When is Powell testimony?
Powell will testify to the House Financial Services Committee at noon on Wednesday and on Thursday, he will appear before the Senate Banking Committee at 9:30 a.m. Eastern. MarketWatchPowell will stress patience in Capitol Hill testimony this week
15 July, 2021 - 07:06pm
There seems to be a campaign under way to scare the heck out of people about rising prices, fueled by the lockdowns and the latest data. Maybe it just makes for compelling headlines.
Should you panic? And, maybe more importantly: What does this mean for your retirement funds, if you’re already retired, or for your investments, if you’re not?
The short answer is: Not as much as you’d think.
I confess: I was one of the many who figured we would presumably get inflation coming out of the last crash of 2007-9, when Uncle Sam started running crazy deficits and then buying his own IOUs, through the Fed, with money he printed in the basement.
It didn’t make sense to me, and I was in very good company.
But guess what? We didn’t get inflation—or at least consumer inflation (we got the massive inflation of asset prices on Wall Street instead, a somewhat different story).
So I did what we’re supposed to do when the data disprove our assumptions: I listened to the data.
We’re now living through a financial experiment that looks about as crazy to me as the last time, and maybe even crazier. Regardless of the rights and wrongs, it involves absolutely unprecedented government intervention in society, business and the economy, staggering deficits, and yet more money printing. The federal government is now talking about further “stimulus” totaling trillions of dollars.
So it doesn’t seem unreasonable at all to worry once again about inflation. And many are doing so.
But…once again, the data are saying otherwise.
The key inflation figure I watch is not the Producer Price Index, the CPI (Consumer Price Index)-U, the CPI-W, the Personal Consumption Expenditures (PCE) index, let alone such political numbers as a “core” CPI figure that excludes food and energy prices. Instead I just watch the bond market’s forecasts.
The bond market isn’t perfect, but its forecasts are probably the best we have.
And right now they’re saying that although inflation expectations have risen, especially when measured since the depths of last year’s crisis, they are still a far way from panic levels.
These forecasts can be extracted from the market prices of two types of U.S. government bonds: The regular kind, known as Treasurys, which pay fixed interest payments every year, and others, known as Treasury Inflation-Protected Securities or TIPS, which promise to pay interest payments that vary with inflation. The simple takeaway is that by comparing the relative market prices of these two types of bonds at any given moment, we can work out what the bond market thinks will happen to inflation in the years to come. And as I say, while it’s not perfect, it’s probably the best forecast we have because if someone actually knows the forecast is wrong they can make billions by betting against it.
Few people willingly lose billions of dollars making a wrong bet. Few people willingly pass up the opportunity to make billions of dollars, either. So if the bond market’s predictions are wrong, nobody yet knows it.
Right now, the bond market’s 5-year forecast for inflation is 2.6% a year. As you can see from the chart above, that’s notably higher than the actual average inflation rate we saw under Obama and Trump, as well as the one they saw all the way back in the days of Eisenhower. But it’s broadly in line with Kennedy/Johnson, Bill Clinton and Bush the younger. And it’s a far cry from inflation under the presidents of the 1970s and 1980s.
Like I said, I’m as skeptical as the next guy and more skeptical than most. I’m not carrying water for anybody, and if I could see rising inflation I’d be writing about it. But when I look at the bond market forecasts even further into the future, so far there is even less to worry about. The 10-year inflation forecast is 2.4% and the 30-year forecast just 2.3%.
Interestingly, these forecasts have been coming down in recent weeks, even while the headline writers have been fretting about inflation.
What’s going on? So far we’re following the playbook sketched out at the start of the year by strategist Joachim Klement at Liberum. He predicted we’d see a surge in headline inflation rates round about now, as all sorts of shortages worked through the economic system. You can’t shut down the world for a year and then just switch it back on again without issues. Right now there’s a sudden bidding war for homes and used cars, shortages of certain computer chips, and so on. There’s also a bidding war for labor: Meanwhile many potential workers say they’ve turned down jobs while they continue to receive unemployment through the crisis.
Inflation happens when there are more buyers than sellers. That can be a temporary phenomenon. Albert Edwards, strategist and gloom-monger in chief at SG Securities, has been accurately pointing out for more than 20 years that while everyone has been worrying about inflation, the real issue has been deflation. And once this crisis passes that could easily continue. The economy continues to support overproduction of many goods and services by so-called “zombie companies,” kept alive only by the Fed’s free money policies. (These companies may now account for as many as 20% of companies.) The crisis sped up technological change, and that is driving prices down, not up. Expect to see a lot of low-wage jobs replaced with automation instead of higher wages.
