Wednesday, April 11, 2018

Wages, inflation good for March. But will gas, other prices sprout in Spring?

With all of the items going on in the news involving certain Wisconsinites and others, today's report on March's Consumer Price Index didn't get a lot of attention. But there are some interesting points that are lurking below that could come to the forefront that might have notable effects on our economy.

If you just look at the topline numbers in the CPI report, it would appear that inflation was slowing.
The Consumer Price Index for All Urban Consumers (CPI-U) decreased 0.1 percent in March on a seasonally adjusted basis after rising 0.2 percent in February, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index rose 2.4 percent before seasonal adjustment.

A decline in the gasoline index more than outweighed increases in the indexes for shelter, medical care, and food to result in the slight seasonally adjusted decline in the all items index. The energy index fell sharply due mainly to the 4.9-percent decrease in the gasoline index. The index for food rose 0.1 percent over the month, with the indexes for food at home and food away from home both increasing.
And this decrease in inflation enabled real hourly wages to rise for only the second time in last 8 months, by a robust 0.4%. Sounds pretty good, and does this mean that we’re heading toward a sweet spot of wage gains combned with lower inflation?

Don’t bet on it. Notice that 2.4% increase in prices over the last 12 months? It’s the highest in a year, and later in the CPI report you see that prices for most items actually went up last month, including a boost to th "core" CPI.
The index for all items less food and energy increased 0.2 percent in March, the same increase as in February. Along with shelter and medical care, the indexes for personal care, motor vehicle insurance, and airline fares all rose. The indexes for apparel, for communication, and for used cars and trucks all declined over the month.

The all items index rose 2.4 percent for the 12 months ending March, the largest 12-month increase since the period ending March 2017 and higher than the 1.6-percent average annual rate over the past 10 years. The index for all items less food and energy rose 2.1 percent, its largest 12-month increase since the period ending February 2017. The energy index increased 7.0 percent over the past 12 months, and the food index advanced 1.3 percent.
Those year-over-year and core inflation figures came out 2 weeks after the Federal Reserve's Open Market Committee indicated in their meeting that prices and the overall economy would go up in the coming months. We found that out today when the minutes from that meeting were released today.
All of the Federal Reserve's policymakers felt that the U.S. economy would firm further and that inflation would rise in the coming months, minutes of the central bank's last policy meeting on March 20-21 released on Wednesday showed.

The readout of the meeting, at which the Fed unanimously voted to raise borrowing costs by a quarter percentage point, also showed that policymakers were wary about the impact of the Trump administration's trade and fiscal policies….

Policymakers also see additional impetus from an economy in which the labor market is tightening, the dollar weakening and the stimulus from a $1.5 trillion income tax cut package and increased government spending yet to impact on the economy.
That likely will translate into rising interest rates from both the Fed and other places for the rest of 2018, and is similar to the outlook that the Congressional Budget Office gave on Monday.

Also, see that March drop in gas prices of 4.9%? Don’t get used to that either, because Oil futures were trading at their highest levels in 4 years after our president tried to distract from the worsening Trump/Russia scandal opened his big mouth about the Middle East this morning.
Prices began to rally as U.S. President Donald Trump threatened to fire missiles at Syria in response to a suspected chemical attack last week.

Prices climbed further as Saudi Arabia's air defense forces intercepted a missile over the capital Riyadh on Wednesday, Saudi-owned broadcaster Al Arabiya said, after at least three blasts were heard in the city.

Brent crude jumped to a high above $72 a barrel, its strongest since early December 2014, after Trump's comments, while U.S. crude rose above $67 a barrel. Gold (XAU=) rallied for a fourth day as investors ditched risk-linked assets such as equities.
That US crude figure is up nearly $5 a barrel since the end of last week, and I would think that would lead to higher prices at the pump in the coming weeks (well, that along with the typical Spring price spike).

And if inflation is on the rise, and if wages do not continue to rise like they did in March, any good will that some people may have for Trump and the GOP have on the economy will melt away in the next few months. And it's not like things look good for those guys these days, even with the country having low unemployment and continued GDP growth. What if inflation and higher interest rates leads to THAT reversing as well?


  1. I found this short article about the right to work change in 2015 and resulting pay gap between MN and WI. It's interesting that WI used to pay higher wages most of the time prior to the change but fell off rapidly after the change. Increasing inflation on everyday items and increasing expenses like fuel costs could definately be tougher on Wi workers in the near future if they rise more quickly.

    1. Yikes, good point. Also add in the fact that the state of Wisconsin spends less on public transit now than we did 7 years ago, and some systems have cut back their routes and frequencies as a result.

      So if gas goes to $3, not so many options out there.

  2. All good points. I'm interested to see if the gap in wages between both States settles at a certain amount and then is simply parallel but stable or if the gap continues to widen indefinitely with no end in sight. Since right to work is a relatively new development,it would be interesting to do more comparison research between all the RTW and non RTW States and see the overall pay gap and trends at the national level. In my opinion, the even larger problem is the low wages faced by a good majority of workers at the bottom. The US is headed toward a 'low demand' economy because most workers can't afford to buy the products they sell or make. Quality of life measurements including lifetime expectancy have been falling fast while other countries like China are paying large pay increases to workers of around 10% yearly while incomes in our country have become mostly stagnant. Giving most of the profits to the top 10% isn't going to do anything to get the economy moving...other than piling up the national debt. I'm sure we all know many people that are cutting back on spending wherever possible instead of spending more because most of their incomes won't support going out an extra time per week or allow them to pay all their bills on time. The challenge for all of us is living in a country that has high costs of living on incomes that are stagnant that really can't support living in a high cost country. Economists pushing for free trade didn't seem to understand that workers here would face falling wages and job opportunities and that government spending would intimately need to be greatly cut to account for workers dropping standard of living compared to continuing to deficit spend as they have done over the last few decades with poor results at best. The US needs to start charging other countries directly for the services they require from us. With free trade, we can't afford to give away things we no longer manufacture anymore. Other than food, we import more than we export which means we no longer have anything to give away and when the rich and companies don't want to pay enough taxes, we can't even afford to keep our own country running, let alone help any other country. Some big decisions will need to be made soon because with the way things look currently, China seems to be in a good position to be the world's next super power which would mean the yuan could replace the dollar in the not so distant future. The petro yuan just went live recently and the dollar has been extremely weak recently, so I do feel that we are facing some challenging times ahead.

  3. One must read I forgot to include in my reply is an article that dates back to early 2010, but explains how lack of competition and how a Monopoly in nearly every industry is hurting america. I have seen many articles that discuss the monopoly situation in the US and lack of competition in most industries today but Barry and Phillip who wrote this go into great detail on what is wrong and what could be done to fix the current US economy. Free trade could probably be left as is(or slightly adjusted) and taxes could possibly be left lower if the government would simply deal with the big elephant in the room: MONOPOLIES and lack of creativity as well as research and development that results from it. The article points out that the US would need to reverse policies changed in the early Reagan years that prevented Monopolies and enforce the policies extensively. This would start creating jobs, offer real(compared to the fake selection at stores today), competitive choices and prices at the local grocery store, add many jobs, and even if some prices went up slightly, more americans would have better paying jobs(competition could increase wages by offering workers more choices) that would allow them to buy the products they made, and the large recent budget deficits could start being erased with more businesses and individuals making more income instead of fewer giant companies that currently try to pay as little tax as possible in both wages and taxes. This is a long article that ran in Washington Monthly's March/April 2010 edition but it is written extremely well and gets to the point with what is wrong with America today. All of us need to start pushing Washington to deal with this very important issue: