The annual cost-of-living adjustment, or COLA, for Social Security benefits in 2022 — usually announced in October — could be 6% to 6.1%, the highest since 1983, based on Tuesday’s Consumer Price Index announcement, according to Social Security and Medicare policy analyst Mary Johnson of The Senior Citizens League, who estimated the 2022 COLA would be 6.2% a month ago.
The latest estimate, which is based on inflation of 0.3% in August, is especially significant as next year’s COLA will be calculated on the average of third-quarter, or July, August and September, CPI data.
The consumer price index for all urban consumers in August rose 5.3% over the past 12 months, and 0.3% from the previous month, the Labor Department reported Tuesday. (The CPI includes food and energy.)
Analysts attributed the popularity of bond funds — which do not include money-market holdings — to concerns about lofty stock valuations and an ageing population’s need for steady income during retirement.
“Financial advisers follow asset allocation models and portfolio rebalancing and demographics are strong trends,” said Shelly Antoniewicz, ICI senior director of financial and industry research. “The cumulative flow to bond funds lines up nicely with the percentage of the population over 65 years.”
The 2020 census reported that there are some 18 million pensioners in Iran, who form part of the 96% of the population who live under the poverty line. Even the regime’s own statistics advise that over 75% of pensioners cannot afford the most basic goods, like food and shelter. This is because the average pension is 25 million rials per month even though some parts of the country have a poverty rate of 100 million rials after the economic crisis caused by the pandemic.
Historically, bond yields have not been very good at predicting inflation.
In the last 70 years, bond yields rarely rose ahead of inflation, going up only after inflation takes hold. One study indicated that past inflation trends were a better predictor of bond rates than what future inflation turned out to be.
Does this mean bond traders are wrong? Not necessarily. It may just reflect that inflation is unpredictable and bond traders don’t know any more about the future than the rest of us. All they have is the past data and current prices to make their predictions, too. So when inflation suddenly spikes — as it has in the past — bond traders are as surprised as everyone else.
The sharp increase in consumer prices this Spring may be a blip but may also be a sign that inflation is returning as a chronic problem. For those of us who can accurately recall the 1970s economy, it is a frightening prospect. Everyone else would benefit from reading contemporaneous news coverage.
Recent events call into question pronouncements of the leading Modern Monetary Theorists who thought that the U.S. could sustain much larger deficits without triggering major hikes in the cost of living. Instead, it appears that the traditional rules of public finance still hold: deficit spending financed by Federal Reserve money creation is inflationary.
Analogies between today’s situation and the 1970s are not quite on target. By the early 70s, inflation was well underway. Instead, we should be drawing lessons from the year 1965, when price inflation began to take off. Prior to that year, inflation seemed to be under control with annual CPI growth ranging from 1.1 percent to 1.5 percent annually between 1960 and 1964 — not unlike the years prior to this one.
For the first time since the start of the COVID-19 pandemic, the Federal Reserve has bucked investor expectations and taken a more hawkish policy stance. After months of projecting near-zero interest rates through 2023, yesterday the Federal Open Market Committee forecast two rate hikes by the end of 2023. With consumer prices and spending rising in tandem of late, the revised projections are a tacit admission that recent inflation may not be as transitory as the Fed has maintained.
“Is there a risk that inflation will be higher than we think? Yes,” said chair Jay Powell. The ten-year Treasury yield increased roughly 80 basis points to 1.57 percent after the press conference.
But the Fed’s revised policy outlook was not matched by an increased medium-term inflation forecast. The central bank continues to expect an average inflation rate of 2.1 percent over the next three years. Goldman Sachs’s macro researchers interpret that to mean that “the FOMC sees the 2021 inflation overshoot, which will bring the average inflation rate since the recession began above 2 percent, as largely sufficient to accomplish its averaging goal.”
Ever since the Fed adopted an average inflation target last summer, markets have been left guessing as to the time horizon over which the Fed would target 2 percent. Yesterday’s projections suggest it will be two to three years.
