Stagflation written all over it:
Labor market added 315,000 jobs in August
20 consecutive months of sustained job growth
Retail added 44,000 new jobs
Manufacturing continued adding jobs for the 15th month straight with 22,000 jobs in the strongest manufacturing job growth in decades
Oh… but average gas at the pump $3.81 up 52% from Dec 2020. So it must be stagflation
Yes, the economy is looking strong. Very strong. That will give the Fed confidence they can raise interest rates until inflation has come down.
Energy and food prices are notoriously volatile so the Fed looks at “core,” “trimmed” and “sticky” inflation. The Fed prefers the PCE inflation rate to the CPI.
https://www.dallasfed.org/research/pce
https://fred.stlouisfed.org/series/TRMMEANCPIM158SFRBCLE
https://fred.stlouisfed.org/series/CORESTICKM159SFRBATL
If the economy looked weak, the Fed might hesitate to raise rates.
The Fed has barely begun to bring the fed funds rate to a neutral level, much less the restrictive level they want. These charts not showing anything like 2% inflation, no matter how they slice it.
Be patient. It will take at least 3 to 6 months to see the outcome.
Wendy
That will give the Fed confidence they can raise interest rates until inflation has come down.
Thank you for the links
So much of this inflation is energy driven. The breakdown in the BLS CPI (I know the Fed doesn’t use this) is the skyrocketing Energy Inflation:
https://www.bls.gov/news.release/pdf/cpi.pdf
Unadjusted ending July 22 12mo
All items 8.5%
But look at how much energy is contributing to this:
Gas all types 44%
Fuel Oil 75% (Yikes)
Utility gas 35%
A great deal of this inflation is not a cycle, rather a political disruption of the energy sector; after a politically induced recession. The Fed has no control over that other than to put millions of Americans out of work. And you know who agrees with this assessment? Robert Reich
The fuel component is due almost entirely to the Russian war in Ukraine. The rest of inflation is predominantly caused by supply chain issues that were never fixed during COVID and are going to be slow to fix.
Why we feel the “fix” for this is to put people out of work is beyond my ability to comprehend. But recession here we come! It’s maddening.
IIRC, the “stag” in stagflation didn’t refer to a growing economy, but rather one that wasn’t floundering.
Jeff
IIRC, the “stag” in stagflation didn’t refer to a growing economy, but rather one that wasn’t floundering.
“Stagflation is an economic cycle characterized by slow growth and a high unemployment rate accompanied by inflation.”
The Investopedia Team
The term stagflation was first used by British politician Iain Macleod in a speech before the House of Commons in 1965, a time of economic stress in the United Kingdom. He called the combined effects of inflation and stagnation a “'stagflation situation.”
Why we feel the “fix” for this is to put people out of work is beyond my ability to comprehend.
I keep hearing this over and over. This explanation misses some important information.
IMHO, you are correct in identifying the source of inflation as supply problems resulting from the pandemic. Some of those problems are still with us. And fixing them is the main way to stop inflation.
But there is another side to the issue. When supply is constrained like this, you need to find a way to curb demand. If you don’t prices rise and you get inflation.
What the Fed is doing it attempting to curb demand by raising interest rates. I have yet to see that the fed has put anyone out of work. Total employment has continued to grow in spite of the recent rate increases. So I question your assertion that the Fed is putting people out of work.
What the Fed is doing is necessary, but not sufficient. If the Fed doesn’t raise interest rates, inflation will continue. So NOT raising interest rates seems to be a worse option than raising them. Raising rates keeps demand in check for a while so that those who have the tools to deal with supply problems (i.e. governments around the world) can figure out what they are going to do.
–Peter
IMHO, you are correct in identifying the source of inflation as supply problems resulting from the pandemic. Some of those problems are still with us. And fixing them is the main way to stop inflation. But there is another side to the issue. When supply is constrained like this, you need to find a way to curb demand. If you don’t, prices rise and you get inflation.
There is also the monetary side of inflation. Don’t forget we goosed the economy with a $2 trillion stimulus package in March 2021. This was almost 10% of US GDP at the time.
