Inflation Is Rising At The Fastest Pace In 30 Years

Summary
In the past 12 months, the CPI has risen 5.4%, the fastest annual pace in 30 years (since 1991).
Despite the rising GDP and high inflation, Fed Chairman Jerome Powell, in prepared testimony in front of Congress last week, amazingly said that the Fed “is still a ways off” from tapering (reducing) quantitative easing.
The Labor Department reported Thursday that new claims for unemployment declined to 360,000 in the latest week, down from a revised 380,000 in the previous week. Continuing unemployment claims declined to 3.241 million, down from a revised 3.367 million in the previous week.
Unemployment claims are trending in the right direction, so as soon as most of the 6.8 million jobs lost from the pandemic return, the Fed can switch from its unemployment mandate to start fighting inflation.

Last Tuesday, the Labor Department reported that the Consumer Price Index (CPI) surged 0.9% in June, the largest monthly increase since August 2008. In the past 12 months, the CPI has risen 5.4%, the fastest annual pace in 30 years (since 1991). Prices for used vehicles rose 10.5% (in one month!), transportation rose 1.5% due to higher airfares, energy prices rose 1.5% as gasoline prices rose 2.6%, and food prices rose 0.8% in June. Additionally, due to the heat wave enveloping much of the U.S., natural gas prices rose 1.7% as demand for electricity at peaker natural gas power plants soared. Excluding food and energy, the core CPI rose 0.9% in June and 4.5% in the past 12 months. Clearly, inflation is alive and increasing.

On Wednesday, the Labor Department reported that the Producer Price Index (PPI) surged a full 1% (a 12% annual rate) in June, substantially higher than economists’ consensus estimate of 0.6%. The core PPI, excluding food, energy, and trade margins, also rose 1%, in June, which was substantially higher than the economists’ consensus estimate of 0.5%. In the past 12 months, the PPI and core PPI have risen 7.3% and 5.6%, respectively. Approximately 60% of the PPI increase was due to higher service costs that tend to not retrace, so this provides further evidence that the latest round of inflation is not “transitory.”

Despite the rising GDP and high inflation, Fed Chairman Jerome Powell, in prepared testimony in front of Congress last week, amazingly said that the Fed “is still a ways off” from tapering (reducing) quantitative easing. Furthermore, Powell said the current supply bottlenecks “should partially reverse as the effects of the bottlenecks unwind.” However, Powell implied that the Fed may be wrong with its inflation forecasts and added, “We’re anxious, like everybody else, to see that inflation pass through.”

As I mentioned earlier, approximately 60% of the June PPI increase was attributable to services, which are hard to unwind. As a result, in my opinion, Fed Chairman Powell is living in a fantasy world if he thinks that all these prices will “normalize” soon. I think he is misleading Congress with his testimony.

Turning to his jobs mandate, the Labor Department reported Thursday that new claims for unemployment declined to 360,000 in the latest week, down from a revised 380,000 in the previous week. Continuing unemployment claims declined to 3.241 million, down from a revised 3.367 million in the previous week. Economists were expecting weekly and continuing unemployment claims to come in at 350,000 and 3.3 million, respectively, so weekly claims were a bit higher and the drop in continuing claims was positive.

Unemployment claims are trending in the right direction, so as soon as most of the 6.8 million jobs lost from the pandemic return, the Fed can switch from its unemployment mandate to start fighting inflation.

Frankly, if I were running the Fed, I would declare a higher unemployment goal that could be achieved quickly, so I could then switch to fighting inflation, since economists are increasingly alarmed that inflation has been ignited and will be hard to squelch in the upcoming months and years.

In preparation for Chairman Jerome Powell’s Congressional testimony last week, the Fed issued a report that essentially implied that shortages in materials and goods, plus hiring problems tied to Covid, are impeding economic growth. Specifically, in the Fed’s semi-annual report before Congress, the Chairman said, “Progress on vaccinations has led to a reopening of the economy and strong economic growth,” and “shortages of material inputs and difficulties in hiring have held down activity in a number of industries.”

Right now, the labor force participation rate is 2% below where it was before the pandemic and the labor force has shrunk by 6.8 million workers. Obviously, these 6.8 million lost jobs are becoming a big policy problem for the Fed, since if these jobs do not come back, it could become a mid-term election challenge.

Another complication is that Israel approved a third shot for its Covid-19 vaccine. Although the U.S. may approve a third shot, most of us do not want to return to Covid-19 lockdowns like the rest of the world.

In the past several days, I was in Louisiana, Alabama, Georgia, and Florida, but I only saw one person with a mask, and that was a hostess at a restaurant in Birmingham. Most Americans are sick of lockdowns, and I suspect that even if a third booster shot is approved, only the elderly and high-risk people may get it.

There is no doubt that Covid-19 is a jobs killer, so if the Biden Administration makes a big deal about more people getting Covid-19 vaccinations and a third booster shot, they run the risk of enforcing more shutdowns and squelching overall economic growth. (Right now, the Atlanta Fed is estimating second-quarter GDP growing at a 7.5% annual pace, down from its previous estimate of a 7.9% annual pace.)

Another risk to economic growth is trade tariffs. The Wall Street Journal reported that some of the tariffs the Trump Administration imposed on China are being enforced by the Biden Administration, such as those on solar panels. Treasury Secretary Janet Yellen is also outspoken that not all of the tariffs imposed by the Trump Administration were well-thought-out and are not having the desired impact.

Despite any tariff barriers, we heard last week that China’s exports surged 32.2% in June, up from a 27.9% gain (annual pace) in May. China’s imports soared 36.7% in June, down from May’s torrid 51.1% surge. Both growth rates were much stronger than the economists’ consensus expectation of 23.2% and 25.5%, respectively. I should add that China’s GDP expanded at a 7.9% annual pace in the second quarter, down from an unsustainable 18.3% pace in the first quarter. This continued strong growth rate essentially means that their “demand push” inflation will likely persist, since both China and the rest of the world are in the midst of a strong economic recovery, and we are suffering “demand push” inflation due to material/supply shortages, but as supply catches up to demand, inflationary pressure may subside.

Interestingly, The Wall Street Journal on Thursday had an article entitled, “Many Jobs Lost During the Coronavirus Pandemic Just Aren’t Coming Back.” This article essentially argued that due to automation and other productivity enhancements implemented during the pandemic, many businesses are already planning to utilize fewer workers in the future. This essentially means that the Fed may not be able to fulfill its unemployment mandate and restore the 6.8 million jobs lost since the pandemic commenced.

Finally, the Commerce Department reported that retail sales rose 0.6% in June, despite a 2% decline in auto sales. Excluding autos, retail sales rose a robust 1.3% in June. Economists were expecting June’s retail sales to decline 0.4%, so this was a big positive surprise. Nine of the 13 retail categories surveyed showed a gain in June. Sales were especially strong at bars & restaurants (up 2.3%), which is a great sign that consumers are getting out and about. Clothing (up 2.6%) and electronics (up 3.3%) were also strong.