Tags: inflation | household | inflation | economy

Creeping Inflation Slowly Chokes Household Spending

inflation shrinking value of us dollar
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Wednesday, 14 November 2018 12:21 PM Current | Bio | Archive

INDICATOR: October Consumer Prices and Inflation-Adjusted Earnings

KEY DATA: CPI: +0.3%; Over-Year: +2.5%; Ex-Food and Energy: +0.2%; Over-Year: +2.1%/ Real Hourly Wages: -0.1%; Over-Year: +0.7%

IN A NUTSHELL: “Inflation may not be high, but it is rising fast enough to limit household spending power.”

WHAT IT MEANS: While prices keep rising, inflation is not yet a major problem. In October, the Consumer Price Index rose the fastest in nine months, but much of that came from a surge in energy costs. Given the rout in the oil markets so far this month, I suspect that will not be the case when the November data are released. There was also a jump in used vehicle costs, but that came on top of a large decline in September. Otherwise, price increases were pretty tame across the rest of the economy. Food and medical commodity costs fell while most other categories rose modestly. Excluding food and energy, consumer prices rose at a moderate pace both over the month and over the year.

While inflation may not look like it is rising sharply, it is increasing fast enough to offset gains in wages. Indeed, with hourly earnings up less than overall inflation, household spending power declined in October. And over the year, it continues to rise at a less than one percent pace. As I keep saying, it is hard to sustain strong consumption and robust overall economic growth if households do not have the capacity to expand their spending.

MARKETS AND FED POLICY IMPLICATIONS: The price of moderate inflation is eternal vigilance. That seems to be the Fed’s strategy and it makes sense. Many people, especially those who believe that everything begins and ends with the equity markets, are arguing the Fed is fighting an inflation war that doesn’t exist. That is wrong. The Fed’s reasoning for raising rates is not that inflation is too high or the risk to inflation getting out of control is significant. In every statement that comes out after a FOMC meeting, the members confirm that they think inflation will remain near target. But the members recognize that there are forces at work, in particular, massive fiscal stimulus at a time of labor shortages, that could potentially lead to inflation accelerating. So, the logical approach is to position monetary policy so that the Fed can fight inflation if the need arises. That is why the Fed members are now talking about a neutral funds rate and possibly exceeding it. Before the Fed can apply the brakes, it has to actually get its foot off the accelerator. That doesn’t happen until it gets to neutral. And since the members have made clear that the funds rate is still well below neutral, there is no reason for the FOMC to stop raising rates anytime soon. The Fed’s war against inflation requires constant positioning and repositioning. Right now, with the economy strong and rates low, it has to raise rates in order to have the ammunition to fight any future bouts of inflation. Failure to understand that is not the fault of the Fed: It says what it is doing constantly. It is a problem for those whose concerns don’t coincide with the Fed’s dual mandate of stable inflation and maximum employment. There is no third mandate to maximize equity prices and if I have to keep saying that, so be it.

Joel L. Naroff is the president and founder of Naroff Economic Advisors, a strategic economic consulting firm.

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Inflation may not be high, but it is rising fast enough to limit household spending power.
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2018-21-14
Wednesday, 14 November 2018 12:21 PM
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