Tag: inflation

The Asininity of Inflation Expectations, Once Again By Powell and the Fed

Mary Pat Campbell

Link: https://mishtalk.com/economics/the-asininity-of-inflation-expectations-once-again-by-powell-and-the-fed

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Excerpt:

Common sense and practical examples suggest that inflation expectations theory is ass backward.

So much of the CPI is nondiscretionary that it’s difficult to impossible for CPI expectations to matter. 

Yet, economists focus on expectations that don’t matter and ignore the expectations that do matter, namely asset prices!

I have written about this several times previously, two of them before I even found the Fed study supporting my view. 

…..

A BIS study concluded “Deflation may actually boost output. Lower prices increase real incomes and wealth. And they may also make export goods more competitive.“

Indeed, that must be the case as more goods for less money by default improves standards of living.

The Fed was hell bent on reducing standards of living via inflation. Now they struggle to undo the inflation and asset bubble consequences they created. 

The Fed is the problem, not the solution.

Author(s): Mike Shedlock

Publication Date: 25 Jun 2022

Publication Site: Mish Talk

Inflation: Return of a Plague

Mary Pat Campbell

Link: https://www.city-journal.org/inflation-return-of-a-plague

Excerpt:

Experience has once again verified Friedman’s and Lucas’s theories, reducing to nothing the naïve propositions of Modern Monetary Theory, a recent delusion of the American Left. According to this unscientific, ahistorical theory, legislatures can control the production of money and distribute it in a way that satisfies all needs, with no destructive consequences from expanding the money supply. The question of reimbursing a gigantic public debt is not supposed to arise, because no one can force the government to pay what it owes. But this magical solution, adopted in part by Joe Biden, ignores the fact that public debt produces inflation and that a debt that is not repaid, as in the case of Argentina, eventually ruins the currency. All this was well known, at least by economists, so it is surprising that governments in America and Europe had not taken it into account of late. They have short memories. From the 1980s until recently, inflation had been constrained thanks to public policies inspired by Friedman—but policymakers had forgotten its threatening presence, as if it belonged only to the past. We can liken inflation with pathogens: smallpox has disappeared, but vaccination is what made it disappear; stop vaccinating, and the evil can return. In the 1980s, central banks helmed by Friedman’s disciples, such as Paul Volcker in the United States or Jean-Claude Trichet in Europe, raised interest rates and defeated inflation by reducing the money supply. Today, economic policymakers will need to apply the same remedy as in 1980. Central banks are working on this, but their conversion comes late; they have waited for inflation to establish itself before responding, a delay that will make the remedy more painful.

Author(s): Guy Sorman

Publication Date: 14 Jun 2022

Publication Site: City Journal

Individual Income Tax Payments on Pace to Reach Record Level

Mary Pat Campbell

Link: https://www.wsj.com/articles/individual-income-tax-payments-on-pace-to-reach-record-level-11654421400

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Excerpt:

An unprecedented gush of income-tax revenue is flowing into the federal government, driven in part by investors and business owners, and the size and speed of the increase has surprised even the nation’s fiscal-policy experts.

Individual income tax collections are poised to reach $2.6 trillion, or 10.6% of the economy in the fiscal year that ends Sept. 30, according to the Congressional Budget Office. That is up from 9.1% in 2021 and would mark a record in the 109-year history of the tax, topping the war-tax receipts of 1944 and the dot-com boom of 2000.

The surge has been particularly notable in taxes outside paycheck withholding, a signal that capital gains and business income are driving the trend. The Penn Wharton Budget Model estimates collections of non-withheld taxes reached an inflation-adjusted $522 billion in April 2022, compared with just over $300 billion in 2018 and 2019, before the pandemic.

Author(s): Richard Rubin, Amara Omeokwe

Publication Date: 5 June 2022

Publication Site: WSJ

Visualizing the Three Different Types of Inflation

Mary Pat Campbell

Link: https://advisor.visualcapitalist.com/three-different-types-of-inflation/

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Excerpt:

Monetary inflation occurs when the U.S. money supply increases over time. This represents both physical and digital money circulating in the economy including cash, checking accounts, and money market mutual funds.

The U.S. central bank typically influences the money supply by printing money, buying bonds, or changing bank reserve requirements. The central bank controls the money supply in order to boost the economy or tame inflation and keep prices stable.

Between 2020-2021, the money supply increased roughly 25%—a historic record—in response to the COVID-19 crisis. Since then, the Federal Reserve began tapering its bond purchases as the economy showed signs of strength.

Author(s): Dorothy Neufeld

Publication Date: 16 Jun 2022

Publication Site: Visual Capitalist

By Design, the Fed May Be Tightening Too Much

Mary Pat Campbell

Link: https://www.wsj.com/amp/articles/by-design-the-fed-may-be-tightening-too-much-11655370001

Excerpt:

The Fed has often moved interest rates by 0.75 percentage point or more in recent decades. But until this week, it had always done so in a downward direction. Indeed, it was a hallmark of Fed policy that it always cut interest rates faster, with less prompting, than it raised them.

