Is our 'long' national inflation nightmare over? Not so fast
I sure hope everyone who claims to be fighting for American families doesn't forget about this problem when the price of gas dips back below $4 for most people
Is the long national inflation nightmare over? Well, that's a $64 trillion question. Today brought news that the Consumer Price Index rate of increase was flat last month -- the first pause in that measure of rising prices since 2020. Wall Street reacted to the news with predictable restraint and circumspection. Investors crashed the barn doors and pushed the S&P 500 to its highest level in three months.
So: Just how bad is inflation? And....are we past the worst of it? The question is so laced with political overtones that it's very hard to sort out the reality of the situation right now -- like so many other important topics in our time. I was asked recently by Forbes to examine the topic of peak inflation. My story published yesterday and turned out to be pretty timely. I hope it'll help you sort through all the noise and get a feel for the real inflation picture right now. But let me quickly summarize here:
Inflation has *multiple* causes, one of which is the fear of inflation itself. If people believe prices are going up, they will hoard items with today's more-valuable dollars, pushing prices higher. But that's just the beginning. The supply chain crisis, a decades-old vulnerability that was exposed by the pandemic, is also a large factor in much of the higher prices you see. So is the war in Ukraine. So are higher wages. And so is all the cash that was sent out by the government during the pandemic. All these things contribute.
But I firmly believe the largest source of economic anxiety for most Americans is housing costs. Rents are skyrocketing. Just Google "rent" and "skyrocketing" and you'll see. Renewal notices calling for 10% or even 20% increases are common in many cities. Landlords have unprecedented leverage right now, partly because home prices have soared 15% or more for several years, pushing ownership out of reach. But let's be real: This is not a new problem. I chronicled the scandal of unaffordability for years in my Restless Project. I am glad people are paying attention to high housing prices now, thanks in part to the politicization of the current inflation crisis. But I sure hope everyone who claims to be fighting for American families doesn't forget about this problem when the price of gas dips back below $4 for most people.
As for today's inflation numbers: You should know that the Fed doesn't value the Consumer Price Index as a good measure of inflation; governors prefer something called the Personal Consumption Expenditures Index. So it is wildly premature to think prices are coming back down. And as I say as often as I can, thanks to the "Rockets and Feathers" effect, prices will come down slower than they went up.
But if you are really trying hard to pinpoint "peak inflation" -- a bit of a fool's errand, like picking a stock market bottom -- there are several other data points to consider. Here's a bit of my story at Forbes, but you should go read it there.  This passage begins by explaining other sources of government data to digest when trying to interpret inflation.
The producer price index (PPI) measures the costs for people who make and sell things, and some believe it’s a canary-in-a-coal-mine indicator for inflation.
Then there’s money supply, a notoriously difficult component to measure and interpret. In simple terms, prices typically rise when there’s more money available. There is nothing simple about the money supply conversation, however. If the government prints more money, but anxious citizens save it instead of spending it, has the money supply increased?  If banks increase credit card limits, but Uncle Sam doesn’t print any extra cash, has the money supply increased? Of course, there is a link. It’s hard to overlook this: The main measure of dollars available to spenders in the U.S., M2 in Fed-speak, grew from the government’s economic stimulus in the early half of 2020. The federal stimulus was part of the emergency relief package to handle the economic fallout from the Covid-19 pandemic. According to Federal Reserve Economic Data (FRED), M2 rose from about $15 trillion in late 2019 to about $18.3 trillion in summer 2020, thanks to pandemic relief efforts. The monetary supply kept climbing up to $21 trillion by late 2021. The good news: The money supply has remained steady at around $21.6 trillion since January 2022, FRED data shows.
There are plenty of places to read the inflation tea leaves outside government data. Shipping costs could be a potential indicator of coming relief. The World Container Index tracks transport prices, which have been trending lower since late 2021. Year over year, the index is down by 29%. That’s a good sign, but it’s still nearly double the normal, pre-pandemic price.
All those floating containers stuck outside ports of entry created a weird shortage of items for consumers to buy. Empty store shelves hint that demand is outstripping supply, and prices have nowhere to go but up. But Walmart (WMT) and Target (TGT) have another problem now. The two big-box retailers are dealing with bloated inventories and are slashing some prices. (That might indicate that inflationary pressures have eased among many retailers, or it could mean Target and Walmart are good at navigating supply chain shocks.)
Meanwhile, anyone who looks at the travel industry has to conclude that U.S. consumers are not acting as if inflation is a big concern. Demand for plane tickets and hotel rooms is robust, suggesting consumer discretionary spending is, at least for now, quite strong. Travel spending surpassed pre-pandemic levels earlier this year and set a pandemic record at $105 billion in June, according to the U.S. Travel Association’s monthly travel data report released on Aug. 4.