Fed’s Lowest Lowball Inflation Gauge “Core PCE” Spikes Most Since 1983

There are whole generations who never experienced this type of inflation, this type of destruction of the dollar’s purchasing power.

By Wolf Richter for WOLF STREET.

The Fed’s favorite inflation measure – which is the lowest inflation measure the US government provides – spiked further in May to multi-decade highs. Sure, it’s just “temporary” or “transitory” or whatever in the sense that next month and a year from now there will be a different number. But the loss of purchasing power of the consumer dollar, including the dollars earned with labor, is permanent. That won’t come back.

The Personal Consumption Expenditures Price index without food and energy, the “core PCE” index, jumped 0.5% in May from April after having jumped 0.7% in April and 0.4% in March, according to the Bureau of Economic Analysis today. In order to dodge the infamous but now diminishing “Base Effect” – comparing today’s readings to the low inflation readings in the same month a year earlier – we’ll look at “annualized” core PCE inflation first.

The three months of May, April, and March combine into an annualized core PCE inflation rate of 6.4%, meaning that if price-increases continue for 12 months at the pace of the past three months, the annual inflation rate would be 6.4% as measured by the lowest lowball measure published in the US. This was the red-hottest three-month annualized inflation rate since August 1983.

The core PCE inflation index is the measure the Fed uses for its inflation target, which currently is 2% (green line in the chart).

The annualized core PCE inflation rate shows to what extent inflation has suddenly heated up in this spring. The Base Effect applies only to year-over-year comparisons and has no impact on these three-month annualized rates.

There are whole generations of adults out there today that have never experienced inflation like this.

Compared to May last year and not annualized, Core PCE inflation – jumped by 3.4%, the biggest year-over-year increase since early 1992.

The Fed’s target of 2% is indicated by the green line. The Fed has specified that this target is “symmetrical,” meaning that it will let inflation run a higher than 2% for a while after it ran lower than 2% for a while. And so now we have a massive overshoot:

Core PCE is the lowest lowball inflation measure in the US. The headline PCE inflation index, which includes food and energy, jumped 3.9%, according to the BEA today.

The Consumer Price Index (CPI) inflation index, released by the Bureau of Labor Statistics two weeks ago, jumped 5.0% in May compared to a year ago, and by over 8% on a three-month annualized basis. The purchasing power of the consumer dollar, the CPI corollary also released by the BEA two weeks ago, plunged by 9.5% on a three-month annualized basis. These are red-hot inflation surges that many adults in the US have never seen before.

Surely, some items in the inflation basket will unwind their current price spikes to some extent, such as the historic price spike in used vehicles. But those prices won’t go back to where they were a year ago. They’ll unwind some, and then they’ll continue to rise from there. As those spikes unwind, other prices begin to surge – such as in services, and we’re already seeing that.

These price spikes that then unwind are the “transitory” part of inflation – meaning those price spikes won’t go on forever. But prices are already taking turns with their spikes.

But there is now a “persistent” part of inflation in the works. This is something we’re seeing that we haven’t seen in decades: The mindset has changed. Price resistance has gone away. Consumers and businesses are willing to pay these higher prices, are accepting higher prices, and are including them in their calculus.

Inflation has surprised the Fed to the upside all year. And this shift in the inflationary mindset makes it likely that a portion of this surge in inflation will persist and that inflation rates will continue to surprise the Fed to the upside.

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  109 comments for “Fed’s Lowest Lowball Inflation Gauge “Core PCE” Spikes Most Since 1983

  1. Seneca's cliff says:

    But my friend ,who reads the NYT’s every day, says not to worry because Paul Krugman says inflation is at record lows.

    • ChangeMachine says:

      The Propaganda of Record has no conflicts of interest, despite being connected to the most powerful financial power brokers in the capital capitol of the world. Do NOT listen to people like Dean Baker at Beat the Press. If you question the NYT you are pizzagate.

  2. Phoneix_Ikki says:

    Obi-Powellbi wave his hand across your face..”Inflation is transitory…there’s no real inflation out here…everything is gonna be alright..we still need ZIRP and more MBS purchase every month…”

    This A$$clown, I think the other day he went on to talk about US needs more inclusive prosperity. Gas-lighting and double talk at its best, bravo!

