The spike in inflation is not a concern – yet
The spike in inflation is not a concern – yet
By now you’ve probably already read a fair amount of commentary on yesterday’s consumer inflation report for May. I’m going to cut to the chase as to my take right off the bat:
1. The primary driver of this inflationary spike is supply bottlenecks rather than increased demand.2. The inflationary spike has wiped out any “real” wage gains during the past 10 months.3. The inflationary spike is not a concern – yet. If this continues about 3 more months, it becomes a real concern and I would expect the Fed to act at that point.
To the graphs …
1. Here’s a look at retail sales (blue) and personal consumption expenditures (gold) since the beginning of 2020:
Figure 1
Just as with last year’s stimulus, the effect of this year’s stimulus has petered out after a few months. Demand has stabilized.
On the contrary, YoY commodity prices have spiked in a fashion last seen when gas prices hit $4.25/gallon in the early part of the Great Recession:
This *can* be a great concern, but note that there have been other spikes approaching 10% YoY in the past 25 years that did not cause recessions or even major slowdowns. Note that those spikes only lasted a few months.
2. Here are average real hourly wages for nonsupervisory workers for the past 3 years, normed to 100 as of February 2020:
As of May, these are up 3% since just before the recession – and not at all since last July. The inflationary spike this year has actually caused them to decline slightly. This will create a problem for consumer spending (70% of the economy) if it continues too much longer.
3. As I’ve said many times before, typically inflation has not been a concern over the past 25 years unless CPI excluding energy (gas) is up 3% YoY or more. As of May, we crossed that threshold:
Another way to look at this is to compare our current trajectory with that which was in place leading up to the pandemic. In the latter part of the last expansion, consumer prices were increasing at the smoothed rate of 2.65%/year. Had that trend continued after February 2020, prices would be up roughly 2.9% since then. With the inflationary spike of the past several months, they are instead up 3.8% since February 2020:
Here’s the bottom line: this is not a big deal if it only lasts another month or two. But if the trend continues longer than that, it will begin to impact consumer spending, and it will get the Fed’s attention. Unfortunately, I have no special insight into supply chains; all I know is that it is important that the supply chain bottlenecks be promptly resolved.
Ahem NDd:
You can not grow wafers overnight. The cylinders are sliced into circular disks. Last time I was involved with buying semi-conductors was 2010-12.
Same issues supply chain led pricing. 4-8 weeks to grow the wafers and get them to a packaging plant where the layers are etched, components added, assembled, and encapsulated. Tack on another 8 weeks. It takes time to bring a plant back on line.
If demand comes in one huge lump. Manufacturers lengthen lead time which does nothing for throughput and only results in more orders.
We lived that way for about two years before things were easier. Funniest thing I overheard was the Panasonic Japanese at the Philippine plants (7) telling the VP of Purchasing for Chrysler that they should allocate some of their supply to us (German company). Quietly laughing to myself then. No one does that and remains a supplier to Chrysler except for them.
You are right on the rest of your post about inflation.
sorry, i am concerned because there’s still a lot of inflation in the pipeline; ie, see the year over year figures here: https://www.bls.gov/news.release/ppi.t02.htm
my tentative headline on the May PPI is:
Producer Price Index YoY Records for Final Demand and Intermediate Services; 46 year High for Intermediate Goods, 48 year High for Raw Materials