As Larry Summers wrote at the time:
www.washingtonpost.com/opinions/2021/02/04/larry-summers-bid…
In contrast, recent Congressional Budget Office estimates suggest that with the already enacted $900 billion package — but without any new stimulus — the gap between actual and potential output will decline from about $50 billion a month at the beginning of the year to $20 billion a month at its end. The proposed stimulus will total in the neighborhood of $150 billion a month, even before consideration of any follow-on measures. That is at least three times the size of the output shortfall. In other words, whereas the Obama stimulus was about half as large as the output shortfall, the proposed Biden stimulus is three times as large as the projected shortfall.
DB2
More stimulus than the gap is inflationary
To have inflation someone has to be charging their customers more. That was well overdone.
The opportunity presented itself thanks to the FED. The opportunity is being shutdown.
The corporate IRRs swing both ways.
If the Fed doesn’t raise interest rates, inflation will continue.
First of all, the Federal Reserve increasing the cost of borrowing is by itself inflationary; it’s counterintuitive but it works. The high cost of borrowing will eventually stop the flow of investment into the economy. Housing starts will go to nothing, construction workers will be out of work, the markets that supply construction will draw down manufacturing… consumer demand drops, banks and retail layoff a bunch of people and with nobody doing anything much, but at least gas is back to $2.50/gal.
I have yet to see that the fed has put anyone out of work. Total employment has continued to grow in spite of the recent rate increases. So I question your assertion that the Fed is putting people out of work.
Oh Wendy’s right, be patient. Today’s 30yr mortgage rate at roughly 5.9% isn’t going to stall this market.
[Freddie’s survey came out this morning showing a modest 0.11% increase from last week to 5.66% with 0.8 points upfront. That would equate to roughly 5.9% without any points based on the average lender’s buy costs.]
https://www.mortgagenewsdaily.com/markets/mortgage-rates-090…
And Wendy’s right again when she says, The Fed has barely begun to bring the fed funds rate to a neutral level, much less the restrictive level they want.
When we see 30yr mortgage interest rates at 9% and variable rates at 10%, You will definitely see lots and lots of people put out of work.
When supply is constrained like this, you need to find a way to curb demand.
By shutting down the economy? No. This isn’t an American inflationary cycle , this is a worldwide, politically imposed double punch supply and demand issue. Let me Quote Robert Reich
(Former United States Secretary of Labor)
“This is bonkers, friends. The Fed is trying to douse a fire in the living room, when the forest is ablaze. Inflation has broken out all over the world. It’s happened because of pent-up demand from more than two years of pandemic. And limited supplies of everything from computer chips to wheat, due to difficulties in getting the world economy up and running, along with Putin’s war in Ukraine driving up world energy and food prices, and China’s lockdowns against COVID.
>>>The Fed’s firehose is hitting none of this.”
https://insurancenewsnet.com/oarticle/robert-reich-why-the-f…
https://www.theguardian.com/business/2022/aug/28/the-fed-kee…
The Fed’s aggressive effort to reduce Oil prices and Liquefied Natural Gas through steep interest rate hikes is madness. Besides the after effects of the pandemic (a political recession, not a cynical recession) the main driver of inflation is Russia’s political war and manipulation of the energy markets. The Fed’s myopic focus on 2% inflation no matter what! will get us into a 10% unemployed economy so maybe, just maybe you can buy gas at the pump for $2.50/gal.
Not Worth It
There is also the monetary side of inflation. Don’t forget we goosed the economy with a $2 trillion stimulus package in March 2021.
I’m sure you meant “fiscal” there instead of “monetary.” Monetary policy comes from the central bankers - the Fed in the USA. Government controls fiscal policy, like stimulus payments.
Yes, that had the potential for inflation, as did the fiscal policies of the previous administration.
But those were largely one time stimulus events. That stimulus has ended.
The ongoing supply issues are harder to change. Some are completely out of the control of the USA, such as periodic factory shutdowns in China due to Covid outbreaks. Shipping has the potential to interfere with supply as significantly higher shipping rates and profits at shippers indicate there is more demand for shipping than capacity.
