4 minute read
US Inflation
MILTON EZRATI is chief economist for Vested, a contributing editor at The National Interest, and author of “Thirty Tomorrows” and “Bite-Sized Investing.” Milton Ezrati
Inflation Won’t Go Away Soon
Believing July’s good inflation news will lead you astray
The latest inflation news looks remarkably good, at least on the surface. The Labor Department reported that, overall, the consumer price index (CPI) for July showed no inflation.
After months of horrific news and no small amount of fear, this seemingly happy result arrived entirely from a 4.6 percent drop in energy prices. The stock market took the news to heart. An hour after the news was released at 8:30 a.m. Eastern time on Aug. 10, the benchmark S&P 500 stock price index jumped 1.7 percent on the opening bell. Investors seem to think the good news will convince the Federal Reserve (Fed) to abandon its anti-inflationary efforts, stop raising interest rates, and provide liquidity more liberally to financial markets.
But one month doesn’t reverse any trend, especially one that has gained considerable momentum for more than a year. Investors and Americans generally would err should they now dismiss inflation concerns. Policymakers at the Fed would do the nation a disservice to throttle back their counter-inflationary posture. Details from this latest CPI report make these conclusions clear.
Food is the first consideration. It’s the largest single part of America’s household budget, about 14 percent, according to the Labor Department. It rose 1.1 percent in July alone, an annual inflation rate of 14 percent. (It’s purely a coincidence that these two numbers are the same). This is a distinct acceleration from the 10.9 percent pace of advance averaged by food prices during the past 12 months. Alone, this picture, regardless of any other consideration, pressures households and the Fed, and has political ramifications.
Nor is it likely that energy prices will continue to provide in the coming months the relief they did in July. The recent plunge was mainly a one-time adjustment. For some time now, a shortage of domestic refining capacity has pushed up gasoline and fuel oil prices faster than those of crude oil. The July drop in retail energy prices seems to signal that the production of refined products has at last caught up with demand.
With this adjustment now more or less complete, gasoline and heating oil prices should return to tracking those of crude oil. And those prices have picked up again. The price of a barrel of benchmark West Texas Intermediate grade hit a low of $88.54 at the beginning of August. Since then, it has risen to more than $94 a barrel, before dropping back to $90 on Aug. 18.
For the rest of the inflation index—the so-called core measure, which excludes food and energy— July brought a mix. It nets out as what could be described as modest relief. This core measure rose between April and June between 0.6 and 0.7 percent a month, or at a 7.8 percent average annual rate. July showed a monthly gain of 0.3 percent, or a 3.7 percent annual rate. If this were to hold, it would still exceed the Fed’s preferred inflation of 2.0 percent. But it isn’t apparent that the economy will realize even this relative moderation in inflation. Much of what brought it came from more volatile sectors, while more important and otherwise stable sectors carried less encouragement.
Part of July’s break in “core” inflation reflected a 0.5 percent drop in the prices of transportation services. This is clearly a direct result of the drop in energy prices that, as already indicated, will not likely persist. A 0.4 percent decline in used car prices also helped to hold back the pace of core inflation in July. This is a notoriously volatile component of the CPI and is as likely to surge in August as it is to repeat its decline.
Against these unreliable sources of relief, the prices of rent and housing continued in July to show the same 8 percent annual rate of advance they have averaged all year. Ominously, the prices of medical services, which had until now held back the overall accounting of inflation, accelerated from the average 4 percent annual rate of increase to a 5 percent rate in July.
Of course, anything is possible, especially in a single month’s accounting. The likelihood, however, suggests four key conclusions to take away from this exciting news. One, inflation matters aren’t nearly as good as the headline number suggests. Two, whatever relief the nation gets from inflation, price pressure will remain a source of concern. Three, investors are foolish to take the good news to heart. Four, the Fed would fail the nation if it were to relax its stated determination to keep up its counter-inflationary policies.
