Eight Days on Inflation: Statistics, Opinions, and the Best Possible Outcome

Ukraine, the Super Bowl, and the Winter Olympics have all been larger news stories, but the financial pages have focused on another topic.

In February 9^th’s “Peak inflation and value stocks” in Fidelity Viewpoints, the investment company ventured that prices would increase more slowly due to “rising long-term bond yields“ (as that would “push up rates on mortgages and other loans”) “a stronger dollar” little changed since summer, and greater business inventories which have grown significantly lately. 

As it’s already over a week old, the results as “Rapid Inflation Stokes Unease From Wall Street to Washington” (Jeanna Smialek and Madeleine Ngo, The New York Times, February 10^th) have already happened, and, before the Ukrainian situation did the same, caused a substantial Dow Jones Industrial Average drop, as “markets tumbled after the government released Consumer Price Index figures for January, which showed prices jumping 7.5 percent over the year and 0.6 percent over the past month, exceeding forecasts.”  Although some have suggested inflation is already leveling off, this is still the most recent CPI data, and that 0.6%, with compound interest, works out to close to the 7.5% annual rate.  The predictions, by “economists” that price increases would be “transitory,” were not so bad, but the transition is taking longer.

Fox Business, though unobjectively negative about many things Biden has affected, was completely right in saying that “Red-hot inflation gave most Americans a pay cut in January” (Megan Henney, February 11^th).  It wasn’t a large loss, but it wasn’t the net gain many workers made in late 2021.  That outcome also hints at uncertainty at best, and lagging-pay problems possibly followed by more “labor shortages” at worst, this year.  The issue of pay-versus-inflation was also central to Peter Coy’s “High prices are not the only things that affect our buying power” (February 11^th, The New York Times).  Coy mentioned that “if the Fed acts too aggressively, it could cause a recession and throw people out of work,” which would be “worse than paying more for stuff.”  He also, though, related that Fed chair Jerome Powell, who agreed with the previous, “has argued that keeping a lid on inflation prevents it from getting so high that extreme measures are required to stop it.”  Also that same day, we saw “Inflation May Have Already Peaked.  The Fed Needs to Step Gingerly” (Jeff Sommer, The New York Times), which may be shown true next month.

Once again, I disagree with a certain former Secretary of the Treasury, his views described in “Larry Summers has a new inflation warning” (Jeffry Bartash, MarketWatch, February 14^th).  Also apart from all the commentators above, he thought it would get still worse, fueled by “an acute shortage of workers” and that a recent unemployment rate “is probably too high and understates just how few people are available for work.”  Monthly federal employment statistics have clearly shown that when jobs are obtainable and well-paying, people appear in the labor force and often accept them, and the American Job Shortage Number or AJSN, though much improved, still reveals that almost 18 million additional positions, over twice the number of officially unemployed, could be quickly filled.  We also learned Monday that “Federal Reserve officials call for a measured response to inflation” (Jeanna Smialek, The New York Times), namely various Federal Reserve Bank presidents, and, soon after, the opinion that “Inflation will ‘moderate’ as COVID fades:  Moody’s economist Mark Zandi” (Angelica Stabile, Fox Business, February 15^th).

Zandi’s view here is a major reason why our current bout with higher prices is not the usual, and, indeed, may not respond to interest rate hikes, which won’t do anything constructive for supply-chain snags either.  I understand that, despite its being officially and generally apolitical, the Federal Reserve is under pressure to “do something” about inflation, so it will happen, but they should keep it as light as they think they could get away with.  One-quarter of a percent in early March would be enough of an increase.  That should be followed by the board paying close attention to pandemic outcomes and the specific transportation situation as well as unemployment.  If we get real progress on these first two issues, we may not need any more rate increases.  That would be the best outcome for America.