Is Inflation Finally Back? Maybe, Maybe Not

FORECASTS & TRENDS E-LETTER
by Gary D. Halbert
April 20, 2021

IN THIS ISSUE:

1. Inflation Jumped Most in 8+ Years in March

2. Will the Current Uptick in Inflation Continue?

3. Dems Push to Make Washington, DC 51^st State

4. Why DC Should Not Be a Separate State

Overview – Inflation Jumped More Than Expected in March

Last week the Labor Department released its Consumer Price Index for March, and it was the highest monthly reading in more than eight years. The 12-month CPI rate was also the highest in years as well.

While the latest inflation readings for March were higher than the pre-report consensus, we knew in advance the numbers would be big. Why? Because the inflation rate plunged this time last year due to the COVID pandemic which caused widespread shutdowns and a deep-dive in consumer spending. In data terms, March 2020 fell off the 12-month window this year, and the same will be true when April 2020 falls off next month, and May after that.

So, the current higher level of inflation will be with us for the next few months. The question is, what happens after that? Will inflation recede back to its previous sub-2% level, or is higher inflation here to stay? That’s what we’ll talk about today.

Finally, I’ll close today with a discussion of why Washington, DC should NOT be made our 51^st state. There is a way to give those citizens the right to vote without violating the Constitution. You just won’t hear about it in the media. (Note: this discussion makes today’s letter run a little longer than usual.)

CPI Inflation Rate Jumped Most in 8+ Years in March

The Labor Department reported last Tuesday that the Consumer Price Index soared 0.6% in March, the highest monthly reading since August 2012, and slightly above the pre-report consensus of 0.5%. For the 12 months ended March, the CPI jumped to 2.6%, also the highest annual reading in several years.

U.S. Consumer Price Index

The markets took the news in stride for the most part because analysts knew it was coming. As discussed above, inflation fell off a cliff last spring as the COVID crisis unfolded (as you can see above) and drove consumer spending into the ditch this time last year. We’ll likely see similarly large readings in the CPI for April and May as those months’ data from last year roll off the 12-month window before getting back to normal, whatever that is.

Look specifically at the month of April 2020 in the chart above. In that month, the CPI plunged 0.8%, the largest monthly decline since December 2008. That 0.8% monthly data point will drop out of the 12-month window when the April 2021 CPI is reported around May 12, which means the rolling 12-month figure for April could be 3% or higher next month.

It remains to be seen if analysts and investors will also dismiss such a big number for April as temporary because of the roll-off of the large April 2020 decline from the 12-month time window. We’ll have to wait and see the reaction.

Now with the economy pretty much fully reopened and consumers loaded with money in their pockets, thanks in large part to stimulus checks, it remains to be seen where inflation will level out. Most forecasters expect inflation, as measured by the CPI, will remain mostly at 3% or below just ahead, but they also don’t see the price index falling below 2% where it’s been for the last several years.

Part of it depends on the economy. Most forecasters now predict US GDP to surge at an annual rate of more than 8% for the 2Q, the strongest performance since the 1980s. For all of 2021, most forecasters believe GDP growth will be around 6% overall, also the strongest in decades. We won’t see the initial 2Q GDP estimate until late July.

Will the Current Uptick in Inflation Continue?

Massive fiscal spending by the federal government over the last year – estimated at apprx. $7 trillion – has triggered warnings of big inflation to come and has revived dark memories of the 1970s. Add to that the scale of US President Joe Biden’s latest American Rescue Plan – $1 trillion in spending for this year, another $900 billion after that, plus a $2-3 trillion infrastructure and energy program which has been promised – and this has spooked many economists regarding the inflation outlook. But are their fears justified?

Bank and bond market economists have warned about inflation many times before and have been consistently wrong in recent years. A year ago, for example, many of them warned that the $2.2 trillion Coronavirus Aid, Relief, and Economic Security (CARES) Act would incite hyperinflation by massively increasing the money supply. It didn’t happen.

The usual conditions for rising inflation – tight job markets and public expectations of rising prices – are mostly absent. Yet if the economy does register GDP growth of 8% annualized in the 2Q, such fears could develop quickly among economists and in the markets. This is especially true given that long-term interest rates have been grinding higher this year since President Biden unveiled plans for more huge new fiscal stimulus spending.

Meanwhile, the Fed has promised it will not raise short-term interest anytime soon – even if inflation rises above 3% for an extended period. Chairman Powell has made it clear the Fed believes inflation must run at or near 3% for a period of time just to get the long-term inflation rate average up to its target of 2% over time.

Gold Prices Not Worried

The bottom line is: While the US Consumer Price Index ran at 2% or lower for much of the last decade, it has now elevated to a new trading range in the 2.5-3.0% area and maybe a little higher later this year – depending on just how strong the US economy becomes.

