Control Panel: Inflation

[WendyBG]

By now, all METARs have heard that the CPI rose to 8.6%, a 40-year record, last week. And it’s sticky.

https://www.bls.gov/charts/consumer-price-index/consumer-pri…
https://fred.stlouisfed.org/series/CORESTICKM159SFRBATL

The Federal Reserve is being blamed despite the fact that inflation was controlled despite years of ZIRP.
https://fred.stlouisfed.org/series/FEDFUNDS

https://www.nytimes.com/2022/06/11/opinion/fed-federal-reser…

**If You Must Point Fingers on Inflation, Here’s Where to Point Them**
**By Christopher Leonard, The New York Times, June 11, 2022**

**...**
**The true culprit for high consumer price inflation is the Federal Reserve. The financial earthquakes of 2022 trace their origin to underground pressures the Fed has been steadily creating for a over a decade.**

**It started back in 2010, when the Fed embarked on the unprecedented and experimental path of using its power to create money as a primary engine of American economic growth.**
[Actually, it began in 2002 when the Fed cut the fed funds rate long after the mild 2001 recession was over, which led to the housing bubble. They just repeated that in 2009 (which led to the stock and bond market bubbles) and 2020 in a more extreme way. – W]

**To put it simply, the Fed created years of super-easy money, with short-term interest rates held near zero while it pumped trillions of dollars into the banking system. One way to understand the scale of these programs is to measure the size of the Fed’s balance sheet. The balance sheet was about $900 billion in mid-2008, before the financial market crash. It rose to $4.5 trillion in 2015 and is just short of $9 trillion today.**

**All of this easy money had a distinct impact on our financial system — it incentivized investors to push their money into ever riskier bets. A sobering realization is now unfolding on Wall Street. The decade of super-easy money is likely over. Because of inflation’s impact, the Fed likely won’t be able to turn on the money spigots at will if asset prices collapse. This is the driving force behind falling stock prices, and why the end of the collapse is probably not yet in sight. ...** [end quote]

The focus of this article is correctly on asset prices. The impact of the Fed’s monetary pumping was on asset prices since the money was pushed into the hands of banks, not consumers. Nobody was complaining about asset price inflation since everyone loved seeing the value of their assets rise. The Fed’s monetary pumping was truly gigantic. The Fed has bought $9 Trillion in Treasury and mortgage bonds in a $24 Trillion economy.

https://fred.stlouisfed.org/series/WALCL

Consumer price inflation didn’t spike until the government sent extra money to consumers (sparking demand) at the same time that supply was constrained for many reasons. Government fiscal stimulus was breathtaking. The spikes in this chart are driven by the 2020 and 2021 stimulus payments to consumers. A lot of this was saved but those savings have been spent by now, since the current level of personal savings is below 4Q2019.

https://fred.stlouisfed.org/series/W068RCQ027SBEA
https://fred.stlouisfed.org/series/PSAVE

Some METARs will contest the reasons for consumer price inflation – but it really doesn’t matter at this point. I won’t argue about it because the arguments are tinged with politics.

As investors, we have to ask: What will happen in the markets?

The markets will be driven by Federal Reserve decisions on the only tools they have: the short-term fed funds rate and the interest rates of longer-duration Treasury and mortgages, which they can influence by selling some of their immense book of bonds. And the data shows that interest rates do drive asset prices, but have little direct effect on consumer demand. So far, the Fed has mostly been jawboning (“forward guidance”) and the markets have responded.

https://www.wsj.com/articles/sizzling-prices-complicate-feds…

**Sizzling Prices Complicate Fed’s Inflation-Fighting Strategy**
**Central bank has used communications ahead of its policy meetings this year to influence borrowing costs**
**By Nick Timiraos, The Wall Street Journal, June 12, 2022**

**...**
**Fed officials said in recent weeks they were likely to follow an anticipated half-point rate rise this coming week with another one in July. But that was before Friday’s reports, which were worse than what officials had expected...**

**Changes made to speed or slow down the economy with interest rates take time to filter into borrowing and spending decisions. The economist Milton Friedman described these changes as the “long and variable lags” of monetary policy. ...** [end quote]

Everyone expects a 0.5% fed funds rate increase this week so the markets won’t respond. They will respond to the “dot plot” of forecast fed funds rates which captures the opinions of the different Fed board members.

The New York Fed’s April 2022 Survey of Consumer Expectations shows that inflation expectations fell to 6.3 percent at the one-year horizon and rose to 3.9 percent at the three-year horizon. This is concerning because it shows that inflation expectations are becoming “entrenched.”
https://www.newyorkfed.org/microeconomics/sce#/

In the 1970s, entrenched inflation expectations led to a wage-price spiral of increasing inflation. So the Fed is in a tight corner. If they don’t raise rates high enough to quench consumer demand (which will probably cause a recession) they will have 1970s redux and end up being forced to emulate Paul Volcker with extremely high rates and a nasty recession. This is a zugzwang where any move the Fed makes will cause problems, but they are forced to move or inflation will get worse.

As investors, we need to be aware that Fed moves will take a short time to damage our portfolios but a long time to improve the economic problem of consumer price inflation. Stagflation is the likely scenario, as described by the World Bank’s report.

The Control Panel shows foreboding by the markets.

The Treasury yield curve continued to rise. The 2YT gapped up to 3%. <gasp!> That shows the bond market is finally beginning to grasp that a neutral rate, which the Fed is seeking, is still far away.

The Fear & Greed index is in Fear. The market is risk-off, as stocks and junk bonds are falling in value even faster than the 10YT. The USD, oil and natgas are rising.

The METAR for next week is for bad weather, but I don’t see a crisis forming at this point. VIX is moderate and financial stress is very low. The market is far from a bottom since we are moving into “winter” and the season has had just a few months to develop. There will be more bad weather ahead. Much more.

Wendy

https://stockcharts.com/freecharts/candleglance.html?VTI,$SP…

https://stockcharts.com/freecharts/candleglance.html?$IRX,$U…

https://stockcharts.com/freecharts/candleglance.html?$SPX,$U…

https://fred.stlouisfed.org/series/STLFSI3

[38Packard]

Wendy,

Thanks so much for your weekly Control Panel posts. I read them every week.

Considering the latest news (not good) on CPI, could / would the Fed instead decide to raise .75 instead of the telegraphed .5 or would that just be more than the financial markets could handle (both surprise and amount) and tip the scales to a big run-off?

Interested in your and other’s thoughts on this.

Thanks!
'38Packard

[Tamhas]

The true culprit for high consumer price inflation is the Federal Reserve.

So why is it more or less world wide?

[NewLiberal]

So why is it more or less world wide?

Because the FED creates US dollars “out of thin air,” and the US dollar is the world reserve currency … for now.

Remember, price inflation is a consequence of monetary inflation.

[WendyBG]

<Considering the latest news (not good) on CPI, could / would the Fed instead decide to raise .75 instead of the telegraphed .5 or would that just be more than the financial markets could handle (both surprise and amount) and tip the scales to a big run-off?>

The WSJ article interviewed a number of analysts with different opinions. I think that the Fed will not want to upset the markets and will stick with 0.5% in June and July, as they previously announced. But if inflation stays high (which it probably will) they will continue to raise several times more in 2022, possibly also in 2023. Their dot plots give a preview so the markets won’t be surprised…though that doesn’t mean the markets will be happy about it. It’s a way to avoid unnecessary panic.

https://www.federalreserve.gov/monetarypolicy/beige-book-def…

Wendy

[WendyBG]

<So why is it more or less world wide? >

1. The entire world is bidding against each other for the same limited commodities and affected by the same Covid-related, Ukraine war and other supply chain problems. This drives up prices for everyone.

2. I don’t know about other countries’ monetary and fiscal policies in detail but I’d venture a guess that their governments and central banks followed similar programs as the U.S. over the past couple of years, increasing the money supply locally.

Wendy

[OrmontUS]

If inflation is world wide, why is the Biden Administration blamed for the U.S. inflation in 2021 and 2022?

---

Jaak, this is a non-partisan function of human nature. Regardless which party has the presidency, the president is always blamed for inflation/recession during his watch - and generally this bodes ill for re-election efforts. The fact that he may not have anything to do with the economy he (whoever my be the person at the time) inherited offers little political protection.

It’s what’s known in the trade as “that’s life”

Jeff

[tim443]

2. I don’t know about other countries’ monetary and fiscal policies in detail but I’d venture a guess that their governments and central banks followed similar programs as the U.S. over the past couple of years, increasing the money supply locally.

Wendy

Our official inflation rate is 6.8%, no idea why it is different than the US … well then again, does anyone else recall that the oil price actually went negative a couple years back?

WCS (Canadian Oil Price) is currently $99.97 per barrel.

WTI (West Texas Crude) is currently $119.47 per barrel.

Tim

[DrBob2]

…does anyone else recall that the oil price actually went negative a couple years back?