    I wonder on my next annual review if my work will give me a cost of living adjustment equal to this lowball CPI% or if they will give me what the real CPI (including housing/asset price inflation) to offset? Ha….I think not.

  3. MonkeyBusiness says:

    It’s temporary because the next one will be worse.

  4. Petunia says:

    The real test of the inflation numbers will be the third quarter, when social security increases are determined. I expect inflation to crash for the third quarter.

    • jo6pac says:

      Sadly the fake numbers that the fed uses for SS won’t help us much.

      • Charlie says:

        Here’s where the SS numbers sit at end of May:
        Jan Feb Mar Apr May Jun
        2020 251.361 251.935 251.375 249.515 249.521 251.054
        2021 255.296 256.843 258.935 261.237 263.612
        1.57% 1.95% 3.01% 4.70% 5.65%

        Source: https://www.ssa.gov/oact/STATS/cpiw.html

        Hearing 4-5% COLA increase

    • Satya Mardelli says:

      You got that right Petunia. Average SSI increase – +$20, average Medicare deduction – $50

  5. Bobber says:

    No problem says the Fed. Inflation ex-everything is still only 0%. We may be hearing more about that at the next press conference.

    • Old School says:

      Fed’s policies change behavior. There was nearly always a reward for savings until 2009 policy started. Anyone putting savings in a savings account to save up a down payment has been made a fool of the last 12 years. Now that the Fed has people trained that savings is stupid and casino gambling is smart, wonder what will happen next

      • Janna says:

        You are spot on! There is no way for ordinary people to get ahead. We have given up on trying to establish own our wealth and are instead focusing on generational wealth. Who knows what this world will be like for younger generations. Although chasing after generational wealth is proving more and more difficult as well. We are all over the board in an effort to retain something of value.

        • historicus says:

          Never have savings been INTENTIONALLY penalized like the Fed is doing now…..
          5% inflation, zero fed funds…and they dont lift a finger to quell the inflation, THAT THEY PROMOTED…despite being obligated to “stable prices”!!
          Remarkable that no one in Congress says a word…..they are all long the stock market and like the free money for the vote buying schemes.

    • Data Deception says:

      Yep that’s right!
      The BLS will show us it is “transitory” by manipulating the calculation again to exclude food prices next time. 0% here we come.

  6. CRV says:

    Meanwhile mining stocks (all kinds) are down for the day. I would have expected to see them go up in this inflationary setting.
    I can’t make head or tails of this any more.

    • ivanislav says:

      It’s kind of funny, gold is up only 35% over the 2014-2019 average after declining from the prior peak, while almost everything else is up much more. My guess is that it’s rise will continue to be muted, unless the dam breaks on fiat currencies or the USD, in which case it will be a lifeline. I don’t know what the odds are, but owning some seems like a worthwhile hedge.

    • Tom S. says:

      I think investors are convinced that people will be able to afford the higher prices…at this point I’m not so sure we aren’t going to see a gigantic crash in consumer spending.

      • Bobber says:

        When I shop, I often see the quantity or volume of products has decreased, but the price stays the same. Recently, I noticed the Top Pot donuts I usually buy in the Seattle area are about half as big as they were last year. When I see that happening, I quit buying those products and make a substitute if necessary, even if I like the brand or product. As a result, the seller loses 100% of my revenue when they try to play that game. Message sent.

        Who really needs donuts or other useless or harmful crap at the end of the day?

        • Rosebud says:

          Your health is worth budgetting for organic food and avoid all carby-starchy-sugary foods if you value long life.

    • NBay says:

      Cramer is a jerk, but he is a GS alumni, which I would guess is still the best capitalist pirate “finishing” school around, just based on where their alumni end up.
      So, he once said the market is like a fashion show, meaning that the best pirates make most of their money moving around, just like they make it on ANY movement in “price discovery”, which the casino is supposed to be for.
      Rest assured the pirates know what they are doing, even if most of us don’t….and they have FAR more chips to play with.

  7. The average CPI the last twenty years is probably 1 1/2%, so how long does 3% inflation have to persist to achieve the 2% target. A long time. Inflation works to ameliorate consumer debt, so be it, the borrowers always get the meat, savers get the bone.

