November Producer Prices and Small Business Optimism

KEY DATA:  PPI: +0.8%; Over-Year: +9.6%; Goods Ex-Food and Energy: +0.8%; Services: +0.7%; Over-Year: +7.1%/ NFIB Optimism: +0.2 Points

IN A NUTSHELL: “Inflation comes, inflation goes, but maybe not as quickly as anyone, especially the Fed, would like.”

WHAT IT MEANS:  Inflation will subside, and it is likely to be transitory over the medium term, but so far, it is not showing signs of moderating. In November, producer prices spiked again and the year-over-year gain for the top-line measure is nearing double-digits.  Each month we keep saying it will come down, but it just doesn’t seem to be doing that.  And the increases are everywhere, in both goods and services, even when you remove volatile food and energy.  About the only segment where we saw any easing of costs was government related products.  Basically, the ability and willingness to raise prices has spread across the entire economy and while it may not become permanently embedded, it is getting harder to tamp down the inflationary pressures.

Small businesses are not a happy bunch.  Yes, the National Federation of Independent Businesses’ Overall Index rose a touch in November, but the details were not very good.  Expectations of the future are about as low as they get, as firms cannot find workers and are raising wages to try to retain or attract them.  The compensation index hit a forty-eight year record high.  This is not a sector that normally has much pricing power, so the added costs are raising real worries.     

IMPLICATIONS:  The Fed is meeting today and tomorrow, and today’s numbers are stoking the fire under the members.  How they handle the final transition from transitory to worrisome will be interesting, but expect Chair Powell to defend the Fed’s stand tomorrow at his press conference, while also making it clear the monetary authorities actually know the data and understand what is happening.  That is, they really are not clueless.  And the fact is, the Fed members do understand the situation, but they trapped themselves when they used the term “transitory”, thinking it was bland enough to survive the period of time it would take to ease the supply chain problems – however long that would be.  Unfortunately, like most economists, they didn’t expect this high a level of inflation for this long.  To show that they central bank is not going to fall further behind the curve, look for the FOMC to announce that the tapering process will be accelerated.  At least that is what 99.44% of all economists think will happen.  I am one of them.  Unfortunately, the supply chain will not get untangled because the Fed reduces its purchases of assets more quickly.  And inflation will not slow much with one or two rate hikes.  The Fed is not particularly well suited to deal with supply-related economic issues and that is what we have.  But it can show that it intends to do something, even if that something may not materially change conditions, unless the economy slows dramatically.  The next few months should be very interesting.  Without a clear deceleration in inflation, the Fed could be faced with a major dilemma: It needs to slow demand, but if it does so, the political impacts could be massive come next November.  Politics should never enter into the Fed’s thinking or actions, but in this world, nothing is apolitical anymore.  And Jerome Powell wants to be Fed Chair for another four years. What is he thinking?

November Consumer Prices and Real Earnings, and Mid-December Consumer Sentiment

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.

November Employment Report and Non-Manufacturing Activity

KEY DATA:  Payrolls: +210,000; Private: +235,000; Retail: -20,000; Revisions: +82,000/ Unemployment Rate: 4.2% (down from 4.6%); Wages: +0.3%; Over-Year: +4.8%/ ISM (NonMan.): +2.4 points; New Orders: 0%

IN A NUTSHELL: “In this labor shortage environment, it is unrealistic to expect hiring in the half-million range every month, so don’t look at this report as being disappointing.”

WHAT IT MEANS:  Is the job market losing steam?  Absolutely not.  Yes, the number of people added to the payrolls in November was less than expected.  But it really should not have been a major surprise that hiring underperformed because there are labor shortages across the economy.  Look at the weakest sectors.  Retail cut employment.  Who wants to work in retail these days?  Health care hiring was soft.  Anyone know of an unemployed nurse?  Education is having a tough time finding workers, so why should we expect hiring to be strong?  And let’s not forget that these data are volatile.  They bounce around like crazy.  Yet the private sector added an average of 429,000 workers over the past three months.  That is awesome.  Revisions to the September and October added an additional 82,000 workers.  That usually means small and mid-sized firm are adding more workers than the models project, as their data come in later.  In other words, on the hiring front, conditions are still really good.

As for the unemployment situation, the sharp decline in the rate came despite a solid rise in the labor force and an increase in the participation rate.  That shows that demand is robust.  And workers are benefitting, as wages rose, though somewhat less than they had been. 