These are just a couple of the tough problems that need to be addressed to really reduce inflationary pressures.
—Peter
Not Worth It
So what is your prescription? What should those who wield the levers of power be doing?
—Peter
So what is your prescription? What should those who wield the levers of power be doing?
Well for one thing as I said before the fed’s myopic focus on 2% inflation no matter what is Ridiculous. Think about it, all we need is some limited tactical nuclear war to break out in Ukraine and oil prices. food prices are going to go through the roof and it has nothing to do with the fed’s discount rate…
But the fed will just keep at it, because it’s 2% no matter what. And right now energy is the main driving force in our inflationary cycle, And the fed refuses to accept the fact that it is a political manipulation of the energy markets
So my point is 2% no matter what: not worth it
IIRC, the “stag” in stagflation didn’t refer to a growing economy, but rather one that wasn’t floundering.
“Stagnation” + “Inflation” = “StagFlation.”
A ship without a rudder going around in aimless circles while prices did have a clear direction, up, led by the same jerk who certified the Chavez election!
The Captain
Jerk
3 informal I was left behind, feeling a complete jerk: fool, idiot, halfwit, nincompoop, blockhead, buffoon, dunce, dolt, ignoramus, cretin, imbecile, dullard, moron, simpleton, clod; informal dope, ninny, chump, dimwit, nitwit, goon, dumbo, dummy, dum-dum, dumbbell, loon, jackass, bonehead, fathead, n-u-m-b-s-k-u-l-l, dunderhead, chucklehead, knucklehead, muttonhead, pudding-head, thickhead, wooden-head, airhead, pinhead, lamebrain, peabrain, birdbrain, zombie, nerd, dipstick, donkey, noodle; British informal nit, numpty, twit, clot, ass, goat, p-l-o-n-k-e-r, berk, prat, pillock, wally, git, wazzock, divvy, nerk, twerp, charlie, mug, muppet; Scottish informal nyaff, balloon, sumph, gowk; Irish informal gobdaw; North American informal schmuck, bozo, boob, lamer, turkey, schlepper, chowderhead, dumbhead, d-u-m-b-a-s-s, goofball, goof, goofus, galoot, dork, lummox, klutz, putz, schlemiel, sap, meatball, gink, cluck, clunk, ding-dong, dingbat, wiener, weeny, dip, simp, spud, coot, p-a-l-o-o-k-a, poop, squarehead, yo-yo, d-i-n-g-l-e-b-e-r-r-y; US informal wing nut; Australian New Zealand informal drongo, dill, alec, galah, nong, bogan, poon, boofhead; South African informal mompara; British vulgar slang knobhead; North American vulgar slang asshat; archaic tomfool, noddy, clodpole, loggerhead, spoony, mooncalf.
The Dictionary
the fed’s myopic focus on 2% inflation no matter what
The ‘Fixation on Magic Numbers’ syndrome.
The Captain
Well for one thing as I said before the fed’s myopic focus on 2% inflation no matter what is Ridiculous.
You’ll have to take that up with Congress. Congress wrote the law that created the Federal Reserve Bank. Not surprisingly, it is called the Federal Reserve Act. You can read it here, at the Fed’s web site: https://www.federalreserve.gov/aboutthefed/officialtitle-pre…
In that Act, Section 2A, Congress laid out the purpose of the Federal Reserve Banks:
to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates
Maximum employment
Stable prices
moderate long-term interest rates
Three goals.
In practice over the last 100+ years, they really focus on employment and stable prices. When those two goals are met, the third will follow.
Stable prices means low inflation. That last 100+ years of history has taught the Fed Governors that inflation of about 2% works pretty well to have high employment and keep long-term interest rates moderate.
You can read more on that at the Fed’s discussion of Monetary Policy Principles and Practice: https://www.federalreserve.gov/monetarypolicy/monetary-polic…
The bottom line is that the Fed is focused on 2% inflation because that’s what Congress told them to do in the law that created the Fed. I suppose you could argue that 2% is not the right goal, that it should be 3% or maybe 5%, or even 0% (after all, their mandate calls for stable prices, not prices rising slowly). At any rate, the recent inflation numbers approaching 10% are too high by pretty much any reasonable definition of “stable prices” and require the Fed to act.
