January Consumer Prices, Real Earnings and Weekly Jobless Claims

KEY DATA:  CPI: +0.6%; Over-Year: +7.5%; Ex-Food and Energy: +0.6%; Over-Year: +6%/ Real Earnings: +0.1%; Over-Year: -1.7%/ Claims: -16,000

IN A NUTSHELL: “If the Fed members think slow but steady will win the inflation race, they are living in a fairy tale.”

WHAT IT MEANS:  Another report, another clear sign that inflation is not going away easily. This time it is the Consumer Price Index, which surged again in January.  This was not a surprise, though the monthly increase was a touch higher than the forecasts.  I think economists cannot believe inflation is still running this hot, but we will adapt, eventually.  The January report was not very pretty.  Food and energy prices surged, but even excluding those categories, household prices rose sharply.  Gasoline and gas prices dropped, but those declines should be reversed in the February report.  Otherwise, prices were up across the board.  If you eat out, you know how much prices have risen already, and the increases are still coming.  Most distressingly, donut prices are surging once again, after having eased in December.  I did get my last box of Entenmann’s chocolate covered donuts at half price, though.  On a more serious note, the increase over-the-year was the highest since February 1982.  That was when Paul Volcker was unwinding his nuking of the economy.  That’s something to think about.

Workers may be benefitting greatly on paper from their huge wage increases, but when it comes to their purchasing power, they are losing ground.  The jump in consumer prices almost totally offset their wage gains in January.  Over the year, they lost a lot of ground.  And with hours worked declining, weekly wages plummeted.  They are down over 3% since January 2021.  That is not good news for the economy.

As for the labor market, it remains the same – tight as a drum.  New claims for unemployment compensation fell again last week and it looks like the surge we saw in January was just a blip in the data.  Backing that up was the Conference Board’s Help Wanted OnLine January report, that was released yesterday.  It inched down, but remained near record highs. 

IMPLICATIONS:Clearly, the Fed members believe that fairy tales can come true, that they can happen to them, because they are – young at heart?  Really?  I know, I am being harsh, but that is what I heard when I called the Fed a band of clueless inflation fighters for much of last year.  I believe the FOMC needs to make a statement at the March meeting.  Yes, I am being a broken record, which is an unfortunate tendency. However, the Fed members have been signaling that a 25-basis point hike is enough to show they are on top of things, and I don’t agree.  I understand that the Fed is an oil tanker that takes forever to change direction, but that means you must start sooner and act strongly to make the turn on time.  It seems like the members have abandoned the transitory verbiage but not accepted the concept that an alternative is lasting or enduring. Measures of inflation expectations have remained at or above 4% since last spring.  We saw similar periods where they stayed above 4% for six months or more in the late 1970s/early1980s, the late 1980s and in 2008.  Each time it took a recession, usually created by large Fed rate hikes, to rid the economy of those beliefs that future price increases will remain elevated.  The current Fed knows this history and doesn’t want to repeat it.  But starting off with a sharp rate hike doesn’t necessarily mean future rate hikes have to be just as large.  If it changes perceptions that the Fed is going to be consistently behind the curve to the Fed is getting out ahead of things, then the FOMC can back off on the size or increase the time between hikes.  Being the tortoise may have worked in an Aesop fable, but this is the real world.