The dollar stores are seeing huge influxes of shoppers eager to avoid the high prices at the local chain supermarket, and people are eager to spend less to make sure that meat and eggs can reach the breakfast table.
In Washington the White House has said that the Federal Reserve with its twinned mandate of keeping inflation at 2 percent, and full employment, has the lead, but it has struggled to gain a foothold on the problem, and last week they raised the interest rates to three quarters of a point, the highest hike in 28 years.
At the September meeting there was another similar rate increase at the same 75-basis points and it seems that rate increase are here to stay until inflation is conquered, with some opining that this will continue at least into 2024, with predictions for 2023 from 4.24 percent to 5 percent.
Fed Chair Jerome Powell, backed into the corner by the Biden administration, was forced to admit that as CNN reported there are external factors that will make it harder to turn the corner, from that “soft landing” that we reported on earlier, and that mitigating forces such as the war in Ukraine, supply chain woes, caused by the coronavirus, were still taking its toll on the US economy.
He is supported by Mark Zandi, chief economist at Moody's Analytics, who has said, "The primary culprit [of inflation] was higher energy prices, particularly gasoline, and a lot of that can be traced back to Russia's invasion of Ukraine that caused global oil prices to spike," he said in a recent episode of his podcast, Moody's Talks. Inflation should ease, when the pandemic subsides and the market adjusts to new sanctions against Russia.”
While gasoline prices have decrease with an average nationwide tag of $4.50 dollars, rents and food remain sky high.
"So much of it is really not down to monetary policy," said Powell at a press conference last week that those supply chain problems had lasted longer than he anticipated
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In a recent mandated appearance before the Senate Banking Committee, he added, notably, and perhaps defensively, “We’re not trying to provoke, and don’t think that we will need to provoke, a recession,” he stressed, “But we do think it’s absolutely essential that we restore price stability, really for the benefit of the labor market, as much as anything else.”
Writing in The Guardian, Clara Mattei, an economics professor at The New School for Social Research, opined that shared pain of rising interest rates will hurt a lot pf people, and to that affect there is truth, if restrictions, such as last week’s surge in interest rates cuts cools down the economy, it will also cause many workers a job loss especially on the lower end, where their jobs will be low hanging fruit, to be quickly cut.
Sen. Elizabeth Warren told Powell at a recent congressional hearing, “Rate increases make it more likely that companies will fire people and slash hours to shrink wage costs,”
“The cost of borrowing will also increase government expenses for public works and social services, forcing states to further cut their budget, hurting the most precarious parts of society that rely most on these services,” Mattei stressed, and some other economists have said that intervention measures like more food stamp benefits might help mitigate some of these fallouts.
Mattei added a final warning saying that while, “Higher inflation is eating away at wage increases, but this does not mean lower costs for employers: compensation for private industry workers increased 4.8% over the year. By comparison, in March 2021, employers faced an increase of only 2.8%.”
Powell himself has acknowledged that these compensatory measures such as “lowering incentives for businesses to invest will produce unemployment,” and we see the risk involves planning to determine the correct balance to stem much of the expected blood letting.
If it seems that the chair is being backed into a corner, his answers seem to make that even clearer. But, there are others that want to look to the future, and take a look down the tunnel for a possible gearing towards a recession.
Federal Reserve Bank President Loretta Mester said regarding both inflation and [a] later recession that, “It isn’t going to be immediate that we see 2% inflation. It will take a couple of years, but it will be moving down,” Mester said in an interview with CBS News this past Sunday.
According to CNBC, Mester also said she was not predicting a recession despite slowing growth; “We do have growth slowing to a little bit below-trend growth and we do have the unemployment rate moving up a little bit. And that is OK, we want to see some slowing in demand to get it in line with supply,” Mester added, referring to forecasts submitted in the past week by participants of the Federal Open Market Committee’s meeting.”
Added to the mix was this from The New York Times: “The Fed needs to hike policy rates more aggressively if it has any hope of bringing inflation down,” said Seema Shah, chief global strategist at Principal Global Investors. “If it’s going to have to tighten even more, then the chance of a recession is higher.”
These were pressures before as we noted in the March Jobs report, when we reported that “Many observers are mentally pushing Powell to increase the interest rate even further than the one-half point anticipated in early May,"
“The tightening from higher policy rates filters through the economy to make borrowing of all kinds — from mortgages to business debt — more expensive. That slows down the housing market, keeps consumers from spending and discourages corporate expansion, “ Shaw added.
But balance is needed since these moves are a ‘’blunt tool”‘ to use Powell’s terminology, and knowing when, and how to calibrate, is very tricky as many economists and academics note.
There are naysayers: “By the time you start to catch it and realize you did too much, you’re going to be deep in a trough,” said Dan Genter, the chief executive of Genter Capital Management, an investment advisory firm. “It’s going to take nine to 12 months before you see the total effects, and it takes that long to get out of it.”
“All the talk of recessions and bear markets could also — at the margins at least — add to the economic pressure, in part because people see their investment, retirement or college savings accounts shrink and start to pull back on spending,” and with no sign of abatement in college tuition, many families are now becoming increasingly worried.
“The behavioral effect is that people will start to slow down on spending, become much more cautious, start to save more,” said Beth Ann Bovino, the chief U.S. economist at S&P Global. “That’s not a good outcome for the economy. It slows growth.”
The CPI report for July indicated that there was some relief with lowered prices on gas, airfares and used cars, to an increased rate of 8.5, lower compared with 9.1 the month before. And, while this offers some relief it is not the end, say most economists, which much more work to do, and that work is the domain of the Federal Reserve and expectations are for a less aggressive rate of half a point, versus the prior three-quarters.
One source of relief is the detangling of the bottle neck of the supply chain issues that so beleaguered world economies for so long, mostly attributable to problems in transportation and warehousing and shuttered factories, due to Covid.
We are not out of the woods on inflation, and Boston Fed president Susan Collins said, with great understatement, "at the moment, inflation remains too high."
Updated Sept. 27, 2022 at 2:04 p.m.CDT
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