FORECASTS & TRENDS E-LETTER
by Gary D. Halbert
August 17, 2021

Inflation Spikes Again In July – Temporary Or Here To Stay?

IN THIS ISSUE:

1. Inflation Spiked Higher Again In July – “Transitory”??

2. Some Indications US Inflation May Be Peaking Now

3. Fed Continues To Rachet-Up Its Record Balance Sheet

4. The So-Called “Biden Inflation Tax” Explained

Overview

I have written a lot recently about the surge in inflation we’ve seen this year. In fact, it’s been the hottest topic in financial circles and the investment markets in 2021. The Consumer Price Index spiked at the highest rate in 13 years for the second time in July as reported by the Labor Department last week. I’ll discuss that report in detail below.

The key question regarding the surge in inflation recently, is whether this is a temporary spike – “transitory,” as President Biden assures us – or whether it is more structural and longer-term in nature. I’ll share my thoughts and conclusions as we go along today.

Following that discussion, I want to again encourage all of my Forecasts & Trends subscribers to sign up to receive my “Between The Lines” (BTL) column I post every Thursday. BTL is free, it is much shorter than F&T and I often cover subjects and topics I don’t write about in F&T.

My latest BTL is a perfect example. The title of last Thursday’s column was “Why Does The Liberal Media Hate America?” In it, I explain why the liberal media (and some Democrats) continually denigrate America – despite the fact that they have complete control over government right now.

With the libs in complete control, you’d think they would be praising America and talking up all the good things happening this year, including the super-strong economy, and giving themselves credit for it. But they don’t and put America down at every opportunity.

Polls continually show most Americans don’t like it, but the media continues to do it anyway. I have my own theory as to why the liberal media can’t help themselves, which I shared in last week’s Between The Lines column. This is not something I would write in Forecasts & Trends, but I think you should see it in BTL.

You can see that column by clicking HERE. Better yet, I encourage you to become a subscriber so you’ll have access to everything I write.

Inflation Spiked Higher Again In July – “Transitory”??

Regular readers will recall that the Consumer Price Index spiked to an annual rate of 5.4% in June, the highest level since the summer of 2008 and well above forecasters’ pre-report expectation. Well, guess what? CPI jumped another 5.4% (annual rate) in July as well.

As they did last month, the Biden administration assured us this big jump in July inflation was only “transitory” (temporary) as the economy continues to recover from the COVID lockdowns last year. Yet the fact is, the Biden administration does NOT know if it is temporary, and neither does anyone else. Only time will tell.

What we do know is that inflation was so low during the spring and summer of last year, largely due to the COVID recession and widespread lockdowns, and it is much higher this year. So the 12-month inflation comparisons are going to remain high, perhaps until the end of this year. This is referred to as the “base effect.”

While the base effect – with higher current monthly inflation figures replacing lower ones from last year – will be dissipating in the months to come, it is important to note that even if price growth is slower over the next few months, reported 12-month inflation rates will still be high. Headline CPI is already up enough in the first seven months of the year that if price increases were to drop to zero on a monthly basis, headline inflation would still be 4.1% for the year.

It would take price decreases in the next few months (possible in sectors like used cars, but unlikely in most other areas) to bring 12-month headline inflation anywhere near the 2-3% range by the end of this year. That will be a tall order which does not seem particularly likely. And to reiterate my point above, no one knows if this will happen just ahead.

Put differently, the latest surge in US inflation may well prove to be something significantly more than transitory. Now this does NOT mean we’re headed for hyperinflation. It simply means that absent some surprise price decreases, inflation is going to run significantly higher than the Fed’s 2% target for the next year or so most likely.

A last word of caution is that the first data released on inflation each month is the Consumer Price Index (CPI), but the Federal Reserve focuses on the Personal Consumption Expenditure Price Index (PCE). The PCE is weighted differently, and this index shifts weights as consumers change spending patterns. As a result, PCE inflation has typically been lower than CPI inflation. In fact, when CPI was up 5.4% in the 12 months ending in June and July, PCE was up just 4.0%. So, depending on which price series are up, it may be that headline data suggests higher inflation than the index the Fed is watching. 

