FORECASTS & TRENDS E-LETTER
by Gary D. Halbert
December 21, 2021

IN THIS ISSUE:

1. US Inflation Suddenly Comes Out of Hibernation

2. Wholesale Prices Jumped Almost 10% In November

3. Americans’ Inflation Expectations Are Record High

4. Fed Chair Abandons “Transitory” To Describe Inflation

Overview

For most Americans under the age of 50, inflation has never been much of an issue. Yes, prices rose a little every year but that was considered normal. Price increases of 1-2% a year for most goods and services were to be expected.

People under the age of 50 were too young to fully experience the wild inflation of the 1970s and 1980s which saw the Consumer Price Index (CPI) soar to double digits. And over the last decade, the CPI has averaged less than 2%. So, until recently, most people didn’t think much about inflation.

Yet that’s changed this year. The CPI which averaged 1.2% in 2020 has jumped to nearly 5% so far this year. And it’s continuing to increase. The latest reading for November has prices increasing at a 6.8% annual rate over the last 12 months, the highest level in 49 years.

It’s true that worker wages have increased meaningfully this year. Wages jumped nearly 5% in the 12 months ended October. Yet with inflation rising at nearly 7%, the higher pay increases are still not keeping up with the rising cost of living. Most people are not getting ahead.

Furthermore, most Americans now believe inflation is only going to get worse. In the latest survey by the Federal Reserve Bank of New York, most Americans said they expect inflation to rise by at least 6% over the next year. That’s the highest inflation expectation on record.

For all these reasons and more, we’ll focus on inflation today.

US Inflation Suddenly Comes Out of Hibernation

Let’s start today’s discussion by taking a look at the history of inflation in the US. The most commonly watched indicator of US inflation is the Consumer Price Index which is prepared and published by the US Bureau of Labor Statistics (Labor Department).

The CPI is a monthly measurement of the prices paid for a wide basket of goods and services purchased by US households. The CPI includes food, energy, housing, healthcare, transportation and commodities, among other things households normally purchase. Here’s a look at the CPI over the last 70 or so years.

The blue line in the chart above represents the price change for all items included in the CPI, whereas the red line omits the prices for food and energy which can be very volatile over time.

US inflation has fluctuated in a wide range since 1950. As you can see, the CPI increased dramatically in the 1970s, reaching its all-time high above 14% in 1980. However, the CPI hovered around 2.5% or below for most of this century – until this year.

In 2021, the CPI has seen its most dramatic increase since the late 1970s. The CPI has exploded from below 2% at the beginning of this year to an annual rate of 6.8% for the 12 months ended November. Most economists attribute this year’s significant rise to COVID-related “supply chain bottlenecks,” but as I’ll point out below, it’s more complicated than that.

The question is, where is inflation going from here? The answer is, no one knows for sure. Let’s take a look at what we do know and see if we can make some educated guesses.

Wholesale Prices Jumped Almost 10% In November

Here’s one thing we know. The Labor Department reported last week that its Producer Price Index (PPI) jumped 9.6% (annual rate) in November. The PPI is considered by many a measure of wholesale prices before they reach the consumer. The increase in November was the highest on record and well above the average pre-report expectation.

Excluding food, energy and trade services, wholesale prices rose 0.7% for the month, putting core PPI at 6.9%, (annual rate) also the largest gain on record. Rising demand for consumer goods and services continued to be the largest driver of the increase in producer prices, increasing 1.2% for the month of November following the gain of 1.3% in October.

The November price increases were broad based, but some categories stood out. In services, prices for financial products, including portfolio management and investment advice, rose sharply. Prices for transportation of freight and mail also jumped significantly. Prices for iron and steel scrap jumped 10.7%, while prices for gasoline, fresh fruit and vegetables also soared.

It remains to be seen if the PPI will continue to rise strongly in the months just ahead. Most forecasters continue to believe inflation in general will peak next year and return to more normal levels. Maybe so but the record rise in the PPI last month does not suggest that consumer prices will come down significantly anytime soon.

