommates,” said CoreLogic economist Selma Hepp.
Rents are reflected only gradually in the official inflation data, so the slowdown in housing costs is not yet fully evident in the consumer price index.
The Fed chairman is less confident about the price of services, which includes everything from restaurant meals to haircuts and which is largely driven by the cost of labor.
Breakfast – the most important meal of the day (supposedly) – has gotten quite expensive. Eggs were the inflation high-flyers because of the bird-flu outbreak. Lower dairy production pushed up butter and milk prices. bread prices went up due to the war in Ukraine. The bacon and avocados are giving us some much needed rest. So is beef. Do you know what to eat for dinner and breakfast?
This was the comeback year after the two previous ones. Movie theaters and concert venues filled up. Big demand plus hiring difficulties and higher food costs pushed up menu prices. Meanwhile, after massive supply-chain backlogs of home electronics, stores were finally overstocked – just when people kind of didn’t need any more, giving us some of the biggest discounts around.
The raises were quickly eaten by inflation. A pandemic-fueled unionization wave continued, though it began to slow. At least that’s the most optimistic explanation for why productivity took a hit when workers settled in to new positions after quitting jobs.
The Best Year of the US Economy in 2022: An Ocean Liner for the Rest of the Biggest Stock Market in the 20th Century?
Ahoy savers! When it comes to fuel and maintenance, cars, hotels, and planes got more expensive, but haven’t you considered an ocean liner? It may not take you many places in the U.S., but at least the CDC is sort of on board now?
It was a brutal period for the stock market, with roughly one-fifth of the value of the S&P 500 vanishing and the Nasdaq dropping by more than one-third. All three major US markets suffered their worst years — by far — since 2008.
Seen this way, 2022 wasn’t a terrible year overall. The economy grew, supply chain pressures eased and fewer people are unemployed. Things are looking pretty good if you don’t need to buy anything or borrow money.
The November Fed Inflationary Results: A Snapshot of an Economic Transition in the 2022-2021 Era, as Derived from the Most Recent Data
Calculations rely on the most recent data. Most compared November 2022 to November 2021. Avocado prices are from December. The data is from October. The stock prices and other markets data are from a year ago. The U.S. dollar is used as a basis for the computation of what is known as the peer to peer computing system, or P2P. The dollar is measured against a basket of currencies.
The Bureau of Labor Statistics said that the latest inflation data, not adjusted for seasonal swings, showed price hikes have slowed to 7.1% for the year, after hitting a peak of 9.1% in June.
Friday’s report also showed that spending continued to rise in November, but at a much slower pace than in previous months. In November, the spending went up by 0.1 as compared to the previous month. Personal income increased by 0.4% in November, down from 0.7% in October.
The November PCE report, the last major inflation gauge released in 2022, provided a snapshot of an economy in transition. The Fed has raised the interest rate several times to rein in the highest inflation since the early 1980s.
Inflation within the services sector hasn’t dropped as quickly as expected. Friday’s PCE report showed the services index posted a monthly increase of 0.4% – unchanged from October’s rate – and a year-over-year increase of more than 11%, Faucher noted.
While much of the services inflation is due to housing costs, which are rapidly reversing, the Fed is concerned that strong wage growth could fuel persistent increases in services prices and overall inflation, he added.
“The Federal Open Market Committee will continue to increase the fed funds rate in early 2023 until it becomes more apparent that the job market is cooling, and wage growth and services inflation are slowing to more sustainable paces,” he added.
Retail Order Decline in the Light of the December 1st Anomalous Double-Centrifugal Flare and Pandemic
In November, new orders for manufactured goods plummeted, the biggest monthly decline since the beginning of the Pandemic.
Transportation equipment, specifically new orders for non-defense aircraft and parts, drove the decline, according to the report. Excluding transportation, new orders increase 0.2%.
“Core durable goods orders slowed but did not contract, reflecting growing unease about the economy,” Diane Swonk, chief economist for KPMG, tweeted Friday after the report’s release. The prelim reading for December suggests manufacturing activity will contract further in the year end. The manufacturing sector is expected to experience a cold winter.
The final December reading for the index of consumer sentiment came in at 59.7 in December, up slightly from a preliminary measurement of 59.1 and November’s final reading of 56.8, according to data from the university’s Surveys of Consumers.
The director of the surveys of consumers said consumers welcomed the recent easing of inflation. “While sentiment appears to have turned a corner from its all-time low from June, consumers have reserved judgment about whether the trends will continue.”
She added: “Their outlook for the economy may have improved, but it remains relatively weak. There is a need for continued strength in incomes and labor markets in the quarters ahead to sustain robust consumer spending.
Earlier this week, the Conference Board’s consumer confidence index – another measure of how consumers are feeling about the economy – landed at its highest measurement since April 2022.
The Return of Consumer Demand After the COVID-19 Flu: Inflation, Consumer Confidence, and a New Year of Low-Cost Air Travel
In the year through November, the prices of several major electronics got cheaper.