    • Old School says:

      Don’t think so. If I my memory is correct CPI has ran right at 2% if you make the time horizon 20 – 25 years. That’s with all the phony baloney adjustments as well. Just an excuse to run inflation above t-bills for a long time. Now 1/3 of savers purchasing power gone.

    • Wolf Richter says:

      Ambrose Bierce,

      What cost $100 in May 2001 costs $151.49 today, according to the BLS CPI inflation calculator. So CPI inflation was 51.5% in 20 years. This is a lot more than your estimate of 1.5%.” It’s more like 2.5%. Added up over the years, you can see what it does to purchasing power.

      • MarMar says:

        Old School is right. This is almost exactly inflation of 2.1%. Remember, it compounds.

        2% inflation over 20 years:
        (1.02)^20 = 1.486 => 48.6% increase over 20 years

        2.1% inflation over 20 years:
        (1.021)^20 = 1.515 => 51.5% increase over 20 years

        • historicus says:

          2% for ten years….22% drop in the dollar
          2.5 % for ten years….28% drop in the dollar

          The FED has decided to REMOVE the ability to SAVE…
          since 2009….
          Save your way to financial stability…impossible
          Buy a house…..nearly impossible

      • kam says:

        Change back from a dollar for the Big Mac meal 1970.
        Inflation at 800%

        • ivanislav says:

          Well after you hedonically adjust for the improved Big Mac that now contains wood pulp, you’re back to ~2% inflation.

        • MarMar says:

          That was half a century ago. Google tells me a Big Mac meal today is $5.99. That corresponds to 3.6% inflation per year.

          $9 would be 4.31% inflation per year.

      • Sorry I was looking at the chart of CORE PCE, YOY and I drew an imaginary line from 1999 to present. If you control the rate of change you control the variable and so far it is within limits. But if the dollar is losing purchasing power that is deflationary, right?

        • historicus says:

          PCE allows the substitution OUT of items that rise “too much” in price
          How’s that for an inflation index?

      • Winston says:

        “according to the BLS CPI inflation calculator”

        And that 2.5% is produced via their manipulated CPI figures used within their calculator.

      • Sams says:

        Is it?

        Is not the CPI gods tracks and the weight of the different in the CPI changed over time? And there are hedonic adjustments done to some of the goods, like cars. The way the CPI is put together make it quite difficult to use the CPI to find the cost rise of a single item. Actually, I suspect that the substitution of cheaper goods of less quality that usually supress the CPI now have turned around. CPI less food may substitute out those consumers that have little to spend and weight in the expenditures more affluent consumers. This make the CPI rise fast, but part of it could be that more expensive products are weighted in.

  8. nick kelly says:

    Gas here just jumped (Van Isle) 1.60 a liter C$.

    Using roughly 4 liters per US gal ( it’s a bit over .26 per gal ) = 6.40 C

    Converting to US$ at .82 = about 5.25 US per US gallon. (we pay higher taxes)

    Most expensive I’ve seen and it was 1.29 C liter in last few months.

    Keep an eye on oil, the elephant of all inputs. Maybe demand flexible long- term but basically zero short term.
    Now just over 74 US$ barrel WTI. Average last year under 40$. (the flux of 2020 prices makes it hard to evaluate this average. I don’t know if that brief weirdness of negative prices is part of the stat.)

    Oil price fortune telling is an expert’s game, but if Cramer can take a swing so will I. Seems to me that oil has crept up fast while bucking big headwinds: likely return of Iranian oil to market, and demand loss due to Covid. (jet fuel, cruise boats, driving lost to WFH, vacations cancelled etc.)

    • Anthony A. says:

      Nick, the Saudis and Russians need the crude price higher and really can’t take low prices for any length of time since that’s their main income to run the countries. You can bet they will do all is necessary to keep the oil price up. The Iranians have been selling oil under the table since the restrictions, and their new increase, about 2 MM BBL/day, won’t rock the price boat.

      Now that we are coming out of the pandemic, and once travel increases, the U.S. will use more hydrocarbons and that will keep the price up and maybe our U.S. producers can start bringing “drilled, but not completed” wells back into service.

      It’s really hard to predict the forward price of oil with any degree of accuracy as it is a worldwide commodity controlled by politicians, dictators, and other untrustworthy folks. Cramer has as good an estimate as anyone.