The Institute for Supply Management released its report on the nonmanufacturing sector and activity and hiring improved solidly in November.  Orders didn’t accelerate, though they remained at a strong pace.  The cost of inputs continued to weigh on firms, as no industry reported a decline in prices paid and fewer than one percent of the respondents said their costs fell.  Overall, the nation’s supply managers are saying both the manufacturing and nonmanufacturing portions of the economy are in very good shape. 

IMPLICATIONS:While worker demand is strong, labor supply is tight, a combination that economists seem to forget when they make up their monthly guesses of job growth.  This month was no different.  Forecasts were for 600,000 or more jobs to be added, which would have been nice.  But it would likely have been unrealistic.  Indeed, I believe the three-month average of over 400,000 is unsustainable.  Job gains in the 200,000 to 300,000 look more likely, and that pace should slow further as we move through 2022.  That doesn’t mean the economy will be weakening.  It’s just that there are not a lot of workers sitting around waiting for the perfect job offer.  Yes, the participation rate is below where it was before the pandemic hit, but that was almost two years ago.  The rate had peaked in March 2000 and trended steadily downward for nearly twenty years.  The sustained expansion after the Great Recession scraped the barrel clean and there was a rise in the rate for a few years.  But most labor market experts had predicted that the participation rate would stabilize or fall further, as boomer retirement rates accelerated.  So, we really are not that below where we might have been if the pandemic didn’t hit.  In other words, there is not a reserve army of the unemployed waiting for the right time to surge into the market.  That is the constraining factor, and the strong job increases we have seen are the result of technology being such that the job market friction has been reduced both in terms of information as well as location.  What is left is the skill mismatch, which cannot easily be resolved and that will keep job growth limited, as we are likely at full employment already.  The implication is that we should start setting our targets to more realistic levels and while we will get some really good job numbers over the next six to twelve months, we will likely trend back to a sustainable, full employment level of somewhere between 175,000 and 225,000 per month.

November Consumer Confidence, Small Business Employment and September Housing Prices

KEY DATA:  Confidence: -2.1 points/ Small Business Hiring (+0.3%); Over-Year: +6.8%/ Home Prices: +1%; Over-Year +19.5%

IN A NUTSHELL: “Consumers are getting rattled by rising prices and the Omicron variant is not going to help going forward.”

WHAT IT MEANS:  We know people have money – income gains have been robust – but at what pace will they spend it?  Consumer spending may hinge on consumer sentiment, and right now that is a little shaky.  The Conference Board reported that its Consumer Confidence Index fell in November.  After rebounding sharpy with the reopening of the economy, the reality of price increases and the continued presence of Covid have sapped confidence.  Views of current and future conditions faded, as job and income prospects declined.  The level of all the indices remains well below where they were pre-pandemic.  Hopefully, the Omicron variant will not turn out to be a major game-changer, as people already have enough to worry about.

Small businesses continue to hire.  The Paychex/HIS Markit Small Business increased again in November, though at a slower pace than October.  Still, the gain over the year is robust, and the 4.1% wage increase over the is strong, though not excessively so given the labor shortages.

Home prices remain out of control.  Yes, the Case-Shiller National Index rose more “moderately” in September, if you can call 1% moderate.  But the year-over-year increase did decelerate.  Of course, 19.5% is not much of a deceleration from the 19.8% rise posted in August.  I guess we can be happy about little things.

IMPLICATIONS:Consumers have been spending, but it doesn’t appear if they are particularly exuberant about things. Initial reports indicate that Black Friday cyber sales may have dropped over the year for the first time, though in-store sales look like they picked up.  That said, the availability of vaccines means there is little sense in comparing the last two years.  It also looks like the idea that Black Friday is the key day is also anachronistic.  Sales start early in the month, if not sooner, and accelerate.  Consumers have also recognized that you can sometimes save money by purchasing items before or after the Thanksgiving extended weekend.  So, while it is fun to make all these comparisons, it is not very enlightening.  We need to look at the entire shopping season and that looks like it will be up massively.  In addition, once vehicle makers can become vehicle builders again, vehicle sales should pick up.  Fourth quarter consumption should be really good.  But given the job and income growth, as well as the federal government’s continued largesse, it should be great.  Confidence will determine if that turns out to be the case.  I suspect we will not get the massive surge we should be seeing.  With firms announcing they will be raising prices next year and with Omicron a potential issue for at least for a few more weeks, we need to be a little cautious about the economic outlook. 

