The Corner

The Economy

Inflation ‘Unchecked’?

July 19, 2021:

President Biden: There’s nobody suggesting there’s unchecked inflation on the way — no serious economist. . . . That’s totally different.

November 8, 2021 (via the Associated Press):

Inflation at the wholesale level rose 8.6% last month from a year earlier, matching September’s record annual gain and offering more evidence that inflationary pressures are not yet easing.

(h/t: Jim Geraghty)

November 10, 2021 (Phil Klein)

The staggering 6.2 percent rise in inflation in October not only represented the highest level in nearly 31 years . . .

Though inflation has been rising for months, in many of the previous reports, the spikes were driven primarily by rising prices for used cars. This time, the Bureau of Labor Statistics notes that, “the increase was broad-based, with increases in the indexes for energy, shelter, food, used cars and trucks, and new vehicles among the larger contributors.”

Energy, overall, rose 30 percent on an unadjusted twelve-month basis, with gasoline and fuel oil soaring nearly 50 percent.

The word “unchecked,” like the word “transitory,” may have to do a great deal of work in the near future.

And while nothing too much should be read into any one day’s move in the markets, it was interesting to read this in the Financial Times:

Investors unloaded Treasury securities across a range of maturities, including the 30-year “long bond”.

Yields on two-year Treasury notes, which are highly sensitive to interest rate expectations, rose by the most since market ructions during the height of the coronavirus crisis in March 2020. The yield increased 0.07 percentage points to 0.50 per cent, signalling a significant fall in price. Yields rise when a bond’s price declines.

The yield on the five-year note rose 0.11 percentage points to 1.19 per cent and the 10-year yield was up 0.1 percentage points to 1.55 per cent.

Longer-dated Treasuries, which provide a snapshot of investor expectations for economic growth and inflation further in future, initially saw a more measured sell-off. But their yields shot up after a lacklustre auction for new issues of 30-year bonds.

At midday on Wednesday the government sold $25bn of 30-year debt, but received weak demand from buyers. This was followed by an immediate sell-off in secondary markets, which pushed the yield on the long bond to a high of 1.96 per cent. Some of that move quickly reversed, though the yield remains 0.1 percentage points higher on the day at 1.92 per cent.

Looking at the absolute yields gives some sense of proportion, however. The numbers still seem (to me) extraordinarily low. They don’t reveal any real sense of panic. Far from it. While investors buy the long bond for any number of reasons (and holding to maturity is far from the only game in town), the fact that the U.S. can issue 30-year debt at a yield of under 2 percent seems (to me) remarkable.

In part (although only in part) such yields can be explained by the way that the price of money has been distorted by the Fed’s activities. That is an invitation to malinvestment in many, many areas, not least housing, a sector that is making its own contribution to inflation, as reflected in the rising cost of “shelter.”

And these ultralow yields ought to be a reminder of something else. The president’s choice of words was telling. Underpinning the claim that inflation is not “unchecked” are two assumptions. The first is straightforward enough. The facts are as Biden presents them, and inflation is indeed not “unchecked,” nor will it be. We’ll see. The second is subtler. It is the assumption that our current bout of inflation can be checked, an assumption that is not so soundly based as the White House might want us to think, an assumption that owes its origins to Fed chairman Paul Volcker’s success at the beginning of the 1980s, when he presided over a switch to a regime that (essentially — more details here) targeted bank reserves, a regime that saw the Fed Funds rate peak (three times) at 20 percent. Just imagine if the U.S. had to pay even half of that on the debt that it has outstanding now.

Meanwhile (via Bloomberg),

President Joe Biden said he’s directed his top economic aides to focus on reducing energy costs, which he blamed for accelerating U.S. inflation after a report showed the biggest surge in consumer prices in a generation.

Quite how “reducing energy costs” can be squared with Biden’s climate agenda is not easy for me to see.

But then I never was able to keep up with the clever strategy that underpinned the withdrawal from Afghanistan, either.


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