The Labor Department’s consumer price index surged 5% year-over-year in May, the largest increase since August 2008 when oil was $140 a barrel. But don’t worry, Americans. The Federal Reserve says inflation is “transitory” and that it has the tools to control prices if they start to spiral out of control. Let us pray.
Nobody should be surprised that prices are increasing everywhere from the grocery store to the car dealership. Demand is soaring as the pandemic recedes while supply constraints linger, especially in labor and transportation. As always, this is a price shock largely made by government. Congress has shovelled out trillions of dollars in transfer payments over the past year, and the Fed has rates at zero while the economy may be growing at a 10% annual rate.
The personal savings rate in April was 14.9%, double what it was before the pandemic. Record low mortgage interest rates have enabled homeowners to lower their monthly payments to burn more cash on other things. Congress’s $300 unemployment bonus and other welfare payments for not working have contributed to an enormous worker shortage, which is magnifying supply shortages.
All of this is showing up in higher prices. Over the last 12 months, core inflation excluding food and energy is up 3.8% and much more for used cars (29.7%), airline fares (24.1%), jewelry (14.7%), bikes (10.1%) and footwear (7.1%). Commodity prices from oil to copper to lumber have surged. Higher lumber prices are adding $36,000 to the price of a new home.
There are eerie parallels today. In 1973, the U.S. was coming off a two-year experiment in wage and price controls, which artificially depressed prices and muted signals that the economy was overheating. Then, too, the Fed pursued an easy-money policy, keeping interest rates low — though considerably higher than now, and without today’s purchases of bonds and mortgage securities.
By the end of 1972, before the inflationary jump, the U.S. economy seemed even stronger than it is now, growing at an annual rate of more than 8%. Unemployment was down to 3.4%, and inflation was a seemingly manageable 5.6%. The pre-pandemic 2020 U.S. economy was also very strong, growing at a 3% annual rate, with historically low unemployment of under 4% and inflation hovering around only 1%.
In 2021 we’re emerging from the pandemic shutdown, which cratered growth and slammed the economy — depressing price pressures, not unlike what the price-control program did 50 years ago. Today’s Fed policies are even more expansive. And Congress has just enacted a $1.9 trillion stimulus bill — on top of earlier relief bills costing another nearly $2 trillion, a lot of which remains unspent and will continue to fuel demand this year and beyond.
Indeed, Brainard writes, “If, in the future, inflation rises immoderately or persistently above target, and there is evidence that longer-term inflation expectations are moving above our longer-run goal, I would not hesitate to act and believe we have the tools to carefully guide inflation down to target.” It matters that people believe this, even if the actions cause immense short-term pain. Do people still believe the Fed has that will? Do people believe that the Treasury Department and Congress have the parallel will to take fiscal steps to contain inflation if it should come?
Does the Fed really have the tools to do it? I am doubtful. For ten years, interest rates were zero. (Interest rates were either too high or too low, depending on your view of things, but stuck at zero in any case.) For ten years, the Fed ran massive quantitative easing after quantitative easing. Inflation just sailed along slightly below 2 percent. This episode suggests the Fed has a lot less power than it thinks. But that is also a cheery view, as if the Fed’s interest-rate and bond-purchase tools are relatively powerless, then not much of what the Fed is doing will cause inflation either. In the current economy, fiscal policy and fiscal anchoring seem the greater danger to inflation than even the monetary mistakes of the 1970s.
That assistance should also be more concentrated on where the need exists. According to Bloomberg, California’s revenues for this fiscal year are roughly 10 percent greater than expected (partly a result of soaring technology company valuations), while general-fund revenue in New York is estimated to be 11.7 percent lower than prepandemic forecasts.
And we should take a fine-toothed comb to lesser-known wasteful provisions, like giveaways to the airlines and an indirect bailout (added by the House) of multiemployer pension funds. Some of the money that we save by trimming the American Rescue Plan Act can be reallocated to one of our most pressing needs: infrastructure. Those funds get spent more slowly (and because of that put less immediate pressure on prices) and have the critical effect of helping to improve our unimpressive productivity growth rate.
Wasting precious dollars that could be better spent can’t possibly be worth the risk of igniting high inflation again.