Americans’ Inflation Expectations Are At A Record High

Each month the Federal Reserve Bank of New York surveys consumers and asks, among other things, what they expect inflation to do over the next year. In the latest survey in November, consumers said they expect US inflation to rise 6.0% in the next year, up from 5.7% in October. Both readings were the highest on record.

So while most Americans have paid little attention to inflation over the last decade or so, rising prices definitely have their attention now! I believe that’s because, as I pointed out above, prices are now rising faster than incomes are, and more and more people are realizing this is a problem for their pocketbooks.

The price increases are broad based and in too many cases are off the charts. Let’s take a look at a few examples. Gasoline prices have soared 58% this year. This is inexcusable because just a year ago, America was energy independent and didn’t have to import foreign oil for the first time in over a century. Thanks to President Biden’s liberal energy policies, all that has changed.

The price for natural gas, which we use to heat our homes among other things, is up over 25% in the last 12 months. The price of used cars has soared 34.1% over the last year. Lumber prices were the stunner of the year with prices exploding over 400% by the peak in May. While lumber prices crashed after the peak, they have been rising sharply again since August.

I could go on with examples of commodity prices which have soared this year, but I don’t have to tell you. We all see it when we fill up our cars, go to the grocery store or visit Lowe’s, Home Depot and other retailers. Again, the question is when do we get back to some semblance of normal? Unfortunately, that could be a while.

Fed Chairman Abandons “Transitory” To Describe Inflation

Earlier this year as inflation started to rise significantly, Fed Chairman Jerome Powell assured Americans that widespread price increases were only “transitory” (temporary) and would not be long-lasting. Regular readers will recall I questioned Chairman Powell’s assurance that rising inflation would only be transitory and cautioned that inflation tends to “have a mind of its own.”

Well, now that inflation has risen to the highest level in almost 50 years, and shows no signs of abating significantly anytime soon, Chairman Powell decided to ‘walk back’ his earlier claim that the latest surge in inflation is only transitory.

At the end of November, Chairman Powell told lawmakers in Washington that “It’s probably a good time to retire that word (transitory) and try to explain more clearly what we mean when talking about inflation.”

As I have pointed out all along, there are growing questions about whether this period of high inflation will last longer than the Fed anticipated. I’ve said that not because I know more than any of the economists at the Fed, but simply because inflation has a history of not performing as expected, both on the upside and downside. And there’s not much the Fed can do about it.

At the end of the day, we are simply going to have to live with uncomfortably high inflation for a while longer. The fact that the Producer Price Index soared 9.6% for the 12 months ended November suggests retail inflation probably has not peaked yet.

I’m not suggesting the CPI will rise significantly above the 6.8% annual rate we saw for November, although we can’t entirely rule it out. My point is, inflation may remain elevated longer than the mainstream economists at the Fed and in Washington currently expect.

And let’s keep in mind that while wage growth of 4.9% is the best we’ve seen in years, it’s not keeping up with inflation of 6.8%, and most workers are still losing purchasing power. The solution is lawmakers in Washington need to stop spending so much money we don’t have, reduce the trillion-dollar federal budget deficits and try to get inflation under control.

Am I optimistic that will happen? Unfortunately, not at all.

In closing, let me wish everyone a very MERRY CHRISTMAS or whatever holiday you are celebrating. We’re excited because both of our kids and their spouses – and their newborn babies – will be coming home this week for several days. It will be so special for Grandma “BB” and Grandpa “Big Dog”! I hope your holiday is very special as well!!

Merry Christmas, everyone,

Gary D. Halbert

SPECIAL ARTICLES

Inflation Soared 6.8% in November, Highest in 39 Years

Inflation Expectations Rise to 6%, a New Record High

Fed Chair Retires the Word “Transitory” For Inflation

Gary's Between the Lines column: Retail Sales Down In November, Big Pay Raises For 2022

 

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