At the same time, they were never giving away gasoline at my local stations.

DB2

[tim443]

At the same time, they were never giving away gasoline at my local stations.

Oh I wouldn’t recommend putting crude oil in your gas tank!!! Even diesel would really gum up the works.

[steve203]

In the 1970s, entrenched inflation expectations led to a wage-price spiral of increasing inflation. So the Fed is in a tight corner. If they don’t raise rates high enough to quench consumer demand (which will probably cause a recession) they will have 1970s redux and end up being forced to emulate Paul Volcker with extremely high rates and a nasty recession. This is a zugzwang where any move the Fed makes will cause problems, but they are forced to move or inflation will get worse.

As offered before, due to US labor unions being largely gutted over the last fifty years, wages will not keep up with inflation, unless the labor market is tight. It didn’t seem to get much attention, but new unemployment claims were up last week.

Jun 9 2022

Weekly jobless claims hit 229,000, the highest level since January

https://www.cnbc.com/2022/06/09/us-weekly-jobless-claims.htm…

Powell is paying lip service to concern about “jobs”, but, in the next breath, says his only priority is inflation.

I am looking for a rerun of 82, not 74.

Steve

[Leap1]

If inflation is world wide, why is the Biden Administration blamed for the U.S. inflation in 2021 and 2022?

Jaak

The blame is one way of phrasing it. No one in our leadership either side is proposing what to do other than leaving it to the FED. Yes at least barrels of oil have been released.

Tax policies geared against inflation are needed longer term.

Spending policies geared to growth with returns in tax revenues are needed longer term.

We are stalling which the American public really dislikes.

[Leap1]

In the 1970s,…yada yada yada

First came the 50s, then the 60s. We had two years of major inflation in the 50s. In 65 inflation kicked off in earnest with all the private and public borrowing.

We had real GDP growth rates that were excellent from 1949 to 1980. From 1981 to 2020 we have had very poor real GDP growth rates. We are either going to lose our country continuing on with supply side policies or we are going to build our nation with demand side economic policies.

Nothing good comes cheap. But building a nation creates massive wealth.

[WendyBG]

<Our official inflation rate is 6.8%, no idea why it is different than the US …>

Inflation rates are calculated and massaged in various ways. The U.S. alone has at least two separate agencies which calculate different inflation rates, the BEA and the BLS. Don’t expect Canada’s economists to calculate it the same way as the U.S. since they will have their own methods.

Wendy

[captainccs]

Inflation rates are calculated and MASSAGED in various ways.

The Hedonic Captain

[MarkR]

Our official inflation rate is 6.8%, no idea why it is different than the US

I explained it elsewhere, but here’s a quick repeat. Let’s look at gasoline. Why would it have less inflation in Canada than in the USA? Very simple … because of taxes.

Here’s a brief explanation, and it’s all simple arithmetic as I explained earlier in the other post.

In the USA, gasoline roughly went up from $3 to $5 over the last 12-15 months. That is an inflation rate of about 66%.
In Canada, gasoline roughly went up from about $6.50 to about $8.50 over the last 12-15 months. That is an inflation rate of about 31%.

So even though a Canadian who uses 50 gallons of gasoline a month will pay an additional $100 each month, and an American who uses 50 gallons of gasoline in a month will also pay an additional $100 each month, when you look at percentages, the Canadian has experienced lower inflation.

Undoubtedly someone will again claim that these numbers are bogus, but they aren’t. See here for Canada gasoline prices - https://www.globalpetrolprices.com/Canada/gasoline_prices/

[jaagu]

In the USA, gasoline roughly went up from $3 to $5 over the last 12-15 months. That is an inflation rate of about 66%.
In Canada, gasoline roughly went up from about $6.50 to about $8.50 over the last 12-15 months. That is an inflation rate of about 31%.

So even though a Canadian who uses 50 gallons of gasoline a month will pay an additional $100 each month, and an American who uses 50 gallons of gasoline in a month will also pay an additional $100 each month, when you look at percentages, the Canadian has experienced lower inflation.

=======================================================

Canadian gasoline price on June 13, 2022, is $6.76 not $8.50

https://www.globalpetrolprices.com/Canada/gasoline_prices/

Jaak

[MarkR]

Canadian gasoline price on June 13, 2022, is $6.76 not $8.50

Canadian gasoline went from roughly CAD$6.50 to CAD$8.50 … when calculating the percentage gain for inflation, it doesn’t matter whether you use CAD$ or US$.