Inflation Seems to Be Re-Accelerating
Jeffrey A. Tucker
Commentary
It was a bad week for those promising that our inflation problems are going away. All data from January suggest exactly the opposite.
The headlines for consumer prices were all about “cooling,” “firming,” “easing,” “moderating,” and another or so dozen weasel words to disguise the reality that January’s numbers had gained steam over December and November. It didn’t look good. Headline writers were scrambling all day to figure out how to say “it’s bad” without saying “it’s bad.”
But two days later when Producer Prices came out, there was simply no denying the reality. The numbers looked terrible, so awful that even the Department of Labor had to admit that “The index for final demand goods moved up 1.2 percent in January, the largest increase since rising 2.1 percent in June 2022.”
This was absolutely not part of the plan.
Epoch Times Photo
(Data: Federal Reserve Economic Data [FRED], St. Louis Fed; Chart: Jeffrey A. Tucker)
The Fed has been battling inflation for a year. It is supposed to soft-land, not re-accelerate. The details are revealing too. A major part of the increase in the prices businesses pay come not from food (thank goodness) but energy, once again.
“Nearly one-third of the January rise in the index for final demand goods can be traced to prices for gasoline, which increased 6.2 percent. The indexes for residential natural gas, diesel fuel, jet fuel, soft drinks, and motor vehicles also moved higher. Conversely, prices for fresh and dry vegetables decreased 33.5 percent. The indexes for residual fuels and for basic organic chemicals also declined.”
Following all of this gives you the picture of a hot potato being passed from sector to sector. It comes and goes in one sector only to appear in another. And the relationship between producer and consumer prices is also fascinating to watch. Of course producers would love nothing better than to “pass on” higher costs to consumers, but that is simply not possible without causing or at least risking a change in demand that would hurt profitability.
For two years now, producers have been working to shoulder the burden without overtly raising prices dramatically. They’ve not always gotten away with it. We are all-too-aware of the endless extra fees, the smaller packages, the reduced services, and the general degradation of the consumer experience.
Another trend we’ve seen develop is for large businesses to offload exorbitant labor costs in the form of terminations. That helps but based on what we are seeing now, they need to be more. This is because business is dealing with higher costs in the area that all share in equally, namely the energy to run the enterprise. This is going to hit consumers down the line, which suggests that we are far from complete with this grueling inflation.
Early in the lockdowns, producers had it going pretty well until the price increases came. They ate as much as they could before the same started hitting consumers. It was the prices businesses pay that gave the long momentum to cause the two-year index for consumer prices to shoot up 15.4 percent. The optimism that this would settle down was largely based on what seemed to be merciful trends in the producer sector.
But with that starting to change, we could see even more momentum for all prices over the coming months. This is not the news you wanted to hear!
How is this possible given that the money supply has actually started to shrink and do so rather dramatically? Well, the problem is that you cannot make what has already happened go away simply because you changed strategy. A cup of salt in the soup is going to ruin the result no matter how many potatoes you add to soak it up.
Bottom line: the Fed added $6.5 trillion to the money stock from lockdowns until April 2022. Looked at from that long perspective, the Fed has only begun to fight the inevitable consequences.
There is another factor here about which no one seems to be speaking, namely velocity. This is the pace at which money changes hands. You can print up trillions but if it is all stuffed in mattresses it won’t drive price increases. Once it starts to circulate, it is another matter. So the pace of circulation can make a huge difference.
And so it has. Even as M2 has declined, velocity is going up and up, thereby wiping out what would be the deflationary effect of a declining money supply.
Epoch Times Photo
(Data: Federal Reserve Economic Data [FRED], St. Louis Fed; Chart: Jeffrey A. Tucker)
The trouble is the damage that has already been done that still needs to bleed its way through all economic structures. The real fear here is that the Federal Reserve has truly lost control if it ever had it. They can raise rates and shrink the money supply, even clean up the Fed’s balance sheet, all they want but it might not stop the momentum already in place. This is the real fear of the latest producer price index (PPI) data.
And this is why Wall Street freaked out today. It means more panic by the Fed. So much for dialing back on the rate increases. They have to get much higher soon if the Fed stands any chance of beating back this inflationary beast.
No longer can the Biden administration blame Putin, corporations, gas companies, and so on. This is a money problem, and made worse by a supply problem owing to the Biden administration’s policies.
Views expressed in this article are the opinions of the author and do not necessarily reflect the views of The Epoch Times.
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