What's Up With Inflation? Everything!

Inflation is roaring in America's economy. This isn't news to consumers but the latest government data confirms prices for goods and services are spiraling at historic levels.  Costs for food, cars, fuel, construction materials, air travel, household furnishing, apparel and virtually everything else is soaring. 

The question on the minds of consumers, economists, bankers, investors and stock market analysts remains: Is this a transitional period of spiking prices that will end soon or will inflation continue for a year or more?   Answers depend on whom you ask and their stake in the outcome of the debate.

                                           The Data

Data not opinions are the appropriate starting point for a discussion about inflation.  The Consumer Price Index (CPI) surged one percent, in June.  But that monthly jump doesn't tell the whole story.  During the last 12 months, the index hiked 5.4%, the largest annual expansion since August 2008.  

Unpacking Bureau of Labor Statistics (BLS) reveals eyeopening numbers.  The price for all energy has leaped 24.5% in the last 12 months. Gasoline prices are up 45.1%; used cars and trucks skyrocketed 45.2%; transportation services rose 10.4%; and, commodities forged ahead 8.7% in the same period.

In 44 of the nation's 50 largest metro areas, rents have surpassed levels before the pandemic began, according to data from Realtor.com.  Nationwide, the median rent reached a record high of $1,575 in June, an increase of 8% from a year ago. Housing is not a discretionary cost for Americans.  

Food, which is not included in the CPI, increased 0.8% in June, a larger upsurge than May's 0.4%. Food prices are heavily impacted by the cost of fuel, because farmers, wholesalers and grocery chains use gasoline for harvesting and for fleets of trucks to ship food to local stores.  

Consumer wages have not kept pace with the inflation.  The Bureau of Labor Statistics measures the growth of weekly earnings, adjusted for inflation.  From May 2020 to May 2021, real earnings decreased 2.2%. This creates a perfect storm of rising prices and falling purchasing power. 

The flow of money into the economy acutely effects inflation. The Federal Reserve has shoved down interest rates while maintaining bond purchases. This usually triggers robust economic activity and business investment, but inflation lurks as a danger.

In 2007 during the financial crisis, the Fed cleaved the federal funds rate from 5.25% to zero. Later, the Fed raised rates slightly, then sliced the target in 2020 to near zero due to the pandemic. This creates a phenomenon known as "easy money," lowering lending rates for consumers and businesses.

However, lax money policy dampens interest rates paid on money markets, savings and bonds. As a result, investors chase returns in the riskier stock market, fueling bumper growth in the major market indices.  Caution: the stock market is not always a reliable indicator of underlying inflation.   

Today's economy is also awash in Biden bucks as the administration, backed by Congress, has pumped trillions into the economy, including direct payments to individuals.  Economist Larry Summers calls the current stimulus "excessive" because it risks overheating the economy, accelerating inflation.  

Another contributor to the inflationary pressure is the rising cost of hiring employees.  As businesses resume normal operations, it is becoming harder to find workers.  Some remain on the sidelines, content to collect beefed-up government unemployment checks and stimulus payments.  

To complicate matters, many employers are not recalling laid off workers as normal operations resume. Lost jobs and idle workers help explain why the national unemployment rate in June swung to 5.9% In pre-pandemic January 2020, unemployment stood at 3.6%.

At the end of May, there were 9.2 million job openings, according to the BLS.  Desperate businesses are being forced to pay hiring bonuses and other perks to fill jobs.  The cost of wages and bonuses are passed on to consumers in the form of higher prices for services and goods.  

                                Inflation: Transitory or Long Term?

In day-one testimony before Congress, Fed Chairman Jerome Powell repeatedly said his colleagues are focused on returning to full employment and less concerned about temporary hike in inflation.  In fact, the Fed made it clear that it would tolerate higher inflation than its target rate: a 2% annual increase.

It is obvious the chairman believes the current inflation will diminish soon. He blames supply chain issues, increased post-pandemic spending and higher oil prices for the uptick.  "As these transitory supply effects abate, inflation is expected to drop back toward our longer-run goal," Powell says.

But is he right?

JPMorgan Chase chief executive Jamie Dimon is solidly in the camp of dissenters.  He recently opined that there is "a very good chance inflation will be more than transitory."  His investment bank, the largest by assets, is stockpiling cash to buy treasures and other investments when interest rates climb. 

He's not alone.  Deutsche Bank economists and Morgan Stanley are sounding the alarm about long-term inflation. But there are still doubters who frankly are championing easy money for their own economic interests, especially those who market stocks and other financial instruments,

"While inflation has a negative connotation for many people, inflation itself isn't inherently good or bad," says Jill Fopiano, president and CEO of O'Brien Wealth Partners.  "Some level of inflation is a sign that the economy is healthy."  

Gus Faucher, chief economist at PNC Financial Services Group, points out recent sharp rises in prices are concentrated in parts of the economy that were whipsawed by the pandemic, including used cars, airfares and hotel stays.

"That suggests that this is part of the dislocation from the (economic) reopening and I would expect that...inflation will settle down later this year," Faucher forecasts.

Economists can find reasons to validate their views on alternative scenarios.  However, this writer doesn't consider wishy-washy perspectives to be a helpful guide to the future.  Uncertainty promotes more uncertainty.  Taking a stand always comes with risks of being wrong.  So be it.  

                                        An Inflation Prediction 

In day-two of his testimony, Powell modified his stance on "transitionary" inflation.  He told the Senate Banking Committee, "I think we're experiencing a big uptick in inflation.  Bigger than many expected.  Bigger than certainly I expected."  Analysts labeled the remarks a "softening" of his stance.

It is more like backpedaling or waffling.  Powell figures by hedging he protects his credibility regardless of the eventual outcome.  But a career economist and bank executive Howard Manning, who spent five years at the Federal Reserve Bank in Kansas City, isn't buying "transitory inflation."

"With the exception of the 1% money earners and the top 5% wealth holders, the rest of the U.S. economy is suffering from a runaway inflation spike that is dramatically effecting net disposable income," Manning notes.  Growing inflation is a drag on savings and investment, he adds.

To underscore his premise, Manning cites a rapid increase in commodity prices that have driven up food and clothing prices, which appear to be "running closer to 7% to 10% rather than the 2% to 5.5% the administration wants us to believe."

He acknowledges supply chain issues, but underscores the continuing outsourcing of production and manufacturing which effects capital formation.  American jobs are fleeing to China, India and other countries continuing to "rob the USA of middle class level wages," Manning reminds economists.

Manning's assessment of jobs: The COVID job losses are "permanent." "And the Green Energy jobs are not financially replacing former jobs. The future now is working for the military industrial complex--wages, healthcare (soft dollar) and government subsidy," he posits.  

In this writer's opinion, based on metrics, inflation will stick to the economy like Elmer's Super Glue for at least a year or more. Rising prices sometimes can be offset by efficiencies and productivity. However, the fastest way to mitigate exploding costs is by shaving payroll and jacking up prices.

Gasoline and fuel prices which effect food,  transportation and energy costs are blooming with no end in sight for at least the next 12 to 24 months.  Virtually every American, especially low income earners, will be forced to make purchase tradeoffs as inflation bubbles, threatening economic growth.

The Fed, economists, the administration and stock market pros will not be able to use the excuse they were blindsided by stubborn inflation.  The data is right in front of them.  They are choosing to adopt a rosy view.  The data indicates inflation will march steadily ahead without proactive Fed intervention. 

National Debt: Politicians Spending Addiction

Yawn.  That's the reaction of most Americans when anyone raises the issue of the country's rotund national debt.  The size of the debt--$23.1 trillion--should concern every American.  Instead people figure it's the federal government's problem.  Not their worry.  They are sadly mistaken or misled.

