For several months now American financial markets – well the more panicky and younger types – have been wetting themselves about inflation.
Suddenly, after fearing deflation, the appearance of workable COVID vaccines triggered a change in the minds of many US economists and analysts away from weak cost pressures to a ‘inflation looms’ mentality which has then followed by the first blossoming of the familiar “Rate rise looms” cry.
Many of the inflationistas are really Trump supporters – worried about debt and deficits now the Democrats are back in control when they were never worried with Trump and the Republicans slashed taxes and boosted the deficit and US government debt, or when the first round of the stimulus packages in 2020 did something similar.
Their complaint – heard now for more than a decade (and probably 40 years truth be known) is that massive government spending and low interest rates will cause inflation – as sure as night follows day.
Well, for the best part of a decade or more the US has had massive government spending – variations of Quantitative Easing from the Fed, bond buying bonanzas, low and weakening interest rates, deficit spending and inflation has not surged.
In fact it has fallen steadily as the accompanying graph of the Fed’s favoured measure, Personal Consumption Expenditures (PCE) excluding food and energy or core inflation has been falling steadily since the mid 1980’s.
That’s through periods of heavy government spending, falling spending, surpluses (under President Clinton), rising taxes under Presidents Reagan, Clinton and George Bush senior and falling taxes under George W Bush and Trump.
Nearly all the inflation fears have proven to be illusory, especially since around 2013 when the core rate (and for many, many months, headline Consumer Price Inflation) has consistently undershot the Fed’s 2% inflation target (which was a ‘hard’ target unlike the RBA’s more flexible 2% to 3% over time).
Data this week for the CPI for January shows more of the same as consumer prices rose 0.3% last month after gaining 0.2% in December. In the 12 months to January the CPI rose 1.4% after climbing 1.3% in December.
The US Commerce Department said petrol prices jumped 7.4% in January, accounting for most of the increase in the CPI, after rising 5.2% in December. Food prices gained 0.1%, but the cost of food consumed at home fell 0.1%. Prices for food consumed away from home rose 0.3%.
But on a core basis – after excluding food and energy, the CPI was unchanged for a second consecutive month. The reading of zero was lower than market forecasts for a rise of 0.2%.
The core CPI rose 1.4% on a year-on-year basis, slowing from December’s 1.6% advance. A 3.2% fall in in the cost of airline tickets put a lid on cost pressures, offset though by increases in the prices of health care, motor vehicle insurance and tobacco.
Some smart economists noted that core inflation slowed in December and January which is when the current wave of COVID infections and deaths hit hardest, with a lot of economic activity in cafes, bars, tourism, travel suppressed by lockdowns, along with price movements.
The Fed’s core PCE inflation reading was an annual 1.5% in December which is still well under the old 2% target.
But the Fed, like the RBA has a new inflation target. Just as the RBA wants core inflation ’sustainably between 2% to 3% for quite a while, the Fed is now willing to see inflation move past that 2% line.
In a speech in New York this week, Fed Chair Jerome Powell focused on still-high US unemployment and re-iterated previous remarks that the central bank’s new policy framework could accommodate annual inflation above 2% for some time before looking at possible rate rises (As well the RBA).
Federal Reserve Chair Jerome Powell said on Wednesday while he expected base effects and pent-up demand when the economy fully reopens to boost inflation, that was likely to be transitory, citing three decades of lower and stable prices (something similar is expected in Australia mid year).
“As the economy reopens we may see a burst of spending … there could be some upward pressure on prices there, again though, my expectations would be that would be neither large nor sustained,” Powell said.
But Powell said the fed would be “patiently accommodative” so far as inflation was concerned. That’s a phrase to watch in future Fed statements and speeches.
Like in Australia the Fed is concerned in the amount of spare capacity in the economy, with the true jobless rate providing the best guide. In the US the jobless rate in January was 6.3% but Powell said this week the real rate was around 10%.
“Fully realizing the benefits of a strong labor market will take continued support from both near-term policy and longer-run investments so that all those seeking jobs have the skills and opportunities that will enable them to contribute to, and share in, the benefits of prosperity,” he said
He said that addressing the issue will require a “patiently accommodative monetary policy that embraces the lessons of the past” regarding the benefits that low interest rates bring to the labor market, the central bank chief told the Economic Club of New York.
Powell said that in the latter years of the record expansion that ended a year ago, wage and employment gains began to be distributed more evenly while the unemployment rate fell, without the threat of high inflation.
When the jobless rate fell in the past, the Fed would hike rates as a way to head off inflation, but will not do so now. It will be “patiently accommodative”.