October Housing Starts and Permits

KEY DATA:  Starts: -0.7%; 1-Family: -3.9%; Multi-Family: +7.1%/ Permits: +4%; 1-Fmaily: +2.7%; Multi-Family: +6.6%

IN A NUTSHELL: “Despite some recent disappointing construction numbers, the rise in permit requests points to better home building days ahead.”

WHAT IT MEANS: The housing market remains strong, but we are not seeing that in the construction data.  Housing starts disappointed in October, declining for the second consecutive month.  Single-family activity accounted for the entire decline as construction of multi-family units increased solidly.  The fall-off in building activity was across most of the country with only the Midwest posting a gain.  But there wasn’t only bad news in this report.  Building permit requests for both single and multi-family dwellings rose in October.   The number of permits has been running ahead of construction significantly this year and that is showing up in a sharp rise in the number of homes permitted but not started.  Since builders don’t like to shell out money for permits they might not use, it looks like the growing backlog of permits will lead to a sharp increase in construction sometime over the next few months.    

IMPLICATIONS: Builders are complaining about the availability and cost of construction supplies and that is likely the major hold up when it comes to home construction.  Yesterday we saw a large pop in the National Home Builders Index, with traffic and current sales rising sharply.  That is a sign that the market remains quite firm.  The big issue is not buyers, but the ability to meet the demand.  Whether it is materials or labor, it is hard for developers to ramp up construction activity.  When that bottleneck will break, though, is unclear, but with the supply of existing homes largely nonexistent, builders have a chance to fill in the gaps and I am sure they would love to do that.  Indeed, once all the goods that are in floating warehouses start being distributed more efficiently, look for growth to accelerate.  The supply chain issues are creating a demand bubble that could support solid, but not necessarily robust economic growth for an extended period.  That is the silver lining in the bottleneck/high inflation dark cloud. 

October Retail Sales, Industrial Production and Import and Export Prices

KEY DATA:  Retail Sales: +1.7%; Ex-Gasoline: +1.5%/ IP: +1.6%; Manufacturing: +1.2/ Import Prices: +1.2%; NonFuel: +0.4%; Exports: +1.5%; Farm: +1%

IN A NUTSHELL: “It appears that the summer moderation in growth may have been the pause that refreshes as consumers and businesses are spending and producing like crazy.”

WHAT IT MEANS:  Shop ‘till you drop, or maybe run out of money.  That seems to be the mind set of consumers these days.  Retail sales soared and while rising prices likely will take a major bite out of the real/inflation-adjusted gain in spending, the increase will still be quite solid.  The biggest increase was not even in gasoline – Internet spending edged that out.  But purchases of electronics and appliances, as well as building materials soared as well.  People went back into department stores and despite the lack of inventory, picked up a lot of new vehicles.  Purchases of clothing dropped, but I suspect that was due to price declines.  As for restaurants, sales were flat.  The reopening process is largely over and now the restraint is a lack of workers.

Meanwhile, factories are doing their best to keep up with the strong demand.  Manufacturing output rose sharply in October, led by a surge in the production of consumer goods and materials.  Despite the chip shortage, vehicle assemblies picked up sharply.  They are still low, but at least more new vehicles are coming off the assembly lines.  Even excluding the added vehicle production, output accelerated.  After four consecutive months of production cutbacks, the petroleum and coal sector finally woke up and increased output. I guess prices are high enough for them.   

As for inflation, it was another bad month for the Fed’s “inflation is transitory” story.  Import prices jumped again, though the increase was more restrained when the energy factor was removed.  But the details were not pleasant.  The costs of imported food, industrial supplies and vehicles all increased significantly.  There was some good news, though.  Imported consumer goods prices, excluding vehicles, rose modestly.  Capital goods import costs were flat.  We are hearing that the rising cost of goods is driving the surge in inflation, but when it comes to imported consumer products, that is just not the case.  Over the year, the increase was below 2%

