The American economy grew at better than a three per cent annualized rate in the fourth quarter of last year. Early reports that retail sales had declined in January were revised to show an increase. Unemployment is at 3.9 per cent, below the pre-pandemic rate, while various measures of workers’ real earnings (inflation-adjusted) are recovering from their low point of two years ago. There continue to be more job openings than unemployed workers. Corporate profits hit a new record, or close to it, last year and are expected to increase by 10 per cent this year. Share prices are at levels that only super-greedy bulls can find objectionable.
Inflation, Hit Hard By The Fed, Remains In The Game
Such generally positive economic news makes it no surprise that the inflation dragon has not breathed its last fiery breath. A hint that there is life in the old ogre yet came when the headline rate of the Consumer Price Index rose to 3.2 per cent in February from 3.1 per cent in January, after falling from its June 2022 peak of 9 per cent. Followed by a 0.6 per cent increase in wholesale prices, double the January increase. That makes the year-over-year rise in the prices of goods headed towards retailers’ shelves the largest since September 2023. The somewhat different inflation measure on which the Fed says it relies will be published later this week. It excludes increases in food and petrol prices, making it of less interest to people who eat and drive.
No matter. “The great unwashed,” as Edward Bulwer-Lytton might put it, or the “deplorables” as Hillary Rodham Clinton would have it, can’t be fussed by a change in the CPI from 3.10598 in January to 3.16574 in February. If you want to know why Trump is leading in most polls, look instead at the inflation numbers that have political clout.
Real People Look At Real Numbers
While her husband is coping in the supermarket aisles with a 25 per cent increase in food prices (eggs +65 per cent per NielsenIQ) and higher prices to feed the dog (dog food + 65 per cent), and do the laundry (bleach +74 per cent) since the White House staff started doing the Bidens’ shopping, Jane The Plumber is coping with the 41 per cent increase in the price of gas since Biden’s limo pulled up to the White House. And with the rising cost of keeping her new truck on the road. If she stops for a quick latte that cost $3.25 before covid, it is $6.82 according to Dataessential.
The annual cost of owning and operating a new vehicle rose from $10,728 in 2022 to $12,182 last year, a 14 per cent jump. Financial services company Bankrate reports the average annual auto-insurance premium has risen 26 per cent so far this year.
Then There Are The Upcoming Elections
Only ten days ago Federal Reserve Board chairman Jay Powell told congress the Fed is “not far” from rate cuts, adding he meant “at some point in 2024.” Fortunately, he added the usual “subject to incoming data”. In they have come, hotter than expected. Some forecasters believe Powell will go forward with cuts, and sooner rather than later. After all, this is an election year, the President who appointed him is running on a platform of “you never had it so good”, and a few quarter-point reductions in the Fed’s benchmark rate can ensure Biden a nicely growing economy come November, with any economic consequences to follow only after election day.
Another view is that the Fed will simply leave things as they are. Even without rate cuts the economy is doing well, and the sainted “incoming data” suggest it is too early for the Fed to holster its major weapon against inflation before the inflation dragon is dead, to sheath its sword before cutting off the head of the snake. Choose your metaphor.
Rate Cuts Called For By Transitory Inflation
Or, Powell might believe the recent inflationary spurt is, er, transitory, and go ahead with rate cuts. His appraisal of the balance of risks might lead him to believe that cutting too soon is less risky than waiting too long, precipitating a hard landing, better known as a recession. In short, the Fed might be seeing enough signs of a weakening economy to warrant an anticipatory cut.
Cracks In A Façade of Strength
Household debt is at an all-time high. Credit card balances are at their highest level since the Fed began tracking them in 1999, and the 30-day delinquency rate has risen for nine straight quarters. A study of “Financial Distress” by the St. Louis Fed concludes that “the incidence of household financial distress … has reached high levels, equal or close to those during the Great Recession.” That might prompt consumers to decide on a shopping pause that refreshes their finances, which McDonald’s says lower-income consumers are already doing by choosing to eat at home, foregoing the small pleasure of a Big Mac.
Known Unknowns Lurk
That leaves what Powell cannot control. Ukraine might take out enough Russian facilities to drive up the price oil. War in the Red Sea and drought in Panama might drive up transport costs and create supply-chain disruptions that trigger renewed inflation. AI might provide such a powerful spurt to productivity that unemployment will soar, or that higher wages and more leisure become the norm. America’s spendthrift politicians might finally rouse the bond vigilantes to insist on sky-high interest rates.
None of which might drive the Fed decision in what is, after all, an election year.