Some Indications US Inflation May Be Peaking Now

It is looking somewhat likely that the prices for some commodities and consumer products may have peaked in May and saw gradual declines in June and July. The price for used cars is just one example. As everyone reading this knows, used car prices in the US exploded over the last year, up over 50% in many cases.

While the reasons for the spike in used car prices vary, most car experts believe it was the lack of mass transit during the COVID lockdowns and rising distrust of public transportation where it was available. With stimulus money in their pockets, consumers descended on auto dealerships in record numbers.

While it is hard to see in the chart below, used car prices peaked in May and actually declined slightly in June. The price of auto rentals skyrocketed 7% over the last year but fell by 5% in July. Auto insurance prices also fell in July after having risen for six straight months. Airline fares also declined very modestly in July after spiking for the last year.

Another more vivid example of prices dropping is lumber where prices have plunged since the peak in May. Lumber prices more than tripled from their low in early 2020 to the end of May this year. But since then, prices have collapsed by more than two-thirds as you can see below. Builders now report demand for lumber is surging again.

While the above are just two examples of prices peaking and coming down the last couple of months, there are others and I expect more will unfold just ahead. However, there are plenty of other sectors where prices are continuing to rise. These include hotel rates, food costs, restaurant prices and numerous others which are continuing to raise prices.

Fed Continues To Rachet-Up Its Record Balance Sheet

Any discussion of the forces driving US inflation higher this year would not be complete without pointing out that the Fed continues to swell its balance sheet to unprecedented levels. The Fed accomplishes this by purchasing $120 billion per month of US Treasury bonds and mortgage-backed securities.

The Fed believes the huge purchases not only serve to keep interest rates low but also provide additional liquidity to the financial system. As you can see in the chart below, the Fed has more than doubled its balance sheet since early 2020.

There is widespread agreement among economists and financial analysts that these massive purchases by the Fed also influence inflation higher than it otherwise would be – whether they want to admit it or not.

The question then is, when will the Fed begin to reduce these huge monthly security purchases and ultimately end this unprecedented latest round of “quantitative easing.” There are a few members of the Fed Open Market Committee who are on the record saying they think the “tapering” should begin soon. However, the minutes of the recent FOMC meetings don’t indicate the topic has been discussed formally at policy meetings so far this year.

Many Fed-watchers believe such formal discussions are overdue, especially with inflation now running at the highest level in 13 years, and the tapering should begin before year-end. Fed Chairman Jerome Powell has not offered any hints as to the central bank’s plans to taper its monthly asset purchases. So, we’ll see. The Fed’s next policy meeting is September 21-22.

The So-Called “Biden Inflation Tax” Explained

Whenever inflation rises significantly as it has in recent months, taxpayer advocacy  groups are prone to refer to it as a “tax on consumers.” And it is! It’s not a tax increase we pay to the IRS. It’s a tax we pay at the cash register for goods and services we consume regularly.

Below is a chart that compares yearly wage and inflation rates for each month from 2017 through July of this year using Bureau of Labor Statistics data. Wage rates are in blue and inflation (CPI) is in red. When blue is on top, as it was during the entire Trump administration, workers’ wages are beating inflation and their standards of living are improving. When red is on top, just the opposite happens as has been the case since Mr. Biden took office.

While President Biden claims it is “indisputable” that his jobs plan “is working,” this chart unequivocally shows that it is not, at least not for American workers. Rather, inflation is surging, more than wiping out any wage gains those workers might have experienced.

Again, this is why taxpayer advocacy groups increasingly refer to this year’s surge in inflation as the “Biden Inflation Tax.” I believe they are more than justified in this characterization.

All the best,

Gary D. Halbert

SPECIAL ARTICLES

Consumer Prices Jump 5.4% (Annual Rate) Again in July

US Inflation May Have Peaked in May (…Maybe)

Gary's Between the Lines Blog: Question: Why Does the Liberal Media Hate America?

 

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