Yes, yes, cheap shot there in the headline. It would, of course, be unreasonable to expect that the Inflation Reduction Act would already be working its promised wonders. Then again, it would be lunacy to expect the Inflation Reduction Act to ever do what it says on the label, so there’s that.
According to the Penn Wharton Budget Model, a group of economists and data scientists at the University of Pennsylvania who analyze public policies to predict their economic and fiscal impacts, the effect of the IRA on inflation will be “statistically indistinguishable from zero.”
Nevertheless, given today’s inflation data, it’s perhaps a little unfortunate that the administration will be celebrating the Act later today in Washington, D.C.
So unfortunate that it would take a heart of stone not to laugh, however bitterly.
But back, via Reuters, to the numbers:
U.S. consumer prices unexpectedly rose in August and underlying inflation picked up amid rising costs for rents and healthcare, giving the Federal Reserve ammunition to deliver a third 75 basis points interest rate hike next Wednesday.
The surprisingly firm inflation readings reported by the Labor Department on Tuesday followed in the wake of recent data showing labor market resilience…
To include both “unexpectedly” and “surprisingly” in the text might suggest that Reuters has a message to deliver. But, to be fair, the number was worse than expected. As (at the time of writing) you can see by the market reaction.
CNBC:
Stocks fell sharply on Tuesday after a key August inflation report came in hotter than expected, hurting investor optimism for cooling prices and a less aggressive Federal Reserve.
The Dow Jones Industrial Average slid 861 points, or 2.7%. The S&P 500 dropped 3%, and the Nasdaq Composite sank 4%
Reuters:
A 10.6% decline in gasoline prices was offset by increases in rents, food and healthcare. Food prices rose 0.8%, with the cost of food consumed at home increasing 0.7%. Consumers also paid more for electricity and natural gas.
Apart from that, Mrs. Lincoln, how is the cost of living?
Economists polled by Reuters had forecast the CPI dipping 0.1%. In the 12 months through August, the CPI increased 8.3%. While that was a deceleration from July’s 8.5% rise, inflation is running way above the Fed’s 2% target.
Though annual CPI peaked at 9.1% in June, which was the biggest gain since November 1981, it has remained above 8% for six straight months. With only one more CPI report due before Election Day it is unlikely to give up that handle before Americans head to the polls.
Core inflation is the real gut punch, rising +0.6% in August, and it’s now up +6.3% over the year.
And core inflation is what the Fed looks at most closely.
In government debt markets, the yield on the 2-year US Treasury, which is more sensitive to policy expectations, surged to be up 0.16 percentage points at 3.73 per cent, having traded at 3.52 per cent before the release of the inflation data.
It’s worth reading the whole of Wolfers’s thread, also for a few signs of optimism. Consumer inflation expectations have fallen (probably thanks to falling gas prices), but that’s a lagging indicator (paradoxically). There are, notes Wolfers, no signs of a wage–price spiral. It also helps that supply chains are easing (I wonder what a freight-rail strike could mean for that).
Wolfers cites data showing that:
Core inflation has remained relatively constant as it has shifted from goods into services. But this is not benign. Team transitory was largely based on the view that a shock to goods prices would dissipate rather than spread.
In Wolfers’s view a 75bp rate hike is a lock-in. I’ve thought that’s more likely than not for a while. His slightly longer-term forecast:
I expect that over the next year or so inflation will come down to rates of two or three-point-something. It’ll become less of a concern for the general public (it’s hard to tell the difference between 2% and 3% inflation), but this will remain a central concern for the Fed.
Note that time frame (“next year or so”). Somewhat unscientifically, I can see inflation getting down to around 4 percent some time next year, which is where it was at the end of the Volcker era, but, as Volcker recognized (rightly), that was still too high (he also didn’t think much of a 2 percent target either, but that’s a discussion for another day).
At this point, if we do not have the 75bp hike next time around, I can see the markets taking that badly.
Still, at least we don’t have an administration that is spending like crazy, attacking the supply side, promoting greenflation and incentivizing massive malinvestment in green projects.
So there’s that.
Isn’t there?