Think about it, all we need is some limited tactical nuclear war to break out in Ukraine and oil prices. food prices are going to go through the roof and it has nothing to do with the fed’s discount rate…
Whataboutism. I will not respond to this distraction.
But the fed will just keep at it, because it’s 2% no matter what.
Yep. The Fed needs to fight inflation. That is their reason for existence.
And right now energy is the main driving force in our inflationary cycle,
I’ll buy that as a reasonable source of inflation. I think there are other drivers, but this is almost certainly one of them.
And the fed refuses to accept the fact that it is a political manipulation of the energy markets
I suspect may of the Fed governors and bank presidents know this. But it doesn’t matter. Their job is to use monetary policy to reduce inflation.
Another time energy markets were a major source of inflation was the 1970s. Just like now, the lack of energy supply (read: oil and gas) caused inflation. At that time, the Fed was too timid in raising interest rates. They’d bump them up a bit, but at the first sign of the economy weakening, they’d reduce rates allowing inflation to flare up. That went on for half a decade or more until Volker became the Fed Chair. Under his chairmanship the Fed raised rates a lot and kept them up. Yes, that triggered a recession, but it also broke the inflation cycle. The current Fed Chair is a student of history and knows this bit of Fed history quite well.
Which circles back to a refrain of mine. When the supply chain is the source of inflation, all the Fed can do is raise interest rates enough to stop the growth of the economy, even taking it into a controlled recession, to reign in demand. If demand is not constrained, the excess of demand over supply will continue to bid up prices and cause more inflation. Demand must be controlled so that supply has time to recover and increase. That will keep inflation from getting wildly out of control.
It’s very much like the first rule of holes. Which is: If you find yourself in a hole, the first thing to do is to stop digging. The economy is in a hole, with demand exceeding supply. And because supply is constrained, the first thing to do is to keep demand from growing. To stop digging. And the way to do that is to raise interest rates, stalling demand and potentially putting the economy into recession.
Then it is up to Congress to take action to promote the supply of goods so that interest rates can fall back to more typical levels. In the mean time, the high interest rates will keep inflation from getting out of hand.
–Peter
Well for one thing as I said before the fed’s myopic focus on 2% inflation no matter what is Ridiculous.
I do not see it as myopic at all. There are monetary and fiscal policy dynamics that come into play that are far reaching. Namely build the US economy for the next two generations of Americans. Not sure why that is being dismissed. Yes we will see pain going through 2023. Why not because the oversized gains in the markets are not guaranteed, mandatory nor an entitlement. It is always interesting when people bat around some sort of entitlement idea for the well off. This economy and the market are going back to reality. Labor will do relative well in the mix.
peter
thank you. A superb detailed summary of the key macroeconomic problem of our time, which I describe as the USA Congress AWOL from fiscal policymaking and shirking its duty in fiscal management. The quietly desperate Fed is and has too long been wielding one oar in a two oared boat.
davod fb
The quietly desperate Fed is and has too long been wielding one oar in a two oared boat.
Yes. This.
Maybe more like a canoe. You can paddle a canoe from just one side. (Look up the J-stroke if you want to know how.) Or you can take a couple of strokes from one side and then switch to take a couple from the other. Either way means you are not very efficient with the paddling and don’t go anywhere very quickly. You can make progress, but if you’re on a river and trying to go against the current, you’re not going to make much progress, and might even be going backwards. But at least the canoe is pointed in the right direction. So when the guy in the front of the canoe wakes up from his drunken stupor you’re in position to take advantage of his help pretty quickly.
Let’s hope the drunken stupor wears off before that waterfall the Fed is paddling away from catches up to us.
–Peter <== old boy scout who liked the peaceful quiet of being in a canoe
Congress wrote the law that created the Federal Reserve Bank.
Congress rubber stamped the law written by bankers on Jekyll Island.
The Captain