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INFLATION HITS 9.1 PERCENT AFTER MONTHS OF EMPTY TALK AT THE FED

TOPICS:InflationRyan McMakenThe Fed

July 13, 2022

By Ryan McMaken

The US Bureau of Labor statistics released new CPI inflation estimates this
morning, and the official numbers for June 2022 show price inflation rising to
9.1 percent, year over year. That’s the biggest number since November 1981 when
the price growth measure hit 9.6 percent, year over year. The month-over-month
measure surged as well, with the CPI measure hitting 1.4 percent. That’s the
highest month-over-month growth since March of 1980 when the measure hit 1.5
percent.

June marks the 15th month in a row during which CPI inflation has been more than
double the Fed’s 2-percent target inflation rate. CPI inflation has been more
than triple the 2 percent target for the past nine months, and year-over-year
growth in CPI inflation has been near 40-year highs for the past 8 months.




Not surprisingly, average earnings for Americans are not keeping up with rising
prices.

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In June, average hourly earnings rose 5.12 percent, meaning earnings came in at
4 percent behind rising prices. This is the 15th month in a row during which
price inflation outpaced earnings growth. This gap is likely the biggest in
decades and is certainly the largest since at least 2006. Not even the
inflationary run-up to the 2008 financial crisis produced an inflation-wage gap
as high as June 2022’s. Wages in June also fell behind price inflation more than
in any month during the covid “lockdowns.”



From the perspective of the public, the Fed, and the administration, this is all
bad news. For the public—and especially for lower- and medium-income regular
people—9.1 percent price inflation means declining real wages, because earnings
simply aren’t keeping up with rising prices. For the Biden administration, this
is just the latest indication that the “Biden economy” is one in which people
are falling behind. And for the Fed and Jerome Powell, this is more evidence
that the nation’s central bankers are in over their heads and were apparently
surprised by the fact the printing up trillions of new dollars in 2020 and 2021
led to rapid growth in prices.

Both the administration and the Fed are likely to keep touting the job numbers
with increasing desperation in an effort to convince people that the economy is
in great shape. Having gainful employment is wonderful, of course, but that’s
hardly the only measure of prosperity. If real wages are declining, one’s
standard of living is declining. Moreover, even mainstream economists for
decades have recognized that employment is a lagging indicator of economic
activity. Yet, Fed economists in recent months—perhaps betraying the fact they
are mostly partisan hacks with little regard for actual economic science—have
been repeatedly invoking jobs numbers as if they were a leading indicator. What
matters for Fed economists is the optics.

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On-the-ground indicators, however, paint a less rosy picture. For example, the
2s/10s yield curve yesterday went into its deepest inversion since 2007. That
points to recession. The Austrian money supply measure points to
recession. Layoffs in the real estate industry are become more widespread as
demand dries up. Car repossessions have increased so much that banks are leasing
more land to store all the cars. And finally, even the official jobs data is a
mixed bag. For example, the media and the regime were careful to focus last week
only on the establishment employment survey which showed job gains. The
household survey, on the other hand—which counts employed persons rather than
total jobs—has showed no gains in four months.

A recession could help bring prices, down, of course, since demand would
presumably fall considerably. But we can’t even be sure that price deflation
will be the scenario rather than stagflation with both rising unemployment and
high prices. After all, the Fed is clearly far behind the curve in terms of
tightening the money supply. Only small amounts of the Fed’s portfolio are
gradually rolling off. Active QE is over (for now) but nearly $9 trillion
remains on the books. Meanwhile, the Fed continues to keep the federal funds
target low. With a 9.1 percent inflation rate, however, the current target rate
of 1.75% reflects the unseriousness of the Fed and its cental bankers. This sort
of policy can only be described as dovish, regardless of all the “hawkish”
talk—and it is just talk—coming out of the Fed since last fall.



More skeptical Fed watcher saw it coming, of course. Last August, when CPI
inflation was already over 5 percent, the Fed was still attached to its PR
effort to label price inflation as “transitory.” In his speech for the Jackson
Hole symposium, Powell admitted that the numbers were headed well above the 2
percent target, but assured his audience:

> Longer-term inflation expectations have moved much less than actual inflation
> or near-term expectations, suggesting that households, businesses, and market
> participants also believe that current high inflation readings are likely to
> prove transitory and that, in any case, the Fed will keep inflation close to
> our 2 percent objective over time. [emphasis added]

When it became clear that inflation was not going to be transitory, Powell
pivoted to hawkish-sounding talk about multiple rate increases that were
“coming.” That, however, didn’t happen until March of this year, and by then,
CPI inflation was over 8 percent. By June, the Fed finally started to come to
the realization that it wasn’t going to be enough to simply tell Wall Street
“hey guys, we’ll raise rates some day” in order to bring price inflation under
control.

When the Fed finally did start to raise rates to what might be called more
moderately accommodative levels—rather than the extreme accommodation we’ve been
seeing for years—real wages were already in decline and price inflation was
hitting near-40-year highs for six months in a row. These timid moves
ridiculously prompted some commentators to compare Powell to Paul Volcker. But,
if anything, Powell is the new Arthur Burns—an out of touch technocrat hoping
beyond hope that some minor tinkering here and there will fix everything—and all
without a recession.

With this latest inflation data, however, pressure will only mount on Powell to
push through a full 1 percent rate hike. That, however, would make government
debt much more expensive to service, tank the real estate industry, and lead to
many household defaults on mortgages and auto payments. Unemployment would
follow, and then what sliver of data will the Fed use to convince us that the
economy is doing swell?





Ryan McMaken (@ryanmcmaken) is a senior editor at the Mises Institute. Send him
your article submissions for the Mises Wire and Power and Market, but
read article guidelines first. Ryan has a bachelor’s degree in economics and a
master’s degree in public policy and international relations from the University
of Colorado. He was a housing economist for the State of Colorado. He is the
author of Commie Cowboys: The Bourgeoisie and the Nation-State in the Western
Genre.

Source: Mises





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