IMPLICATIONS – INFLATION: The economy has thrown off whatever lethargy it might have had in the summer, and it is growing quite strongly.  The truth is, growth didn’t really soften, it just eased back.  That is a very normal pattern.  As for inflation, the argument that it is transitory cannot be dismissed, as long as you define the length of time of a transitory process.  Chair Powell and his band of clueless inflation fighters assumed earlier this year that the bottlenecks at the ports and transshipment points would dissipate steadily and largely be gone by the end of this year.  It appears that they were off by at least one year.  As of now, there are indications that it could take all of 2022 to clear up the backlogs and some residual problems could remain into 2023.  So, if transitory is a couple of years, then Mr. Powell may ultimately get it right.  Sarcasm aside, it wasn’t clear how long the bottlenecks would last.  But now that we have some indication of the length of time inflation could remain well above the target, the Fed will have to deal with impacts of an extended period of elevated inflation.Short-term inflation pressures become problems when they get imbedded in expectations.  I have raised this issue before, and I will keep doing so. That seems to be happening and the longer that transitory lasts, the greater the likelihood that inflation expectations will have increased to the point where rates will reflect the rise for an extended period.  That is the real, longer-term issue the Fed could be facing.  Unfortunately, there is little that can be done to quickly resolve the inflation pressures.  The Fed could try pulling a Volcker and nuking the economy so demand falls sharply and matches the bottleneck-constrained demand.  I doubt that is in the cards.As for government action, the problem is the supply chain. Unless we want the military to start unloading ships, transporting goods to warehouses, unloading the trucks at the warehouses, stocking the goods, reloading the goods on trucks, and finally delivering them to stores or consumers, we are stuck with the private sector trying to solve the problem.  Inflation will diminish, but it might be a slow process and during the process, damage to the economy could be done.

3rd Quarter GDP, September Pending Home Sales and Weekly Jobless Claims

KEY DATA:  GDP: +2%; Durable Goods Consumption: -26.2%; Consumer Inflation: +5.3%; Ex-Food and Energy: +4.5%/ Pending Sales: -2.3%/ Claims: -10,000

IN A NUTSHELL: “If you don’t build it, they cannot buy it, so it cannot be argued that the slower summer growth rate reflects a weakening economy.”

WHAT IT MEANS:  Economic growth took a hit in the third quarter, as GDP expanded by what would normally be called trend growth.  But when you have had four consecutive quarters of 4.5% or more growth, 2% looks tepid.  The details, though, correctly describe the situation.  The biggest problem was a massive drop in vehicle purchases, which took 2.4 percentage points out of growth.  We knew that had happened and why: There was little inventory to buy.  The demand is there, the supply isn’t. That is not a sign of weakness.  There was a major widening in the trade deficit, which was mostly due to a rise in imported services. Goods imports were still constrained by the port backups.  Goods exports declined, possibly for the same reason.  On the business side, investment rose modestly, while housing construction declined, slowing growth.  As for the government, while state and local governments spent like crazy, the federal government didn’t, with the result being largely a wash.  The one biggest addition to growth was a massive rebuilding of inventories.  That was needed given the huge drawdowns we saw in the previous two quarters.  Finally, the numbers on inflation were as ugly as expected, with or without food and energy included. 

Housing sales have been restrained by a lack of supply, but that could be changing.  The National Association of Realtors reported that pending home sales declined, in September, though that is not as troubling as it might seem. There was a huge pop in the index in August and the current level is high.  The trend over the past two months is up sharply from the February through July numbers, so it would not be surprising to see closings rise over the next few months.

New unemployment claims fell again last week.  The level may not be near the historic lows we saw before the pandemic hit, but they are pretty low on an historical basis.  Given the massive number of job openings, look for claims to continue declining for some time.  And look for the labor market to remain drum tight.    

IMPLICATIONS:  Without perspective, the data provide little information.  When it comes to analyzing the daily economic reports, that has been my overarching philosophy.  If you put the GDP numbers into perspective, it is clear the moderation in the headline growth number does not reflect a weakening economy.  The massive decline in durable goods spending was basically the result of a lack of vehicles on the lots.  And that was largely due to a problem with the supply of microchips which has restrained production.  Demand remains strong, but there is little to purchase.  That is slowly changing, so expect consumer spending to be a lot better in the current quarter.  A key sign of that happening is the massive spending on services. People are buying things for themselves, and they will back it up with big-ticket purchases once there are items to spend it on. So, look for a rebound in growth in the fourth quarter.  How big a jump is unclear as it is hard to know how fast production can expand given the continuing supply chain snafus.  The backlogs at the ports just keeps growing.  Pent-up demand continues to build, and it will likely power solid growth at least through the first half of next year.  I suspect that is how the Fed’s will view things when the FOMC meets next Tuesday and Wednesday.  Today’s GDP report should not stay the Fed from completing its appointed round of asset purchase tapering. 