So far, analysts and investors are taking the increase pretty much in stride because the rolling off of CPI data from this time last year is largely responsible for the recent increase to 2.6% in the 12-month time window. While the CPI could inch above 3% next month when the April CPI is released around May 12, thereafter the price index looks to slow down again. How much it will slow down will depend on how strong the economy is in the second half of the year.

Dems Push Hard to Make Washington DC 51^st State

Through a party-line vote, Democrats in the House of Representatives last week passed a bill to make Washington, DC our 51^st State. According to its proponents, Democrats say it would cure a constitutional anomaly which gives the residents of the District of Columbia no voice in Congress other than a nonvoting delegate in the House.

Yet everyone realizes the real reason behind the move is to create two new Senate seats which would be held by Democrats for the foreseeable future. How certain are we of this? Consider that in 1984, voters reelected Ronald Reagan in one of the greatest landslides in American political history. He carried 49 states and only missed the 50th by a mere 3,761 votes; yet in the District of Columbia, he captured less than 14% of the vote.

The Framers of the Constitution didn’t want the US capital to be a state, fearing the state would have too much influence/power as a result. So, they authorized the creation of a “District (not exceeding ten Miles square) as may, by Cession of particular States, and by the Acceptance of Congress, become the Seat of the Government of the United States.”

In Article I, Section 8, the Constitution gives Congress the power “To exercise exclusive Legislation in all Cases whatsoever, over such District.”

Maryland ceded 63 square miles and Virginia 37 to create the ten-miles-square DC District. In 1846, Congress agreed to retrocede the Virginia portion back to that state, which is why the Pentagon is in Arlington, Virginia, not the District of Columbia.

In the earliest days, residents of the new District simply voted as the citizens of Maryland and Virginia as they had previously done. Then, in 1801, Congress passed the District of Columbia Organic Act, which organized the local government and deprived the citizens of the right to vote in federal elections.

In 1800, the year the government moved to Washington from Philadelphia, the population of the District was only 8,144. Today, it is more than 700,000.

In 1960, Congress passed the Twenty-Third Amendment, giving the District’s citizens the right to vote for president, with the District having three electoral votes. Widely perceived as fair, the amendment was ratified in just nine months.

In 1978, Congress passed a proposed amendment which would have treated the District of Columbia, for purposes of federal elections only, as though it were a state, giving it two senators and at least one congressman. But this proved a bridge too far, as only 16 states ratified the amendment before the seven-year time limit ran out.

Why DC Should Not Be A Separate State

The opposition to the amendment noted above centered on the fact that the District of Columbia bears not the slightest resemblance to a state. Rhode Island, our smallest state geographically, is almost 18 times the size of the District of Columbia. And while DC’s population is 23% larger than that of the least populous state, Wyoming, it has nothing like the same diversity of interests. It’s also not a very large city, ranking only 20th in size in the US

With a revived constitutional amendment unlikely to be ratified, Democrats now want to do an end-run around the Constitution and make the District a state by legislation. Would that be constitutional? In a word, NO.

For one thing, Maryland ceded the land for purposes of creating a federal District, so Congress has no right to make that land into another state without the original state’s permission. For another, the Framers called for a federal District precisely to prevent a state from exercising control over it. Making the District a state of its own would fly in the face of that original intent.

To get around these constitutional impediments, the current proposal would shrink the District down to its federal core, running from the Lincoln Memorial to the Supreme Court – essentially the “Mall” and the federal buildings and museums on either side, as well as the White House.

This wouldn’t fix the problem that the land was Maryland’s before it was ceded to create a federal District, and it would also create a new constitutional anomaly. The number of permanent residents in the new District would be vanishingly small, but they would control the District’s three electoral votes.

There is, however, a way to give the citizens of the District of Columbia the same rights as other Americans – without violating the Constitution or tilting the balance of power in the Senate. All we need is a simple and fair constitutional amendment:

Section I

The Twenty-third Amendment to the Constitution of the United States is hereby repealed.

Section 2

For purposes of participating in federal elections only, the citizens of the seat of government of the United States shall be regarded and counted as being citizens of the state that ceded the land to the Government of the United States.

Residents of the District of Columbia would vote, then, in Maryland for senators, congressmen, and presidential electors. With the population of the District added to Maryland’s for election purposes, that state would get at least one more congressman and one more electoral vote.

After 220 years, “taxation without representation” would finally be banished from the nation’s capital.

Hope this helps!

Finally, on a personal note, I became a GRANDPA for the first time early this morning when our daughter gave birth to our first grandchild. Mom, Baby and Dad are all doing great.

Very best regards,

Gary D. Halbert

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