Tuesday, August 15, 2023

Inflation continues to be moderate, and real wages rise. And dont panic about gas prices.

On a day when the President visits our state to talk up the Inflation Reduction Act and efforts to be more environmentally sustainable, it seems to be a good time to check in on both those fronts, doesn't it?

We saw last week that inflation stayed on a lower track in July 2023, and is significantly below the peaks of June 2022.
The Consumer Price Index for All Urban Consumers (CPI-U) rose 0.2 percent in July on a seasonally adjusted basis, the same increase as in June, the U.S. Bureau of Labor Statistics reported [Thursday]. Over the last 12 months, the all items index increased 3.2 percent before seasonal adjustment.
That makes for 4 out of the last 5 months where CPI has increased by 0.2% or less.

But somehow, far too many media members decided to use that 12-month figure to imply that inflation had gone up .

That’s because of the 0.0% figure in July 2022, which reflected gas prices falling back to earth after peaking the month before. So even if inflation speeds up to a 0.3% rate for each of the next 3 months, will the AP and others give us headlines that 12-month inflation is falling?

And as usual, the lagging indicator of shelter was the reason for most of the (small) increase in prices.
The index for shelter was by far the largest contributor to the monthly all items increase, accounting for over 90 percent of the increase, with the index for motor vehicle insurance also contributing. The food index increased 0.2 percent in July after increasing 0.1 percent the previous month. The index for food at home increased 0.3 percent over the month while the index for food away from home rose 0.2 percent in July. The energy index rose 0.1 percent in July as the major energy component indexes were mixed.
The “Core rate” (something that inflation hawks have been trying to hang onto as a reason to keep raising rates) also continued to fall.

The index for all items less food and energy rose 0.2 percent in July, as it did in June. Indexes which increased in June include shelter, motor vehicle insurance, education, and recreation. The indexes for airline fares, used cars and trucks, medical care, and communication were among those that decreased over the month. Over the last 3 months, the “core” CPI has increased by a total of 0.8%, or an annual rate of around 3.3%-3.4%. And when we have wage growth that is consistently between 4% and 5%, what’s wrong with that?

The low CPI number also means that July was another month of real wage growth, which has consistently been happening since inflation peaked in June 2022. And another consistent trend is that non-supervisory line workers have been seeing faster growth that workers overall.

That’s a pretty good situation as well, and the last 12 months have retraced about half of the inflation-adjusted losses suffered in the year before. There’s still plenty of work left to be done to get back to where we were in 2021, but it’s also still above pre-COVID (and Trump-era) levels.

1982-84 dollars

I think the “base” inflation isn’t going to cause many problems in the near future, but I certainly noticed a runup in oil prices in July and early August….because inflation isn’t hampering the economy and the stock market has increased for most of 2023. And that’s starting to reflect in higher gas prices.

This adds up, as it looks like gasoline supplies were tight at the start of this Summer, with the lowest supply levels in 8 years. But there hasn’t been any depletion of supply in June or July, and now we’re in a more typical level of gasoline availability. Also note how supply jumped last year as people backed off driving in the face of $4 and $5 gas, (and how the pre-vaccine, low-travel Summer of 2020 had so much gas around that it barely even shows up on this chart).

And while gasoline consumption is up compared to last year, it is still behind most other non-COVID Summers in our recent history (note, we only have one week of gas consumption data for August 2023). .

In addition, the Energy Information Administration, the US has pumped out at least 12 million barrels in every week of 2023, and had a new post-COVID high of 12.6 million barrels in the first week of August. So we are keeping up on the supply side as well.

So I don’t see why gasoline prices would get higher than whatever moderate increase we may see over the next few weeks. And that should quickly subside as the Summer driving season ends and demand falls further. I don’t see it spiraling like gas prices did in early 2022 – there isn’t a new overseas conflict that might pop up or some other supply disruption like we saw at that time. And I also will note that while supplies are slightly tighter than they were last year, it’s not much different than what we’ve seen in times with lower gas prices and more supplies. Especially pre-COVID.

Just play smart and don’t panic because Wall Streeters are throwing money around and/or Saudis and Russians make an effort to manipulate prices and the US economy. Even if there is a slight uptick in inflation for August as a result of what's happened in the last month to gas prices, don’t be fooled into thinking that CPI levels are going back above 5% any time soon.

Bottom line - if I were a US economic policymaker, I’d care a lot more about keeping US unemployment at or below 4% than in getting inflation below 3%. And I am suspicious of Central Bankers who do not feel the same (do you hear me, Kashkari???).

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