The Inflation Post Mortem Begins
Now that CPI is truly trending down, and the dust has settled, the economics profession can get down to what really caused inflation, how effective (or irrelevant ) Fed policy was, and add some context and color to this period in economic history.
This episode will be studied for a long time.
As regular readers know, I have long thought this bout of inflation was more chimera than reality. Look, I don't LIKE paying over $4.00 a gallon for gas, but the idea that it sends a middle class family's financial existence into a death spiral is patently absurd. And it's harder to feel sorry for a nation whose predilection for three row SUVs and pick up trucks seals their fate when they voluntarily lash themselves to the whims of a historically volatile commodity. Moreover, gas prices give the lie to the hysteria: in real terms, gasoline hasn't been this small a slice of "wallet share" in decades, but the consumer gets dozens of price signals just driving three miles down the turnpike. So they're conditioned into thinking things are out of control.
Perhaps the most critical part of this episode was food prices, and there were several factors behind this that monetary policy couldn't cure. Initially, supply chain issues caused a whiplash affect from the "on again-off again" effects of the lockdowns.
You'll note that grain prices spiked and were heading back down again as the pandemic faded, but they spiked again when Ukraine was invaded. (Blue rectangle) They have been on a steady descent for over a year now. Although food inflation has stalled in real terms, it seems we should be seeing some more disinflation here.
Again, note that monetary policy can't fix these things.
Another overblown issue was egg prices. Driven by the avian flu, which caused the slaughter of hundreds of thousands of chickens, prices skyrocketed. It is also apparent that since there's been no anti-trust enforcement in this country for decades, some of the larger producers enjoyed some fatter margins as they kept prices higher for far longer than their input prices would have warranted. This is a subject that demands attention, and a sharp lesson will be taken from the pandemic for this.
Also note how brief the price spike was. The unhinged fury that was unleashed and the finger pointing, was, as with gas prices, well out of proportion to the actual effect. After all, how much do you spend on eggs, and one does have the choice of buying fewer of them.
Shelter was another sticking point, but here too, some dissection is needed. As mentioned before, the BLS has an odd way of calculating shelter costs, as it views the purchase of a home as a capital investment and is therefore not factored into CPI. The implied cost of renting a home is the metric used, which is a price few actually pay. Moreover, most people own their homes with fixed rate mortgages and millions own them without mortgages altogether. For them, CPI gets sliced by about a third.
The other problem with the shelter component in CPI is that it's a national figure. Manhattan can lose 50,000 residents and rents won't drop. If 50,000 people migrate to Austin, Texas or Tampa, Florida in a short burst, as we saw with the pandemic migration, prices will skyrocket. Predictably enough, what was once hot is now not, and both of the aforementioned areas are seeing notable price deflation.
This brings us to monetary policy. There has been quite a bit of criticism thrown at the Fed for being late to the game. Here's where it gets interesting.
Looking at the price data, the idea that there may have been no need to go to the game in the first place should at least be entertained. Here's CPI (blue) plotted against the Fed Funds rate (black) on a bar chart.
Or, looking at the same data on a line chart.
Note how prices spike (BLUE lines) beginning in January 2021. The vaccine rollout is in its early stages, and the global economy is reeling. But the Fed, perhaps correctly deducing that monetary policy can't fix supply shocks, especially since the unemployment rate (RED line below) had skyrocketed and had only begun to heal, doesn't pull the trigger. It is at THIS point, however, in early 2022, that the Fed acts:
But looking at the two CPI/Fed Funds charts, it appears prices may have been already moderating by themselves by the time the Fed starts hiking, as supply constraints got unraveled. Keep in mind there is a lag effect as to when rate policy actually shows up in the economy, and it could be that MonPol, which is not quite as precise in it's effects as your home thermostat, has uneven and less than desirable second order effects in the economy.
Like adding more pain in an already constrained housing market, for example.
There is the complaint that fiscal policy overstimulated the economy. No doubt that was a factor, but by how much? And we can't ignore that "Big Fiscal" got people back into the workforce at a breakneck pace, and that is an accomplishment worth applauding. COVID exacted a terrible social cost that the numbers don't show, and getting society normalized has to be considered a top priority. Moreover, the Great Financial Crisis taught us a few lessons: no one is going to be braying about a "slow recovery" this time around.
There's been a lot of finger pointing at stimulus checks funding excess consumption. But in nominal terms, the data seems to show that billions of these dollars were shoveled into paying down revolving debt, a natural reaction in an economic crunch.
Lastly, as I find I have to remind everyone, even if CPI were at 0.00%, prices within the index still move up and down. It's the confluence of all of these different metrics in one direction, each one with it's own set of inputs, that drive CPI.
So the lines have been drawn.
In the coming years, as we dissect the path of this critical part of our history, we'll find out.
September 3, 2024