…..

This asymmetry reflected the Fed’s perception of risks. If it cut rates too little, the economy might spiral down and the financial system implode. If it cut them too much, inflation might, some years later, rise. Throughout this prepandemic period, inflation was low and, at times, too low, but that wasn’t a big deal. Moreover, during that low-inflation, low-interest-rate era, rates couldn’t fall very much — the Fed called this the “zero lower bound” — so best to act quickly to forestall a downward spiral. If inflation was a problem, there was no limit to how high rates could go.

This philosophy got taken too far. The Fed kept rates too low for too long last year (and the Biden administration enacted too much fiscal stimulus) out of a mistaken belief that inflation was a remote threat compared with prolonged high unemployment.

The result is that risks are now asymmetric in the other direction. Inflation is too high and a self-sustaining wage-price spiral is a real threat. Asked why, after carefully laying the groundwork for a half-point increase, the Fed raised rates by 0.75 point Wednesday, Mr. Powell pointed to an “eye-catching” report that showed long-term inflation expectations rising ominously.

Author(s): Greg Ip

Publication Date: 16 Jun 2022

Publication Site: WSJ

To Fight Inflation, The Fed Declares War On Workers

Mary Pat Campbell

Link: https://www.levernews.com/the-fed-declares-war-on-workers/

Excerpt:

New inflation data released Friday offered dismal news: Historic price increases aren’t showing any signs of abating, and in fact may be accelerating.

What can be done? Federal Reserve Chairman Jerome Powell has an idea: throw cold water on the hot labor market — perhaps the one bright spot in the current economy.

In fact, Powell recently screamed the quiet part out loud, making clear the largest central bank in the world is in fact an adversary to workers, when he declared that his goal is to “get wages down.”

At a May 4 press conference in which he announced a .5 percent interest rate hike, the largest since the year 2000, Powell said he thought higher interest rates would limit business’ hiring demand and lead to suppressed wages. As he put it, by reducing hiring demand, “that would give us a chance to get inflation down, get wages down, and then get inflation down without having to slow the economy and have a recession and have unemployment rise materially.”

Author(s): Julia Rock

Publication Date: 13 Jun 2022

Publication Site: The Lever

Consumer Price Index, 1913-

Mary Pat Campbell

Link: https://www.minneapolisfed.org/about-us/monetary-policy/inflation-calculator/consumer-price-index-1913-

Excerpt:

The U.S. Bureau of Labor Statistics (BLS) began collecting family expenditure data in 1917 and published its first price indexes for select cities in 1919. In 1921, the BLS published a national consumer price index (CPI), including estimates of the CPI back to 1913. The data and methods starting in 1913 are considered generally compatible through the present day; however, the Minneapolis Fed maintains a separate historical table that includes estimates prior to 1913.

The data below use 1983 as the index (1983=100). This chart uses data from the sole measure of CPI available until 1978, after which it reflects the CPI for all urban consumers (CPI-U). The current year’s inflation figures reflect the most recent quarterly data.

You can use the Minneapolis Fed’s inflation calculator to instantly compare the buying power of past and present dollars. However, you can also use the Annual Average CPI numbers below (center column) to make manual calculations. To find out how much a price in Year 1 would be in Year 2 dollars:

Publication Date: Date Accessed 10 June 2022

Publication Site: Minneapolis Federal Reserve Bank

In a Rare White House Meeting, Biden Meets Powell to Discuss Inflation

Mary Pat Campbell

Link: https://mishtalk.com/economics/in-a-rare-white-house-meeting-biden-meets-powell-to-discuss-inflation-guilty-meets-guilty

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Excerpt:

PCE stands for Personal Consumption Expenditures. Those numbers come from the Bureau of Economic Analysis (BEA)

CPI stands for Consumer Price Index. Those numbers come from the Bureau of Labor Statistics (BLS)

The key difference is the PCE includes prices paid on behalf of consumers (e.g. Medicare and Medicaid), whereas the CPI only contains prices directly paid by consumers.

The PCE tends to overweight medical expenses while the CPI tends to overweight rent.

The Fed’s preferred measure of inflation is PCE.

CPI and PCE Both Seriously Flawed

Neither measure directly incorporates home prices. Economists explain this away by stating homes are a capital expense. 

OK, so what? The fact is, rising home prices (asset prices in general), are a direct reflection of inflation.

By ignoring asset prices, the Fed helped blow the biggest economic bubble yet. Now the Fed struggles to contain the serious inflation it helped create.


Author(s): Mike Shedlock

Publication Date: 30 May 2022

Publication Site: Mish Talk

How the Inflation Rate Is Measured: 477 Government Workers at Grocery Stores

Mary Pat Campbell

Link: https://www.wsj.com/articles/inflation-bls-price-checkers-who-determine-cpi-11652132333?page=1

Excerpt:

Ms. Mascitis, 50, who has been working as a BLS price checker since 2013, describes her job as “a treasure hunt.”