Quantifying the national debt can be reduced to a few key numbers.  America's debt equals $179,695 for every household in the country.  The federal government carries 46% more debt than the combined debt of every household in America.  The debt is 107% of the U.S. economy.

Even those sobering figures fall short of calibrating the size of the debt.  Consider that in the last 19 years the government has racked up more debt than than in the previous 100 years.  Since 2000, the U.S. has amassed $17.5 trillion in new debt as a result of spending more than its revenues.

The federal government's record spending binge threatens the financial health of the country, which ultimately impacts businesses, jobs and wages.  The budget for fiscal year 2020 is $4.7 trillion, a colossal 164% increase in spending since 2000. Politicians of both parties are complicit.

Federal government revenues are rising too, but at a slower pace.  The federal government estimates it will receive $3.64 trillion in revenue, the lion's share to be paid by individual taxpayers like you.  In 2000, $2.03 trillion flowed into the U.S. Treasury.  America doesn't have a revenue problem.

In 2020, the deficit or revenue shortfall will climb to $1.01 trillion by the time the government fiscal year ends September 30.  Since the end of the Clinton Administration, each Congress and president has overspent.  This trend is unsustainable without major changes in expenditures

It helps to understand what is driving government spending.  In the current budget, six out of every 10 dollars goes to mandatory spending, which includes programs such as Medicare, Medicaid, Social Security, food stamps, federal pensions, Obamacare and veterans programs.

Mandatory spending has automatic increases built in as more people are added to the rolls. Increases in benefits are baked into the budget too.  To put this in perspective, in 1968, three years after Medicare and Medicaid were created, mandatory spending represented just 27% of the budget.

For fiscal 2020, here is a breakdown of the budget for the top three mandatory spending programs: Social Security, $1.1 trillion; Medicare, $679 billion; and Medicaid, $418 billion.  Total mandatory expenditures are budgeted at $2.841 trillion.

This spending category is called mandatory because these programs have been mandated by law to be funded.  This rigid requirement leaves little room for so-called discretionary spending, which amounts to 13.3% of the current budget.  The national defense consumes 12.4% of spending.

The remaining 11.7% of the budget is devoted to paying interest on the debt.  Nearly $480 billion is included in the 2020 budget to service the interest.  There is no room in the budget to actually pay down the debt or principle.  Each year the interest gobbles up a greater percentage of the budget.

Congress has no incentive to reign in spending.  Representatives and senators use the budget as personal piggy banks to fund pet projects in their districts.  That doesn't mean the expenditures are all wasteful, but lawmakers view the projects as little more than a downpayment on their reelection. 

If Congress actually followed its own rules of producing a national budget, there would be more scrutiny of these expenditures.  But lawmakers have failed to pass an annual budget in seven of the last 15 fiscal years, instead using what's known as continuing resolutions to fund the government.

These temporary funding resolutions usually cover six months or less leaving little incentive for  a substantial spending debate.  These resolutions are the product of eleventh hour, horse-trading sessions designed to win both parties' votes and avoid political blame for a government shutdown.

Most senators and representatives, if they are honest, will admit there is too little time for members to even read what is included in the spending resolution.  They are essentially blindly rubber stamping a budget that has been engineered by a handful of members behind closed doors.

This cannot continue if Americans want accountability from their government.  Congress needs to return to the budget process where spending, the debt and specific programs are reviewed, debated, prioritized and voted on.  Congress has no greater duty than to establish the federal budget.

Unfortunately, there is only the dimmest hope this will ever happen.  A divided government, partisan bickering and voter apathy have all contributed to today's sausage making process that serves the interests of senators and representatives but lacks transparency for the American people.

Americans must demand change by contacting their elected representatives and senators.  Otherwise, Congressional members will continue on a track that surely will one day bankrupt the country and force extreme measures, including crippling taxes and Draconian budget cuts.

That day draws nearer each year that Congress refuses to tackle spending and the ballooning debt.