Yesterday (May 11, 2022), the U.S. Bureau of Labor Statistics released the latest – Consumer Price Index Summary – April 2022 – This indicates a monthly increase of 0.3% in the CPI, the lowest monthly increase since August 2021, and happens to be about the same as the average monthly increase in January 1947 and April 2022. The results point to price pressure. The energy sector fell 2.7% in April after surging 11% in March. In addition, food price increases fell for the third consecutive month. All of this has nothing to do with the recent rate hikes the Fed has imposed on the economy. They were ready and confirmed the brevity of this period of price instability. The U.S. Treasury Department also released the latest fiscal statistics yesterday – Monthly Treasury Statement – April 2022, reports a staggering $533,794 fiscal shift between April 2021 and April 2022 – The fiscal drag this shift represents is massive and questions the Fed’s behavior – why they think they need to Push the economy into recession? Fiscal policy is already working in this direction!
CPI data
The first graph shows the monthly average CPI growth for all projects in US cities from January 2015 to April 2022 (CPI_U).
The graph shows that CPI growth has risen to higher levels since 2021, but certainly not accelerated and may now be declining.
The graph below compares the trajectory of the All-Items series with the same series minus the food and energy components.
Clearly, once we exclude volatile food and energy items, underlying inflation is much lower.
These volatile components are clearly related, as rising oil prices affect truck and transportation prices and other machinery used to produce food.
The next graph compares the All-Items series to energy prices.
Energy prices fell 2.7% in April and oil prices may have peaked as demand fell.
Contrast the current experience with the next chart, which covers the period from January 1970 to December 1985, when there were two major oil price shocks (marked by red bars).
The first shock occurred in October 1973, when the Arab OPEC members decided to raise oil prices by about four times. There are also export bans on countries believed to be conspiring with Israel (e.g. US, Japan, Western Europe).
Subsequent inflation began to subside in the second half of that decade, but was hit by a second OPEC shock with— 1979 oil crisis – This is due to the reduction in oil production related to the Iranian revolution.
Shortly thereafter, oil prices took a further hit due to the Iran-Iraq war (which began in 1980).
It was not until the remainder of the 1980s and the recession of 1991 that these inflationary pressures were completely removed from the global economy.
The current situation is not entrenched in wage price struggles, nor long-term expectations.
In the 1970s, after the initial oil price shock, both institutional forces pushed inflation higher.
In the current period, real wages are falling as nominal wage growth lags far behind the temporary rise in the CPI. It doesn’t make sense for wage growth to push inflation even higher.
We know what the driving factors are:
1. Supply disruptions in manufacturing and distribution – shipping, trucking, etc.
2. Workers continue to contract the virus and are unable to work.
3. The Ukrainian War.
4. OPEC anti-competitive profit push.
None of these drivers is very sensitive to changes in interest rates.
We keep hearing about corporate profitability being affected by cost pressures from rising wages.
Well, if this logic is correct, then cost pressures from rising interest rates will certainly have the same effect.
Just as businesses use their market power to pass wage costs on to consumers, they also pass on rising interest rates to consumers.
thereby exacerbating inflationary pressures.
The only way higher interest rates will lower inflation is if they are pushed so high that the economy is plunged into a deep recession and stifles the ability of companies to push profits.
But by then, mass unemployment has risen to high levels, and we have a human tragedy on our hands.
Fiscal policy shift
As stated in the introduction, fiscal policy in the United States is currently contracting sharply.
On May 9, 2022, the Congressional Budget Office released their — Monthly Budget Review: April 2022 – This indicates:
The federal budget deficit for the first seven months of fiscal 2022 is $360 billion…about one-fifth of the $1.9 trillion deficit recorded during the same period in 2021. Revenue increased by $843 billion (or 39%), and expenses increased by $729 billion (or 18%) from a year earlier.
And then you might be tempted to think along these lines – there are still fiscal deficits, so the government’s finances are still supporting the overall economy.
In a sense, this is true.
There is still a net injection of government spending into the economy — the deficit.
But that doesn’t help us be very informed.
We need context.
The context requires us to look at other contexts – the domestic private sector and the external sector.
It requires us to recognize that changes in fiscal conditions over time are important in adjusting our view of fiscal policy.
On March 24, 2022, the U.S. Bureau of Economic Analysis, which publishes national accounts data and balance of payments data, released the latest current account data.
Post – U.S. current account deficit widens in 2021 – tell us:
The U.S. current account deficit widens by $205.5 billion, or 33.4 percent, to $821.6 billion in 2021, reflecting trade in goods and services and the aggregate balance of income flows between U.S. residents and residents of other countries. The goods deficit widened. The 2021 deficit is 3.6% of current dollar GDP, up from 2.9% in 2020.
Thus, in terms of spending flows, the external sector is pulling more and more net spending away from the domestic economy, increasingly undermining GDP growth.
The question, then, is what does this mean for private domestic income and spending balances as the fiscal balance moves toward equilibrium at least rapidly, while the external sector consumes 3.6 percent of GDP worth of GDP from spending streams.
To fill the gap, the domestic private sector will have to increase deficits and accumulate large amounts of debt.
This is a particularly volatile outlook at a time when private debt is currently at unsustainable levels.
The rapid fiscal shift has put enormous negative pressure on the spending system.
next stop?
economic recession.
Failure to maintain responsible policy settings will be entirely self-inflicted.
The chart below shows the annual fiscal deficit (millions of dollars) since 1985 on a rolling monthly basis.
You can see that the current period is consolidating (shrinking) very fast relative to the GFC period.
Compared to the current pandemic, the U.S. government has been supporting the economy for much longer during the global financial crisis.
I am afraid that the current pace of integration is too fast.
The April 2022 monthly treasury statement (related above) shows that the U.S. federal government has seen a substantial increase in revenue and only a small increase in spending (mostly due to higher prices).
The fiscal shift in April was about $533.794 billion, which in relative terms meant a massive withdrawal of spending from the system.
The crazy thing about all of this is that as the U.S. government increases its support for Ukraine, they are shifting spending away from other areas like education, Chilean healthcare, healthcare and climate governance.
These fields are the foundation of the president’s domestic agenda, but they fall into the trap of thinking there are only so many dollars available, which sparked the whole transfer frenzy.
The results would be pretty obvious—a decline in the well-being of U.S. citizens, especially low-income recipients.
in conclusion
When Jerome Powell made his August 2020 statement, I had hoped they were breaking the NAIRU mentality that things could change.
I wrote in this blog post- Fed statement marks new stage in macroeconomic paradigm shift (31 Aug 2020).
I was wrong, however, U.S. policymakers seem bent on making a recession part of a futile fight against already moderating inflationary pressures.
Enough for today!
(c) Copyright 2022 William Mitchell. all rights reserved.
