Inflation Continues To Accelerate
As predicted in our prior posts, inflation continues to accelerate. Although there may be occasional blips, inflation has trended upward with the current massive spending by Washington. Combined with the admitted major errors by the Federal Reserve on interest rates, most in America continue to see prices jump everywhere on everything. Will this reverse or slow down? That depends on Washington DC admitting mistakes and not passing any more spending. That includes dumping Build Back Better. Inflation may continue to remain high through 2025 or Washington can stop spending. Build Back Better is a bad acronym and name, better described as Spend, Spend, Spend. Also known as High Inflation, Higher Inflation, Highest Inflation.
The bureau of Labor Statistics released numbers for inflation for November on December 10. The numbers are ugly. While the BLS reports 6.8% inflation, that counts low inflation prior to the change in administration in 2021. Trailing numbers show inflation at 7.6% to 8.4% and rising. The price increases come across the board and result from bad choices and programs in Washington DC. The outlook shows no relief in sight. Only now have some on the Federal Reserve actually paid attention as conceded by Chairman Powell and other past Federal Reserve Bank presidents. Others, including the Presidential Press Secretary state the inflation really is an illusion — It’s good for you — It’s nothing to worry about.
But it is something to worry about
No less an authority than former Clinton and Obama economist Larry Summers warned in February that profligate government spending would “set off inflationary pressures of a kind we have not seen in a generation.” The Democrats ignored him and passed a $1.9 trillion COVID relief boondoggle. In hindsight, Summers was prescient. In November, he recommended that the administration “not compound errors” it had already made “with far too much fiscal stimulus and overly easy monetary policy” and reject Build Back Better.
A study by the Progressive Peoples Policy Project, a Democrat policy group, found that the bill would actually increase the cost of child care for middle-class families by about $13,000 per child annually.
The supply-and-demand dynamic and its impact on inflation seem to be mysteries to the administration – but not to most Americans. According to the Penn Wharton Budget Model, the average American family will incur an additional $3,500 in expenses this year solely because of already-surging inflation. It’s the kind of thing people notice.
Housing Inflation Understated in CPI Reports
Most gauges of U.S. rents and home prices are surging (up 15% to 20%). The government’s consumer price index (CPI) shows housing costs rising much less. The disparity worries many experts. “Rent of shelter” makes up a third of the CPI basket of goods and services prices. CPI only reflected a rise of 3.9% from November 2020. That’s the most in 14 years. But it pales in comparison to private-sector metrics.
We have all seen house prices & rents soar. Home prices based on Case Shiller are up 15 to 20%, as are rental prices, as reported by the nation’s largest landlords. If we assume 17% residential inflation, both CPI and core CPI would have exceeded 10 percent last month.
— Lawrence H. Summers (@LHSummers) December 13, 2021
Housing inflation is unlikely to abate based on supply and demand trends. The inflation that households are actually experiencing is raging and well in excess of reported gov’t statistics.
— Bill Ackman (@BillAckman) December 10, 2021
Government statistics only measure a fraction of price changes for housing in any month. The price changes show up over the course of about 12 to 18 months in the CPI. It means housing costs are expected to keep the CPI elevated well into next year.
By next summer, estimates for CPI housing components could be running in the 6-7% range. That beats any time in the last 30 years and double the rate recently included in CPI. If this had been included in the recent CPI reports, inflation already would have been close to, or exceeded, 10%.
Effects
How’s that working for your budget? Real or imaginary? Look at the effect beginning on housing prices. Will this take housing prices into a 15%-25% decline as occurred in prior bouts of high inflation? As inflation continues to accelerate, what effect will this have when the Fed raises interest rates multiple times in 2022? Are you ready for that? A sharp raise in interest rates might be a surprise for home prices.
Producer Prices
As we noted in a prior post, producer prices (PPI) have escalated faster than consumer prices (CPI). Producer price inflation represents the price increases at the business level. These eventually have to get past to the consumer. The November PPI measurement by the BLS shows PPI increasing at the fastest rate in its history. It now has reached 9.6%, representing the change form the prior year. We asked whether a 10% raise is in your future for your wages. Perhaps that number is too low. With the pending “Build Back Better” spendathon being considered in Washington, passage will push that 9.6% inflation much higher and more quickly. Will writing your representatives and senators make any difference in voting for the bill? You can choose to encourage or discourage this vote. Does it help you more than it will hurt you?
The price increase measured by PPI doesn’t automatically translate to the CPI in the next month. Different companies have the ability to pass on more of the cost increases than other companies. In addition,t he final delivery of items from the business to the consumer may not follow immediately. For example, aluminum or steel price increases to a car manufacturer may not show up until the car is sold a number of months later.
Import and Export Prices
The US imports and exports hundreds and hundreds of billions of dollars of goods every year. As import prices rise, your price to purchase rises on everything – Phones and electronics, clothes, appliances, food, pharmaceuticals, furniture and home goods, cars, etc. Recently released data shows that inflation increases still to come may be shocking for consumers. Look at the year over year change of 11% on imports and 18% on exports. While it may appear good that the 18% increase is on exports, consumers actually will see their purchase of the same goods have similar price increases, minus shipping costs. So 7% inflation in consumer prices and 10% in producer prices haven’t yet hit a peak.
Shipping Costs to Elevate Inflation At Least Through 2023
Global shipping problems look set to go on delaying goods traffic and fueling inflation well into 2023. These costs rarely get counted since changes haven’t been severe in the past for long period of time. For shipping, the standard cost uses the price of a 40-foot container as a benchmark. That price hit a record high above $11,000 in September. It has eased to around $10,000 recently, but up from $1,300 prior to 2020. The current high costs haven’t yet factored much into inflation, but will soon become part of price increases.
With 90% of the world’s merchandise shipped by sea, it risks exacerbating global inflation that is already proving more troublesome than anticipated. Experts from RBC, Xeneta (freight logistics), Oxford Economics, and others do not expect container shipping costs to normalize before 2023. This means the higher cost of logistics is not a transitory phenomenon and means trouble for inflation.
In early November, 11% of the world’s loaded container volume was being held up in logjams at ports. Other freight experts see perhaps a longer period of high prices affecting inflation for another couple of years. Even with “hoped for” increases in unloading cargo on west coast ports, the backlog and delays are unlikely to clear before 2023.
Shipping Cost Effects on Inflation
A UN report noted things are not getting materially better. The report notes high freight rates threaten the global recovery. It suggests these rates might boost global import prices by 11% and consumer prices by 1.5% between now and 2023. The effect will be more pronounced on lower end products than higher end products. Shipping would make up a greater percentage of cost to the end buyer. For example, the retail price of a low-end refrigerator will rise 24% compared with 6.5% for a costlier brand. Companies may just stop shipping very cheap fridges, as it just won’t be worth it. This would limit options for consumers and might exacerbate inflation by taking lower cost items out of the market.
In the US, much of the tame inflation data for the last decade resulted from consumers substituting lower costs items from China for normal purchases. This covers everything from the stock at Home Depot to furniture and home decorating. It includes appliances, phones, electronics, clothes, dishes, pots and pans, and countless other items.
The problem could get worse if smaller companies are unable to meet their commercial obligations and struggle to stay afloat. These companies don’t have sufficient resources to weather lower sales or absorb higher costs.