The Corner

Monetary Policy

Inflation: A Better Time in the Transit(ory) Lounge?

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Headline inflation came out at 5.4 percent year-on-year in July, about where it had been expected, and at the same rate as the previous month, which had been the highest number since . . . August 2008. The monthly rate of increase was 0.5 percent. Core inflation (which excludes energy and food) was 4.3 percent, down slightly from June’s 4.5 percent. Looking at core inflation on a month-by-month basis, the rate was 0.3 percent, below expectations of 0.4 percent and well below June’s numbers (0.9 percent). The results represented the first deceleration since February. More favorable base effects helped, but one major reason for the decline was that the surge in used-car and used-truck prices, a phenomenon that owed a great deal, one way or another, to pandemic-related dislocation, eased off dramatically: They increased by 0.2 percent (month-on-month) in July, after rocketing by 10 percent in June. A plateau is not the same as a cliff, of course, but there are now signs (via Manheim) that prices are falling.

It also seems that other prices — airline tickets, for example — that had risen on the back of pent-up demand are beginning to cool off, a trend, it seems, that may now be reinforced by the Delta variant putting a crimp in people’s plans. On the other hand, the surge in home prices, which typically would take a number of quarters to show up in the CPI (as OER, essentially the rent people would have had to pay on owner-occupied housing) has not yet really made its presence felt. The interplay between house prices, a structural housing shortage, ultra-low mortgage rates, and inflation may well mean that this presence turns out to be very far from (to use the Fed’s favorite adjective) “transitory.” Shelter makes up about one-third of the CPI.

So, what now? Inflation is something that can feed on itself, and even if, well, food is excluded from core inflation, it won’t be excluded from the way that consumers look at the price environment.

The Washington Post:

The cost of many grocery items — including meats, poultry, eggs and dairy — also ticked higher again in July, according to the report. Groceries have been trending higher for well over a year, with the Bureau of Labor Statistics showing a 2.6 percent rise in the “food at home” category compared with last year.

Well over a year.

And it won’t help if real wages are under pressure.

The Wall Street Journal:

Inflation is eating into household spending power despite wage increases in some industries. Average hourly earnings of private-sector workers, adjusted for inflation, fell 0.1% in July from June on a seasonally adjusted basis, the Labor Department said. However, wages in the leisure and hospitality industry, where labor shortages are unusually acute, rose 0.4% from June, adjusting for inflation.

On the other hand (also from the Wall Street Journal):

Last Friday’s jobs report showed average hourly earnings have risen at a 5% annual rate over the past three months.

There’s a catch though:

That will lead many businesses to at least try to offset higher labor costs by charging higher prices.

The key question — to which I don’t, of course, have the answer — is how long people will be prepared to wait before they cease to think of more rapidly rising prices as “transitory” and start adjusting their behavior accordingly.

The Washington Post:

For the Fed and White House, price challenges are compounded by the fact that inflation can be driven by what people expect it will be in the future. For example, if businesses shift their plans for investment or consumers change their spending habits because they think prices for construction materials or hotel rooms will continue to soar, that behavior could drive prices up, too.

Michael Strain, director of economic policy studies at the right-leaning American Enterprise Institute, said it matters to households that “we’re on month five of this, and we might be in for another year of it.”

Strain adds:

“The Fed may be absolutely right to keep its zero interest rate policy. But I think the Fed has been too blasé, too serene, too dismissive of this potential risk.”

There is a limited amount that can be drawn from one month’s numbers, but these latest data provide some grounds for optimism that the pandemic effect on inflation may slowly be passing (for a relatively upbeat view on the prospects, take a look at this analysis by Matthew Klein), but that’s still far from a given.

Strain is right to be concerned that the Fed may be too relaxed about what might lie ahead for inflation. What’s more, given the way that the nation’s debt is ballooning, the central bank enjoys relatively little room for maneuver now —  and will have far less in the years to come. It is not too hard to see how the country could reach a point when a Volcker moment (when Paul Volcker became Fed chairman in August 1979, the Fed Funds rate stood at 10.5 percent or so: It peaked at around 20 percent less than two years later) is essential but impossible. Under the circumstances, the Fed would do well to err on the side of caution. On the brighter side, the sharp spike in Americans googling “inflation” appears to have reversed, so there’s that.

And then there’s the small matter of all that money that’s been created out of thin air . . .


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