International Forecaster Weekly

RISING INFLATION NOT OVER YET - Is Bigger Income Growth a Consolation?

Inflation came in like a hot potato last month.

At 6.2% for all items, virtually no economist wants to touch it, politicians just want to play the blame game, and few everyday Americans see a silver lining.

There are always a ton of ways to slice and dice inflation, including what it actually is and the best way to measure it. 

Guest Writer | November 17, 2021

By Dave Allen for Discount Gold & Silver

Inflation came in like a hot potato last month.

At 6.2% for all items, virtually no economist wants to touch it, politicians just want to play the blame game, and few everyday Americans see a silver lining.

There are always a ton of ways to slice and dice inflation, including what it actually is and the best way to measure it. 

And as shown in the chart above, they’re all up and to the right in CPI Land — hitting its highest level during October in decades.

This number hit with such a thud that President Biden said that passing his policy agenda is a critical tool for fighting these increases.

So, where are prices rising? Virtually everywhere — except medical care commodities and airfares (down -0.4% and -4.6% year-over-year, respectively).

But they’ve surged particularly in these areas (figures represent percentage change, October 2021 vs. October 2020):

  • Fuel oil (59%)
  • Motor fuel (49.6%)
  • Piped natural gas service (28.1%)
  • Used cars and trucks (26.4%)
  • And meat, poultry, fish and eggs (11.9%).

People See Inflation Differently

When it comes to their views on the economy, Americans are increasingly split into two camps. 

One is focused on the strength of the consumer, employment growth and corporate earnings.

And the other is sounding alarm bells that inflation — a result of that growth — will be more persistent and widespread than officials are willing to acknowledge.

In the latter vein, Joe Wiesenthal believes it's important to keep the price increases in perspective.

To him, inflation should be viewed “in the context of an extraordinarily fast labor market recovery and…aggregate private sector income growth [that] has vastly outperformed price increases since the stimulus measures were put in place at the start of the pandemic [last year].” 

Well, that's true for the most part, because when you look at all income (wages plus payments from the government), the public at-large has come out ahead. 

Rather than casting blame, Wiesenthal says “it makes more sense to talk about who gets credit for a recovery that's been much faster than virtually anyone anticipated.”

Still, he points out that everyone wants the line above to go down — and fast.

Even Wieisenthal says he’s tempted to look at all the money spent over the last 20 months and say that's the major cause of higher inflation. 

But then, he remembers, a big chunk of the inflation has been offset by the huge labor recovery.

Plus, the PPP program and bailing out the airlines ensured that various businesses and industries were able to make it to the other side. 

In fact, all the government spending is likely one reason why inflation isn't even higher today than it otherwise would be. 

As Wiesenthal notes, “credit where credit is due.”

As for the Future…

Fed Chair Jerome Powell said earlier this month that Fed policy makers will be patient on interest rate hikes but says it won’t hesitate to act if inflation doesn’t soon change its trajectory. 

President Joe Biden, who is under increasing political pressure over rising prices, said that reversing the trend is a “top priority.”

The divide is playing out in communities across America — and in the U.S. Capitol.

Some, like Hans Nichols, say that last week’s inflation report validates the instinct of Sen. Joe Manchin to punt Biden’s Build Back Better agenda until next year — potentially killing a quick deal on the $1.75 trillion package.

Slowing down work on the massive tax-and-spending plan is against the fervent desire of the administration and House progressives.

With a limited number of legislative days left in 2021, Manchin appears content to focus on the issues that “need” to be addressed — such as funding the government in fiscal year 2022, raising the debt ceiling and passing the National Defense Authorization Act.

Manchin, like some House moderates, doesn’t want a final vote on BBB until the Congressional Budget Office scores the true cost of each of Biden’s proposed programs as well as the tax proposals to fund them.

Ironically, White House chief of staff Ron Klain is trying to couch Biden's spending plan as a long-term strategy to lower inflation.

"What it does is it makes sure that our federal spending meets the things that families really need: 

“Bringing down the cost of childcare, prescription drugs, elder care, and preschool, while cutting taxes for middle-class families."

On the other hand, Manchin is arguing that Congress should take a “strategic pause” on the bigger package until Congress has more time to assess the effects of the nearly $5 trillion stimulus spending.

What Matters Most

Kate Marino points out the massive economic policy debate right now about whether inflation expectations really matter. 

“But if you think they do…then there’s one type of price increase that’s far more emotionally powerful than others, and that’s one that impacts people’s ability to feed and clothe their family.

And the October inflation reading has bad news on that front. While overall CPI came in hot at 6.2%, the highest since 1990, there are some specific categories relevant to growing families that look even more dramatic.

Keeping kids well-fed and clothed is getting more expensive. 

Baby food prices are up 7.9% year-on-year, the fastest rate of growth since the Great Recession, and seem poised to post their largest ever annual growth rate soon.”

Clothing for infants and toddlers increased by an annualized 7.6% — the second-fastest growth rate in the last three decades.

And the price of sugar and sugar substitutes jumped 4.1% in October, the biggest monthly gain on record — another reason for parents to feed their young kids less candy, processed cereal and other sweets.

Traci Alloway reports that multiple studies have shown that grocery shopping is one of the most important activities through which people form inflation expectations. 

As with gas prices, it’s something you see on a regular basis and which you probably can’t avoid.

Alloway says from a household balance sheet perspective, if you’re paying more for baby food or child clothing, the increased cost may have been more than made up for by the Child Tax Credit that was put in place for 2021. 

But the sticker shock may be relevant anyway in terms of forming views about the economy and inflation in general.

And rising food and energy prices are likely to hit hard on households’ disposable incomes available for the purchase of other goods and services. 

The bottom line is that inflation is not only not transitory, it’s ongoing. And as long as it’s rising, like now — and inflation-adjusted interest rates are falling — gold and silver will live for another day and shine brightly.

Time to get a new pair of shades.