Earlier in the year, chains like Best Buy and Walmart stocked up on merchandise, preparing for supply chain shortages and what they projected to be robust consumer demand. Their plans were derailed by inflation and poor consumer confidence.
After falling to an all time low in 2020, demand for air travel roared back this year. Plane ticket prices went up 39% yearly in the year through November.
In March, Delta president Glen Hauenstein called the spike in demand “unprecedented,” adding “I have never seen … demand turn on so quickly as it has after Omicron,” the Covid-19 variant that caused cases to spike last winter.
Travelers returned in force two years after the outbreak of the H1N1 flu, and many airlines had record revenue because of it in April, May and June.
Margarine got 47.4% pricier because of price swings in the vegetable oil market caused largely by the war in Ukraine, while butter got 27% more expensive after a contraction in the global milk supply.
Overall, grocery prices jumped 12% in the period, with many consumers accepting the higher prices as thriftier alternatives to restaurant meals, which also grew more expensive, though at a slower clip. The cost of food away from home rose 8.5% in the year 2022, with many restaurants raising menu prices in order to make up for higher input costs.
The Fed is Still Hunting: Are We Close to the End of the Cold War? Comment on Mark Zeddi and Steven Kamin
Hiring remains surprisingly resilient. The unemployment rate plummeted to 3.7% in November, down from 15% in the spring of 2020, as the economy added 263,000 jobs.
New numbers published last week show first-time applications for unemployment benefits edged up to 225,000. That is still not very high, but it is close to where it was a year ago before the recession began.
Mark Zandi of Moody’s added to CNN that he was optimistic that the economy could avoid a recession. It is unlikely that consumers will stop buying and the economy will go into a downturn without mass layoffs.
The main risk to the economy is not that the Fed sticks to its guns, but that it keeps rates close to current levels. Indeed, keeping rates elevated could heighten the risk of recession, but it likely wouldn’t be a very sharp or prolonged downturn. The biggest risk is if inflation stops declining. It would require a lot more monetary tightening to get it under control, and could have serious ramifications for the US economy and financial markets.
It makes sense to slow the pace of monetary growth in order to assess effects on inflation and the economy, which is precisely what the Fed has been doing.
Editor’s Note: Steven Kamin is a senior fellow at the American Enterprise Institute (AEI), where he studies international macroeconomic and financial issues. He served as director of the international finance division of the Federal Reserve from 2011 to 2020. The author of the commentary has his own opinions. CNN has more opinion on it.
Are Inflation Expected to Fail? The First Two Years of the Fed’s Decreasing Economy Revisited: Why Do We Need More Rates?
A second reason the Fed should be slowing its rate hikes is that the actual level of the interest rates needed to slow inflation is unknown. The inflationary surge that took place in 2021, and the fact that the models the Fed uses to determine how high to raise rates, are not very good, must be taken with a grain of salt.
There are measures of inflation expectations derived from financial markets and household surveys, but they have gone down since the recession. Perhaps more importantly, since the beginning of the pandemic, wages have barely kept up with rising prices, whereas labor productivity has risen about 4%.
In other words, workers have received no compensation for increases in productivity. The consequence, as acknowledged by Fed Vice Chair Lael Brainard, is that “the labor share of income has declined over the past two years and appears to be at or below pre-pandemic levels, while corporate profits as a share of GDP remain near postwar highs.” This suggests that, going forward, wages may rise faster than prices as workers regain their share of corporate income. But that should not force firms into additional price increases, and therefore shouldn’t impede the Fed’s ability to reduce inflation, since firms should be able to absorb those wage hikes by reducing profit margins rather than increasing prices.
“There’s been an expectation that it will go away quickly and painlessly, and I don’t think that’s at all guaranteed,” Federal Reserve chairman Jerome Powell said last week. It will take some time, and we will have to do more rate increases and see if we’ve done enough, according to the base case for me.
Gas prices fell for the first two weeks of February but the American Association ofMotorists warns that drivers can’t expect gas prices to fall in the near future.
“We are entering the higher-priced spring and summer driving season, and so drivers should brace for that,” said Devin Gladden of AAA. “It will likely be a volatile year given how much uncertainty remains around the economy.”
The price of used cars fell 8.8% last year and another 1% in January, which acted as a brake on inflation. The wholesale market is showing that used car prices could rise in the coming months.
“The bottom line is inflation is still a problem,” said Torsten Slok, chief economist at Apollo Global Management. He said that his analyses showed that the price rises could be persistent.
“Sticky-Price CPI” for January held at 6.7% year-over-year, its highest level since 1982, even as “Flexible-Price CPI,” which tracks items including food and gas, has pulled back sharply.
Two data points arrived on wednesday and thursday, raising investor fears about inflation. Retail sales increased by 3% in January, the largest increase in almost two years. That’s a problem, given that getting Americans to spend less is crucial to the Fed’s anti-inflation campaign.
“We’re still in that really uncertain zone,” May said. “We know inflation will end the year lower than it is now and, in all honesty, quite lower, but the speed of the fall will depend on a lot of factors that are quite hard to predict.”