September Existing Home Sales and Leading Indicators and October Philadelphia Fed Manufacturing Index

KEY DATA:  Sales: +7%; Over-Year: -2.3%; Prices (Over-Year): 13.3%/ LEI: +0.2%/ Phila. Fed (Manufacturing): -6.9 points; Orders: +14.9 points

IN A NUTSHELL: “There may not be a lot of homes for sale, but those that are on the market are getting purchased quickly and at high prices.”

WHAT IT MEANS: The housing market remains in good shape, even if the insanity of last year is fading.  The National Association of Realtors reported that existing home demand rebounded sharply in September, with gains spread fairly evenly across the entire nation.  The sales pace was the highest since January, which given the lack of inventory, is amazing.  Median prices have receded from the record set in June, but they are still up double-digits over the year. 

That growth is slowing is not a surprise and the moderation should continue.  The Conference Board’s Leading Economic Index rose modestly in September, after having surged in July and August.  So yes, conditions are cooling, but just a touch.  The Conference Board noted that it “continues to forecast strong growth ahead: 5.7 percent year-over-year for 2021 and 3.8 percent for 2022.”  Hard to complain about those numbers.

The manufacturing sector has been battered by the messed up global supply chain, but conditions are not terrible.  The Philadelphia Fed’s reading of manufacturing activity in the Mid-Atlantic region was that activity expanded at a somewhat more moderate pace in early October.  Yet orders surged, backlogs built faster, hiring increased and expectations improved.  The big issue is prices.  Over seventy percent of the firms reported paying more for their inputs, while nearly sixty percent were able to raise their prices.  With pricing power nearly universal, it is hard to argue, as Fed Chair Powell continues to do, that high inflation is transitory.   

IMPLICATIONS:  There are all sorts of worries about inflation, supply chain snafus and labor shortages, but the economy continues to chug along quite solidly.  Yes, the supply shortages are slowing growth, but activity is hardly collapsing.  People are buying houses, it seems that every time a vehicle shows up on the lot, it is purchased, and incomes are increasing.  It’s unrealistic to believe that growth above 5%, 4% or even 3% is sustainable for an extended period.  It’s nice to dream big, but when it comes to potential growth, you can exceed 2% greatly for only so long.  Right now, we are doing that, so let’s enjoy it.  Without a steady easing in growth, the bottlenecks we are seeing could last significantly longer than currently expected, raising serious concerns about how long inflation will remain elevated.  When large firms are talking $21 per hour wages, which will rise to $25 per hour, it is clear they believe there has been a shift in the supply of labor and that labor shortages are not going away anytime soon.   

September Housing Starts and Permits

KEY DATA:  Starts: -1.6%; Over-Year: +7.4%; Permits: -7.7%; Over-Year: 0%

IN A NUTSHELL: “Home construction is slowing, but not for a lack of demand.”

WHAT IT MEANS: The labor and goods shortages are having negative impacts across the economy and the housing sector is one place where the effects are significant.  Housing starts were down in September, though the level is not that bad.  Actually, they were pretty close to the where they were in February 2020 and are well above last September’s pace.  The problem appears to be in the single-family segment, which has largely flatlined over the past few months.  Yesterday, we saw that the National Association of Home Builders’ Index rebounded, led by strong current sales.  Traffic was also up and so was expectations of future sales, so the issue isn’t demand.  As for the multi-family component, starts may have fallen in September but they were still up almost 40% since last September.  Looking forward, builders are starting to get permit requests more in line with construction activity.  They had been running well above starts and without the means to use the permits, there appears to be less appetite to pay for them.    

