If there’s anything to be learned from the current economic climate, it’s to always double-check your sources.
In this instance, President joe Biden seems to have confused monthly and annual inflation rates, ignoring the fact that while monthly inflation in August was "only" 0.1% (and still over 8% year over year) the real shock is that most economists expected prices to decline in August (primarily due to a sharp decrease in fuel prices).
More worrying still is that while Americans spent over 23% more for energy, 6% more for shelter, and 11% more for food in August, we have also experienced the largest increase in grocery prices since 1979.
Reality’s refusal to subject itself to wishful thinking or publicity spin is perhaps its most inconsiderate and irritating character flaw.
It’s comically tautological to decry politicians for literally lying with the truth — and to evoke Mark Twain — "there are lies, there are damn lies, and there are statistics," but the recent stance taken by the White House concerning inflation is an entirely different matter.
At best, the position taken suggests that political leaders are living in an entirely different reality from the rest of the country; at worst, it creates an inherently flawed foundation for (in)action that will continue to destroy Americans’ ability to provide for themselves or save for their future.
Few serious economists — those who find themselves outside of Washington and are thus forced to work for a living — see any hope in the Inflation Reduction Act (and the $485 billion of demand that it’s going to pump into the economy) providing relief.
We must reiterate the harsh reality that we have been preaching for some while: the soft landing is a myth, and to paraphrase Metallica, the soothing light at the end of the tunnel is a freight train coming our way.
Inflation has become more stubborn, and excluding the price actions of the volatile (but quite necessary) food and energy sectors, core inflation jumped 0.6% in August after climbing a milder 0.3% the previous month.
A metric used by the Federal Reserve Bank of Cleveland to track median inflation was worse still, rising by 0.7% last month. The "silent thief" has invaded all sectors of the economy and has become demand-driven — restaurant prices, for instance, jumped 0.9% in August and 8% over the past year, but restaurant traffic has increased to pre-pandemic levels — and because inflation has become demand-driven it is more likely to be persistent.
The increase in wages and salaries — 6.7% in August alone, including a record wage premium for those who switch jobs — may or may not disprove the dismissive adage of "no one wants to work anymore," but it unequivocally demonstrates that businesses are willing to pay real money to fill vacancies.
The inflation that began from a pandemic-induced supply shock has begun gaining momentum, and the outcome will be determined in large part by what happens in the labor market.
The wage increases and hiring frenzy may be a boon for job-seekers, but the fact that salaries have increased at the fastest pace in decades means that consumers can keep spending — and are forced to increase spending, when considering essentials such as food and fuel — which adds fuel to the fire.
We are quickly approaching the point where it will be impossible to bring down inflation without a recession and a sharp increase in unemployment.
Some would argue that we are already past that point, and that sharp disruption is the only way to keep prices from continuing to ratchet upwards. This would obviously not be without consequences which could put Black Monday to shame.
The decision to inject massive amounts of government-funded demand into an already-overheated economy suffering what has now become demand-driven inflation is based on a set of economic principles that are, quite literally, not of this world.
Most economists expected a price decrease in things like automobiles as some supply chain issues tried to resolve themselves — although the impending rail strike, which has not been resolved despite a tentative deal being reached, may ruin an already-tenuous recovery of the supply chain — but these expectations were not supported by reality.
It remains to be seen just how much businesses can pass on costs to customers, but the cliff is in sight. As the economy continues its melt-up, it will be necessary to continue increasing rates until a recession is all but guaranteed.
While it’s arguable that the Fed ignored the threat caused by the allegedly transitory inflation, even the optimists have started to accept that raising the benchmark rate above 4% by early 2023 will be necessary.
We’re less enthusiastic: it will likely need to be 6% to bring the inflationary monster once again to heel, and maybe 10% or more if decisions continue to be made with all the temerity of melting ice cream.
While the Fed continues to hope for a soft landing, Americans are about to learn the consequences of building policy on wishes and dreams.
Vinh Vuong is the Chairman and CEO of Garrison Fathom, a diversified holding company with a focus on long-term holdings and shareholder activism.
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