It’s Baaack …

Inflation data continue to show progress has stalled and even reversed. Let’s look at what Punxsutawney Phinster saw this morning:

YOY labor price inflation: 4.5%
QOQ M2 inflation, annualized: 7.2%
QOQ stock price inflation, annualized: 57.7%

That’s right, the BLS reported average hourly earnings up 4.5% this morning. No mere shadow given the recent resurgence of M2 and rip roaring asset price inflation. Markets are focused on the headline payrolls number, but this labor report datum most directly reveals the rate of dollar depreciation. You can either conclude the value of an hour of human time increased 4.5% since last January, or that the value of a dollar deceased.

Nolo contendere.

But wasn’t inflation on a glide path to the Fed’s 2% utopia? What went wrong?

Monetary policy works by incentivizing or disincentivizing the assumption of debt. While the private sector has responded to more expensive borrowing by cutting back, the public sector has not. The has put a $34T barrier between the Fed and its inflation target. By itself that might not be insurmountable, but the Fed itself has again been fanning the inflationary flames … not through any concrete policy action, but by just talking about monetary easing.

Media are already abuzz with talk about the Fed having to walk back its Big Pivot (read: Big Talk about pivoting).

I hereby indulge in a not-so-rare but well-deserved “I told you so”.

6 thoughts on “It’s Baaack …

  1. jk says:

    the “inflation reduction act” authorizes $891 billion of gov’t spending.
    “when you hear the names of legislation or anything done by the government, it is worth remembering that the group that sent so many people to the guillotine during the French Revolution was called ‘The Committee of Public Safety'”….

    tweet by Elon Musk 2/2/24

    1. Finster says:

      You can say that again, JK. The relationship between monetary and fiscal policy vis-a-vis inflation is not well understood. Interest rates alone do nothing but determine how much it costs to borrow. Because in our system money is created by being lent into existence, more borrowing results in more money and less makes it less.

      But it “works” only to the extent actual borrowing is affected. If rates rise and borrowing and money growth is unaffected, it has little effect on inflation. The first wave of disinflation in this cycle resulted from private sector retrenchment in response to higher rates. Public sector borrowing has so far been insensitive to the price of credit.

      It tends to respond asymmetrically as well. Government debt began to surge last decade largely in response to sustained easy money. Politicians grew reckless, but the Fed provided the bottomless piggy bank, making the cost of borrowing unnaturally cheap. So while at first blush fiscal policy is to blame for recalcitrant inflation, easy monetary policy was the great enabler. So the Fed remains culpable.

      The reverse is more difficult. Each year’s government spending becomes the baseline for the next. Putting a spending program in place creates a constituency for its continuation. It creates a sense of entitlement and restraint is viewed as its taking away. The funds received by special interest benefactors give them political power that is difficult to resist.

      For all the talk about the feared “wage-price spiral”, it is this ratcheting aspect of government spending that should be most feared. And while so much ink is spilled over the fiscal crisis risk of maintaining existing entitlement spending, the more pressing concern is the fact that politicians can’t even seem to stop creating new ones.

      Just since the turn of the century we’ve seen Medicare D (a bonanza for big pharma), Obamacare (a blow to quality full time jobs), and a push to add a college education to the list of entitlements (via nationalization of student lending).

      It continues. Far as marquee programs go, the Tax Cut and Jobs Act brazenly cut tax rates for the worlds richest corporations below that of many individuals. And the Inflation Reduction Act takes the cake for the most cynically and brazenly named.

      It will take years for higher rates to put even a dent in this juggernaut. If monetary and fiscal catastrophe don’t kill it first.

      PalisadesGold interviews Luke Gromen