KEY DATA: CPI: +0.8%; Over-Year: +6.8%; Ex-Food and Energy: +0.5%; Over-Year: +4.9%; Energy: +3.5%/ Real Hourly Earnings: -0.4%; Over-Year: -1.9%/ Sentiment: +3 points
IN A NUTSHELL: “When you can say that inflation is the highest in nearly forty years, you know things have gone haywire.”
WHAT IT MEANS: Another inflation report, another set of distressing numbers. The Consumer Price Index surged in November, led by another jump in energy costs. It looks like energy may have peaked, which is good. But even excluding energy, consumer costs rose sharply, both over-the-month (0.5%) and over-the-year (5.1%). So yes, we should see some deceleration in price increases, but it will not come quickly or sharply given the broad-based nature of inflation. The one thing saving consumers is that service costs, while rising solidly, are not soaring at the same pace as commodity prices. Since services comprise over sixty percent of consumption, that relative restraint is keeping things from getting totally out of hand
The high rate of inflation is devastating workers’ incomes. Despite solid gains in wages, real/inflation adjusted hourly wages fell in November and over-the-year are down sharply. Declining purchasing power doesn’t bode well for economic growth.
Normally, when inflation rises as much as it has, households get depressed. Well, they are unhappy, but they seem to be hanging in there. The University of Michigan’s Mid-December reading on consumer sentiment increased nicely. That said, the level is low and has varied around the current number for almost six months. Thus, it cannot be said the people are learning to live with inflation. Indeed, as the report noted “When directly asked whether inflation or unemployment was the more serious problem facing the nation, 76% selected inflation…” Fed Chair Powell, the people are speaking. Are you listening?
IMPLICATIONS:I really hope that transitory comes soon and lasts quite a while, as inflation is starting to become worrisome. I say “starting to become worrisome” because like most economists, I have assumed it would begin to decelerate and over the next year, get back to somewhere in the 2.5% to 3% range. The delayed deceleration is reinforcing my previously stated belief that the Fed’s 2% average target is likely going to go the way of the Fed’s view that the high rate of inflation was only “transitory”.The elevated monthly gains, even excluding energy, are hanging in longer than expected and that creates the risk that rising inflation expectations may not be easy to excise from the economy. Jerome Powell is not Paul Volcker, and the nuclear option (massive rate hikes) is not on the table, in the room, the building, the nation, the planet or the solar system. Indeed, given this is a largely supply driven inflationary period, barring a major slowdown in growth, which I don’t think the Fed wants to engineer, elevated inflation could be with us for an extended period. The Fed meets next Tuesday and Wednesday. Expect the statement to reflect growing concern about inflation, the willingness to accelerate the taper, and the likelihood that the Fed will begin raising rates soon afterward.