It’s Wednesday, and I have two things to write briefly about before exposing readers to more music. First, the evidence base for my “this period of inflation is temporary” narrative becomes more important. The latest CPI data from the U.S. Bureau of Labor Statistics showed that U.S. inflation has peaked, and the rapid decline in inflation in the commodity sector kicked off the scene. The second theme concerns measuring progress in the development and dissemination of new ideas. It is often difficult to know how far a new framework has penetrated the wider debate. But sometimes something happens that reminds me how far we still have to go in changing the framework and language around fiscal capacity and related topics, which Modern Monetary Theory (MMT) has brought to the fore. We end with some calm guitar playing.
US inflation
Yesterday (December 13, 2022), the U.S. Bureau of Labor Statistics released the latest—— Consumer Price Index Summary – This indicates:
1. “In November, the national consumer price index for urban residents (CPI-U) rose by 0.1% after seasonal adjustment, and rose by 0.4% in October.”
2. “Over the past 12 months, the All Items Index has increased by 7.1% before seasonal adjustment.”
3. “The energy index fell 1.6% for the month as the gasoline index, natural gas index and electricity index all fell.”
4. “The All Items Index rose 7.1% in the 12 months to November; the smallest 12-month gain since the end of December 2021.”
5. “The All Items Minus Food and Energy index increased 6.0% over the past 12 months. The Energy index increased 13.1% over the past 12 months
In November, the food index rose 10.6 percent from a year earlier; all of these gains were smaller than in the period through October. “
The word – peak – came to my lips.
Recall these blog posts:
1. Central banks are resisting inflation scare hype from financial markets – and we’re better off as a result (December 13, 2021).
2. Current inflation still looks like a blip (March 28, 2022).
I noted that sectoral imbalances emerged due to the pandemic as restrictions prevented the delivery of many services, as spending shifted from services to goods.
In this case, the pandemic did three things.
First, government stimulus spending, while imperfect, has helped maintain household income and spending capacity.
Second, the lockdown essentially prevented consumers from spending on services – hospitality, entertainment, travel, etc.
With incomes held constant, spending shifted toward the production of goods—decorations, gadgets, flat-screen TVs, you name it.
Households came up with spending plans in some areas, while normal spending patterns were disrupted by their inability to spend in others.
Third, the lockdown and health problems have also reduced the ability of commodity-producing sectors to meet new demand. This is what we call a supply-side bottleneck.
If workers are locked down, get sick, and ports and freight terminals are disrupted, normally smooth supply chains are disrupted, leading to inventory shortages, delayed deliveries, and more.
Then add market forces—which allow producers, wholesalers, and retailers to profit by raising prices to cover shortages—and you can see the problem.
In the blog post referenced above, I demonstrate that excess supply in the services sector mirrors excess demand in the goods sector.
As such, the pandemic has created a combination of supply constraints and rapidly changing demand patterns.
These shifts are partly a driver of inflationary pressures.
This all happened before Putin invaded Ukraine, which exacerbated supply constraints, especially in food.
This was before OPEC+ decided to halt supply to drive up prices and profits.
Given this discussion, the graph below is interesting.
It shows the annual CPI inflation rate for broad categories (goods and services).
What you’ve observed is that the cargo industry is beginning to address capacity pressures quickly as more ships sail, more factories resume production and freight rates come down (sharply).
Meanwhile, CPI movements in the services sector have been driving recent inflationary pressures due to the food and energy (transportation) components, but even they are waning.
The most recent monthly CPI growth for total goods was -0.73%, with 4 of the past 5 months being negative.
The November services CPI result was 0.30% (mom), down from 0.36% in October and 0.71% in September 2022.
So again, this looks a lot like a transitional period of price pressure, largely explained by supply constraints, with some impact from the Ukraine situation and OPEC+ not insignificant
One of the problems now is that as the U.S. central bank raises rates while inflationary pressures subside, mainstream economists mistakenly link the two.
I was wrong because rising interest rates – purportedly to curb overall spending and force companies to cut jobs and squeeze margins – have little to do with reducing emissions.
U.S. retail sales data showed higher spending in October 2022 than in March 2022.
There are no signs of a recession yet, but CPI pressure is coming down significantly, and I expect it to continue to abate.
when you know there’s more to do
A few days ago, a friend in academia sent me an “open letter” to sign and distribute.
The goal is to get as many progressive economists as possible to sign up, and then buy space in the mainstream media to publish it.
It originally came from the Australia Institute, which pretends to be a “progressive” think tank.
The content (below) concerns the proposed “stage three tax cuts”, which the previous Conservative federal government had legislated into and which the new Labor government (one could call “Conservative Lite”) claimed would deliver.
