How the Fed Keeps Getting Inflation Wrong

[Celerity]

https://prospect.org/blogs-and-newsletters/tap/2024-04-12-fed-keeps-getting-inflation-wrong/



President Biden made two catastrophically bad appointments. One was Attorney General Merrick Garland. The other was Fed Chair Powell. Either could literally cost Biden his presidency and the country its democracy—Garland by having slow-walked Trump’s prosecution and Powell by needlessly slowing the economy. The latest inflation report by the Bureau of Labor Statistics, released Wednesday, showed the Consumer Price Index ticking up by 0.4 percent in March, the same as in February, but slightly higher than expected. This in turn set off signals from the Fed that expected rate reductions would have to be postponed, and near-hysterical media commentary. The Dow duly dropped more than a thousand points.

According to one press report after another, the economy was stuck with high inflation; high interest rates would persist; and Biden’s election-year good-news economy would be stuck with a bad-news story. But if you bother to take a close look at the details of the actual price increases by sector, they have nothing to do with the kind of inflation that justifies high interest rates. Some of the Fed’s own research confirms that. Nearly all of the price hikes came from a few sectors, none of which have anything to do with overheated demand. Take homeowner insurance, where costs have soared, rising 20 percent between 2021 and 2023. That has everything to do with climate-related losses that insurance companies try to make up by hiking rates on other homeowners, and nothing to do with demand. High interest rates don’t touch that.

Likewise auto insurance rates, which increased a staggering 22.2 percent in 2023, according to the March CPI report. Why? Accidents rose during the pandemic, apparently because stressed drivers with cabin fever expressed their frustrations via road rage. More complex systems in cars also increased repair costs. The Fed’s policy can’t fix any of that either. A few outlier studies by economists at regional Fed banks confirm the errors in both the Fed’s analysis and its policies. This March report by two researchers at the San Francisco Fed, titled “What’s Driving Inflation?,” concludes that “current inflation is being driven almost entirely by services such as health care, transportation, accommodations, and housing rents.” People with spare purchasing power are not “demanding” more health care. Rather, the health system, including drug companies, has too much market power to rig prices.

Rather than hiking rates, the Fed should be pressing the Federal Trade Commission for even tougher antitrust enforcement. Some of the recent increase in the transportation sector is driven by idiosyncratic hikes in gasoline prices. For instance, California, with more than 27 million licensed drivers, experiences a more extreme version of the climate-friendly policy of requiring refiners to shift from “winter blend” to “summer blend” gasoline every spring. Because of transition costs, the current price of gas in California is about $5.43 a gallon for regular, or almost two bucks higher than the $3.63 average in the rest of the country, according to AAA. Powell’s high interest rates can’t fix that either. Nor can they solve the housing shortage. This is wonky stuff, but not that wonky. The media should be doing a better job of explaining it, as a counterweight to Powell’s bad instincts; and the economists in the Fed’s employ should be bolder about pointing out Powell’s bad economics.

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[c-rational]

1. K&R. Good article, thanks for posting.

[gab13by13]

2. Nice thread, nice article,

Watch out for the "Biden appointed Jerome posse" coming for you.

I am on a fixed income and my economy couldn't be better. I watched the Masters just to root against the Saudi golfers and saw 10's of thousands of people who paid big money just to get into Augusta and watch golf. Where the fuck did all those people get their money?

When the 300,000 jobs report came out the narrative was the economy is booming, I knew the right wing would have to change that talking point to the dreaded 2.0 inflation target.

I can't even get to sleep at night worried about meeting that 2.0 target. Do I need the sarcasm thingy?

The economy couldn't be better, just imagine where we would be with Trump banning immigration and imposing a 10% tariff on all imports.

There has only been 1 Democratic Fed chair, Janet Yellen.

We get Magat leftovers: Powell, Wray, DeJoy. If products are too expensive, don't buy them.

Let me tell my prescription drug story and then someone let me know what the Fed can do about it.

I take 4 prescription drugs, 3 I get from mail order, 1, a popular blood thinner I get from my local drug store. I got a text from my mail order provider that I could be saving money if I got my blood thinner from them for only $399.00 for 3 month supply. I pay $10.00 per month for the same pill from my local drug store and the deal comes from the manufacturer of the drug.

Want to reduce inflation, allow Medicare to negotiate drug prices, have the government take over Big Oil.

[progree]

3. Inflation in the last month and last 3 months, graphs and all. PCE, CPI, PPI. Regular and Core

Last edited Mon Apr 15, 2024, 02:51 AM - Edit history (1)

I've been seeing some mischaracterizations of the recent inflation situation in the media, so here is a summary table followed by the graphs.

I annualize them all to be easy to compare to each other, and to compare to the FED's 2% goal. I use the actual index values rather than the one-digit changes that are commonly reported in the media. Links to the data are with the graphs.

The "1 month" number is the change from February to March, expressed as an annualized number (for the PCE it's the change from January to February; the PCE folks don't do March until near the end of April).

"Regular" is the "headline" number that has "everything"

"Core" is the regular with food and energy removed (The Fed prefers this as a basis for projecting FUTURE inflation)

3/29/24 PCE (Fed's favorite inflation measure)

REGULAR 3 month: 3.4%, REGULAR 1 month: 4.1%; CORE 3 month: 3.5%, Core 1 month: 3.2%;

4/10/24 CPI-Consumer(retail) inflation

REGULAR 3 month: 4.6%, REGULAR 1 month: 4.6%; CORE 3 month: 4.5%, Core 1 month: 4.4%;

4/11/24 PPI (Wholesale prices)

REGULAR 3 month: 4.4%, REGULAR 1 month: 1.9%; CORE 3 month: 4.7%, Core 1 month: 2.5%;

Edited to Add:
. Average real (i.e. inflation-adjusted) hourly earnings are up over the past 2 years and are above the pre-pandemic level:
. . . # Real average hourly earnings of production and non-supervisory workers: https://data.bls.gov/timeseries/CES0500000032
. . . # Real average hourly earnings of private sector workers: https://data.bls.gov/timeseries/CES0500000013

And now the graphs, in the following order:

* Core CPI and Regular CPI

* Core PCE and Regular PCE (Core PCE is the Fed's favorite for projecting FUTURE inflation)

* Wholesale inflation - Core PPI and Regular PPI

CORE CPI

http://data.bls.gov/timeseries/CUSR0000SA0L1E



The Regular aka Headline CPI
https://data.bls.gov/timeseries/CUSR0000SA0



CORE PCE through February that came out 3/29/24
CORE PCE: https://fred.stlouisfed.org/series/PCEPILFE

This is the one that the Fed weighs most heavily. The Fed weigh the PCE more heavily than the CPI. And in both cases, they weigh the CORE measures higher than the regular headline measures for projecting FUTURE inflation



Regular PCE through February that came out 3/29/24
PCE: https://fred.stlouisfed.org/series/PCEPI


WHOLESALE INFLATION (PPI - the Producer Price Index)

https://www.bls.gov/news.release/ppi.nr0.htm

As for which core PPI measure, since the BLS highlights the one below in its reporting (as opposed to the one without food and energy), then I guess I should do likewise.

BLS Data Series CORE PPI (excluding food, energy, trade services): http://data.bls.gov/timeseries/WPSFD49116



===========================================================

BLS Data Series Regular PPI ( includes "everything" ): http://data.bls.gov/timeseries/WPSFD4