In a nutshell: Sure, inflation could come. We had better keep watching. But despite the headlines, I’m not panicking just yet.
It's time to pursue your own unique interests
15 July, 2021 - 04:36pm
To protect against inflation and monitor the stability of the economy, the US Department of Labor tracks an indicator called the Consumer Price Index (CPI). The CPI "measures the change in prices paid by consumers for goods and services.”
As the economy reopens and markets find their equilibrium, many shoppers have reported paying higher prices for basic goods.
The Bureau of Labor Statistics, which calculates the CPI, has released the June data showing that consumers pay around 2.4 percent more for food and almost five percent more for appeal than their levels a year ago.
Following the passage of the American Rescue Plan, some economists are arguing that too much stimulus was added to the economy, leading to an increase in prices and inflation. There is some truth in these fears, as data from the BLS clearly shows consumers have less purchasing power than they did when the pandemic began.
For example, the BLS CPI Inflation Calculator shows that $100 in January 2020 is equal to $105 today. Meaning that consumers’ purchasing power has decreased slightly. If in 2020, someone needed to spend $100 to purchase a good or service, they would now need to pay five dollars more.
Decreases in purchasing power and increases in the CPI mean that consumers' price for goods has increased. The US economy is structured in a way where a small increase in prices is normally on a year-over-year basis. However, the pandemic lockdowns and stay-at-home orders changed the way many Americans spent their money. These shifts in demand for certain goods, combined with covid-19 outbreaks, led to the breakdown of global supply chains, which means that prices are still finding their balance after taking on so many economic shocks.
Only through vaccination are we beginning to see the levels of spending on par with those seen pre-pandemic.
One sector within the CPI has been reported widely in 2021, and that is the used car and truck market. Consumers are paying as much as forty-five percent more than in June 2020 across this market.
Of the 386 goods and services that form part of the CPI, the BLS reported that consumers are paying higher prices for around 225. The largest increases since January 2020 are reflected in the price of
One item that also ranks daily high on the list is oranges, for which the CPI has increased 366 points from January 2020.
While these prices may be shocking to consumers, the increases follow the laws of supply and demand. During times of crisis, public health experts have found that sales of tobacco products usually remain steady, as fewer people are in a situation that would help them quit.
Additiationlly, two states, Oregon and Colorado, have passed laws increasing the taxes and thus the price of tobacco, with twenty-four other states considering an increase.
As for educational expenditures, many of those who could afford to send their children to private schools that may have been offer in-person learning did. With more students or higher demand, these schools likely increased their tuition prices.
The same goes for educational materials. Parents stuck at home looking for ways to keep their children in school increased the demand for these products and, in doing so, bumped up the price.
Sadly, the increase in the cost of health care could stem from the fact that millions have lost coverage during the pandemic. Around half of the population receives their insurance through their employer, and with millions out of their jobs, many workers and their families lost coverage. By losing coverage, many were forced to pay higher prices for basic and critical care.
For other goods like bread, cheese, eggs, and meat, consumers have seen an increase of about fifteen points in the thirteen points compared to pre-pandemic levels. These increases are likely related to shifts in food supply chains that experts believe will stabilize in the coming months.
The goods and services categories that have seen the largest decreases in price since January 2020 include,
These decreases are also reflected in the change in consumer preferences throughout the pandemic. The demand for personal care items stayed consistent and, compared to other products that saw major fluctuations, could have helped drive down the price as supply chains stayed intact. Additionally, the market for computer-related software and gadgets hit a peak early in the pandemic, and prices may have fallen since the surge in demand. Demand for public transportation is at an all-time low as fewer people are commuting, and many cities have cut prices to encourage those who can use it to do so.
On 15 July, Fed Chair Powell testified before the Senate Committee on Banking, Housing, and Urban Affairs to provide an update on the state of the economic recovery. In his testimony, he spoke to the increase in inflation, noting that it has “increased notably and will likely remain elevated in coming months before moderating."
Like the examples above, Chairmen Powell spoke to the impacts of how "strong demand in sectors where production bottlenecks or other supply constraints have limited production" contributed to the increase of inflation. The pandemic rocked global supply chains, and while shortages were not seen in the US on a wide scale when it began, they are feeling the pain of bottlenecks now.
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