To get elected, they told voters they would not renege on cuts scheduled for next year.
The beneficiaries of the cuts were overwhelmingly high earners.
So we get that knee-jerk reaction of the progressives “tax the rich” and they only think so much.
However, the content of the “Letter” goes a step further.
I read the text and replied telling my correspondent that I would never sign something like this and that he should stop distributing it.
I wrote (besides some personal banter as a friend):
1. This shows that the federal government is financially strained and needs revenue to spend
2. It talks about financial costs rather than actual resource costs.
In other words, it just reinforces what I find unacceptable mainstream framing and anathema to progressive positions.
He replied that he hadn’t actually read it – but I now note that the document was published in a medium he signed. disappointing.
The letter was addressed to the Prime Minister and read as follows:
Australia is a low tax country compared to other advanced economies. Research from the Australia Institute has shown that most of the income tax cuts in stage three will benefit higher earners in general, and men in particular. In turn, the Phase 3 tax cuts will make inequality worse. Modeling by the Parliamentary Budget Office suggests they will cost more than a quarter trillion dollars over the next decade.
We, the signatories, all agree that the stage three tax cuts are unfair and unacceptable given the inflationary environment and new pressures on the government to make higher priority commitments to the budget.
We think politicians should take their promises seriously, but we also think the economic environment has fundamentally changed since the Stage 3 tax cut legislation was enacted in 2018.
We urge the Prime Minister and Parliament to reconsider the size, shape and timing of the third stage tax cuts, and to bring current tax policy in line with current economic conditions.
So you should be able to see my objection.
1. Emphasize ‘cost’ and acknowledge that the Parliamentary Budget Office is an authority to be cited and respected. It’s a neoliberal institution, like all these institutions in the world that claim that fiscal policy should be able to generate a surplus.
2. “Cost” is defined in financial terms, a meaningless concept for a currency-issuing government like Australia, and takes our attention away from real resource constraints.
The “cost” of tax cuts can only be measured in real resources. “Xin” remained silent on this.
3. It feeds into the current misconception that current inflationary pressures are due to excessive spending – the mainstream agenda.
4. It claims that the Australian government is financially strapped and needs cash represented by tax losses to fund more important things. This is clearly wrong.
When applied to the federal government, there is no applicable concept of “affordability”.
It can afford to buy anything sold in the currency it issues.
Putting some numbers into a bank account won’t hurt financial capacity.
This “letter” is the basis of today’s mainstream media reports – Top economists urge government to reconsider stage 3 tax cuts (December 14, 2022) – Which means their paid publicity stunt hit its mark – publicity.
The reporter has just rehearsed the framing and language of the “letter,” which means readers are further misled by these economists about the nature of the monetary system.
Language repetition:
– “Unaffordable” – the government has financial constraints.
– “Budget costs are rising under the weight of increasingly expensive schemes” – Financial constraints are intensified.
– “Can’t afford it given the changing economic outlook since 2019” – as if the government will run out of money as the deficit rises during the pandemic.
– “Boosting government spending and soaring interest rates have seriously deteriorated the budget outlook” – Government debt is getting heavy.
– “Long-term budget damage” – reinforces the concept of fiscal constraints and the possibility of “bad” or “impaired” fiscal balances.
– “Worsening the structural fiscal deficit” – Rising fiscal deficits are bad.
All mainstream frameworks and languages that support the neoliberal agenda.
It creates and reinforces fictional worlds and lies to people about the true nature of financial problems.
Many of Australia’s so-called progressive economists have signed the letter.
Some of them have been colleagues throughout my career.
If they feel the need to support such lies and nonsense, then we are a long way from a breakthrough.
Apparently, the Australia Institute is obsessed with tactics of political trapping that are more important than truth.
This is the state of the progressive mind in 2022.
The road ahead is long.
Music – Jimmy Dludlu
Here’s what I’ve been listening to this morning at work.
Jimmy Truru – is one of the hottest guitarists around, but also one of the least known.
I first heard of him when he released his first album in 1997— echoes of the past – have been following him ever since.
He was born in Mozambique but educated in Cape Town.
His jazz combines the traditional sound of great guitarists like Wes Montgomery with beats and sounds of West and Central Africa.
This song – Simone – from his 2002 album – Africa-centric.
The musicians are:
1. Jimmy Dludlu – lead vocals and guitarist.
2. Moreira Chonguica – Saxe.
3. Lucas Khumalo – Bass.
4. John Hassan – percussion.
5. Tiale Makhene – percussion instrument.
6. Mark Goliath – keyboard.
7. Soweto String Quartet.
very cool.
Enough for today!
(c) Copyright 2022 William Mitchell. all rights reserved.