She set out on her route one day in April with a list of items to price. First stop: a locally owned auto-repair shop in an up-and-coming part of Philadelphia, where she is to record the total cost for a rear-brake job, wheel-bearing hull assembly replacement and full brake replacement.

The mechanic tells her about the rising costs of running the shop. He says he will have to move his office to a less-expensive part of town. He says some customers are holding off on fixing their cars and taking public transit because of high repair costs.

“It’s a mess,” she agrees.

After 10 minutes, the mechanic calls his parts supplier to find out the most up-to-date material costs.

“And is sales tax on materials and labor still 8%?” Ms. Mascitis asks. Yes, the mechanic confirms.

…..

“We have very strict data-collection rules. Someone running a store isn’t trained in CPI’s data-collection rules,” says Ms. Greene, who supervises Ms. Mascitis and 65 price checkers in a region that includes New Jersey, Pennsylvania, Delaware, Maryland, Washington, D.C., Virginia and West Virginia. She adds that it would be a burden on stores to expect them to do what CPI does. “They would say this is good enough, and good enough is not usually good enough for us.”

Author(s): Rachel Wolfe

Publication Date: 10 May 2022

Publication Site: WSJ

The Fed’s Preferred Measure of Inflation Jumps to 6.6%, a 40-Year High

Mary Pat Campbell

Link: https://mishtalk.com/economics/the-feds-preferred-measure-of-inflation-jumps-to-6-6-a-40-year-high

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Excerpt:

The PCE price index for March increased 6.6 percent from one year ago, reflecting increases in both goods and services. 

Energy prices increased 33.9 percent

Food prices increased 9.2 percent. 

Excluding food and energy, the PCE price index for March increased 5.2 percent from one year ago.

Author(s): Mike Shedlock

Publication Date: 30 April 2022

Publication Site: Mish Talk

Here’s Why Cutting Gas Taxes Doesn’t Work When Prices Soar

Mary Pat Campbell

Link: https://www.governing.com/now/heres-why-cutting-gas-taxes-doesnt-work-when-prices-soar

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Excerpt:

A new report from the Urban Institute catalogs state-level responses and finds that 20 different states have introduced legislation to suspend gas taxes, which are often used to fund infrastructure projects. (Florida, Georgia, and Maryland have already passed gas tax holidays.) There are 16 states considering legislation to provide payments to residents — in the form of tax rebates, credits or stimulus checks — to counteract pain at the pump. Only three are considering changes to help people avoid driving: California, Connecticut, and Hawaii.

“Of the three main categories of policy solutions we could be considering, cutting gas taxes is the worst,” says Jorge González-Hermoso, research associate with the Urban Institute. “It’s very popular, it will get you headlines, but it only creates a simulation that the government is providing a solution.”

González-Hermoso says the problems with gas tax holidays start with the premise that they help consumers. The average gas tax across all states, he reports, is 31 cents a gallon or 7.75 percent of the average price. By one estimate, a driver would have to use 20 gallons of gas a week to save just $30 over the course of Maryland’s one-month holiday. There is no guarantee that station owners wouldn’t pocket the difference, and keep prices roughly the same.

In addition to being ineffective, this policy imperils future infrastructure projects. State and local gas taxes comprise 26 percent of highway spending and often contribute to mass transit as well. They also have the disadvantage of incentivizing driving, as residents in nearby jurisdictions try to take advantage and local consumers know relief is contingent upon buying gas.

Author(s): Jake Blumgart

Publication Date: 26 Apr 2022

Publication Site: Governing

How Much Free Money Stimulus Still Hasn’t Been Spent?

Mary Pat Campbell

Link: https://mishtalk.com/economics/how-much-free-money-stimulus-still-hasnt-been-spent

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Excerpt:

The question is not as straight forward as it looks. The gap between spending and income isn’t constant. 

Free money that goes to bottom rung households tends to immediately get spent. The higher the rung, the more the savings. This is complicated by the fact that most of the money was supposed to go to lower tiers, and further complicated by corporate fraud, especially in round one. 

More importantly, personal spending does not count mortgage paydowns, stock market or Bitcoin purchases, capital expenses for businesses, drug money, other illegal uses, or money sent to relatives overseas. 

….

The Peterson Foundation reports direct checks were $292 billion in round one, $164 billion in round two, and $411 billion in round three.

There was $850 billion of direct payments to taxpayers with the biggest and most unwarranted round the last.

Spending data suggests free money, at least most of direct payments, already did enter the economy. 

However, that does not factor in unpaid rent via eviction moratoriums or SNAP (Supplemental Nutrition Assistance Program), formerly Food Stamps, which I will address in a separate post. 

So yes, there still could be a pile of unspent stimulus savings, possibly much higher than my $2 trillion summation estimate, again with my caveats on investments, sending money overseas, etc.  

Author(s): Mike Shedlock

Publication Date: 22 Apr 2022

Publication Site: Mish Talk