IMPLICATIONS:In an economy that is supply restricted, it is important to look at the data in a somewhat different light than you would in either a normal or demand limited environment.If you cannot build it, they don’t come and right now, builders are finding it difficult to get enough inputs and labor to do that.So, home construction is fading, restricting sales.  The paucity of existing homes on the market is limited housing purchases in that segment of the economy.  If you would look at sales and construction, you would think the housing sector is faltering.  That is clearly not the case as builders are optimistic and homes continue to sell quickly, and frequently at above asking price.  The point is that the economic “slowdown” we are in has not been created by typical factors, such as the Fed jamming on the brakes, or a crisis of one kind or another that leads to layoffs and falling income.  Instead, job and income growth are strong.  Since it is not due to a lack of demand, fiscal and monetary policy are largely impotent to deal with the situation. It is a supply constrained economy where fixing the constraint, the broken global supply chain, is the only thing that will change the situation.  That said, the economy continues to expand solidly.  Economists are downgrading their third quarter GDP estimates and will likely do the same for fourth quarter.  But the pace of growth being forecasted remains well above trend growth of roughly 2%.  The latest Blue Chip Economic Indicators’ consensus is for 3.6% growth in the third quarter and a robust 5.3% in the fourth quarter.  There is no reason to say the economy is in trouble, is weakening or is stagnating.

September Consumer Prices, Real Earnings and Help Wanted OnLine

KEY DATA:  CPI: +0.4%; Over-Year: +5.4%; Ex-Food and Energy: +0.2%; Over-Year: +4%;/ Real Hourly Earnings: +0.2%; Over-Year: -0.8%; HWOL: +3%; Over-Year: +63.6%

IN A NUTSHELL: “Price pressures are hardly fading, and inflation is eating into household spending power.”

WHAT IT MEANS: Economists have a saying that if you forecast something long enough, you will eventually be right.  Well, Fed Chair Powell may eventually be correct when he says that inflation will fade, but for now, he is still forecasting the same thing, but it is yet to be accurate.  Consumer prices jumped sharply again in September, driven by a wide variety of factors.  Energy and food led the way, which should surprise no one who actually pays for food and energy. If you are on the Fed, well that’s a different story.  Excluding those volatile components, prices rose more moderately .  New vehicle, shelter and medical commodities costs were up significantly.  Most disconcerting was another surge in fresh cake and cupcake costs.  I am getting priced out of the market (never!).  And if you eat out, forget it.  Restaurant prices seem to be on a stairway to heaven.  On the other hand, apparel, medical services and used vehicle prices declined, limiting what could have been a really ugly rise in household expenses.  Over-the-year, the increase in consumer prices was the largest since early 1991.  Yikes.  There was one bit of good news in the inflation data, at least for those on Social Security.  The cost-of-living adjustment will be 5.9%, the largest in about forty years. 

The high inflation rate is causing wage earners to think they are hamsters on a wheel: They just keep running in place.  While hourly earnings continue to jump, the gains are being eaten up by rising prices.  Despite 4.6% rises in both hourly and weekly earnings over the past year, real (inflation-adjusted) earnings declined.  It may take the $21 or more starting wage that some banks are now targeting to pull wage earners out of this morass. 

Meanwhile, businesses continue to look for workers all over the Internet. The Conference Board’s Help Wanted OnLine Index skyrocketed in September and is up massively over the past year.  No, this isn’t because it’s a comparison against a weak pandemic number.  The current level is about fifty percent higher than it was just before the pandemic hit.  That’s insane. 

IMPLICATIONS:Inflation is high, and it seems as if it could be staying at greatly elevated levels for an extended period.  The back-up in supplies is likely to get worse as we are into the holiday season.  With labor shortages abounding, it is hard to see how the ports will be cleared anytime soon.  Seriously, when you hear reports that firms are hiring helicopters to ferry containers from ships, and major retailers are chartering their own ships, you know the supply chain is broken badly.  All you have to do is going into any store and see the lack of inventory on the shelves to convince you that we have a really big problem.  We have a cycle going: Lack of supply, strong demand, rising wages, more demand, not enough supply, and higher prices.Strangely some people are calling the current environment “stagflation”.  Huh?  This is the downside of supply-side economics.Demand is strong and with the problems being are on the supply side, any resulting economic moderation will have nothing to do with economic stagnation.  It’s not even wage-price inflation, though that is part of it.  It’s supply-price inflation, which I think is something new.  And monetary and fiscal policy cannot do anything about it.  So, buckle up.  The next year should be very interesting and I truly hope Mr. Powell starts facing reality soon. 

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