      • Fat Chewer says:

        Nick Kelly and Anthony A. I am very impressed with your concise summary of future oil prices. It was a pleasure to read. Thank you.

  9. Depth Charge says:

    “But the loss of purchasing power of the consumer dollar, including the dollars earned with labor, is permanent. That won’t come back.”

    I think it depends upon what you will be purchasing. For instance, my saved dollars just gained 4% in purchasing power on a used vehicle model I am looking at per Kelley Blue Book. Further, when the real estate market melts down, my saved dollars will be able to buy at 50% off today’s prices, so my purchasing power will have increased.

    • Wolf Richter says:

      Wait… you already own that vehicle and paid for it, and you’re checking to SELL it. That is not “purchasing power.” That’s the opposite. It will be the purchaser of that vehicle whose “purchasing power” sags.

      • Depth Charge says:

        You misread my statement, Wolf. It was a bit clunky, I will admit. I use Kelley Blue Book to track used vehicle prices. I get an email from them periodically telling me what the value of the used vehicle is that I have been watching. It declined 4% in less than a month. Were I to purchase that, my dollars would have gained purchasing power over the same purchase a month ago.

        • Wolf Richter says:

          I sure did misread your statement. It was actually pretty clear. If I had slowed down just a tad, I would have saved me and you a lot of time :-]

  10. jrmcdowell says:

    “The Fed has specified that this target is “symmetrical,” meaning that it will let inflation run higher than 2% for a while after it ran lower than 2% for a while.”

    Yeah, got to make up for the imprecise and understated inflation of yore with higher inflation today. How on earth did this economic quackery make it into the rulebook?

    How does the principle even apply to a housing market that has exceeded the inflation target for a lengthy period of time leaving more people priced out?

    • Bobber says:

      The Fed’s senseless games will end soon. They’ve backed themselves into a corner. Damned if they print money; damned if they don’t.

      I’ve never seen so much uncertainty and anxiety in the general population.

      • historicus says:

        How are the “damned” if they don’t?
        They don’t undo what they implement….ever.
        QE temporary…..Bernanke
        27% bump in M2…..will they bring that back down?

        More and more….the Fed’s 4th mandate.

  11. SaltyGolden says:

    Is the flash crash/spike in the early ‘00’s 9/11?

  12. YuShan says:

    Consistently underestimating inflation also means that real growth is consistently overestimated. In other words, much of the “growth” of past years is actually inflation.

    • kam says:

      Inflating paper assets and hard, depreciating assets.
      I give you the entire U.S. economy for at least a generation.
      No growth whatsoever.

    • historicus says:

      roughly a third of GDP is government spending….
      add in inflation…

  13. Yamo says:

    “There are whole generations who never experienced this type of inflation, this type of destruction of the dollar’s purchasing power”….. but, but, Jerome Powell and his 15 friendly speakers said inflation is not real……LOL
    When will be these people punished for their lies????
    Its amazing the liberty of these criminals in the streets

  14. Charlie says:

    and on yahoo finance today “inflation is overstated” – by the Economist
    We keep being fed the lie.
    You tell lies long enough – and there still lies.

    • doug says:

      yes they are still lies, but they start to sound ‘familiar’ or something.
      We humans are easily led astray.

      • kam says:

        It’s not so much that humans are easily led astray, as it is closing your ears to the white noise, to maintain some level of sanity.
        It is all lies, all the time.

    • nick kelly says:

      It is easy to call many absurd beliefs ‘lies’. The Economist is not monolithic, the same issue can have differing opinions. I don’t think inflation is medium term transitory either, but at this rate of debt there is going to be a crash eventually.

      That will be deflationary.

      All murders are homicides but not all homicides are murders. It’s intent that makes it murder.

      A person lying has to know it’s not true. It also helps at trial if you can establish motive.

      If you are looking for blatant lies, you can find them more easily than in the Economist.

      • historicus says:

        “That will be deflationary.”

        Point to anywhere where there has ever been “deflation”?
        Venezuela? Zaire?

        • nick kelly says:

          United States, Canada, UK, Germany etc. etc. Oct 1929- 1938.

          Ten thousand US banks went under.

          The largest personal residence in Canada went for taxes.

          The lender, Prudential, twice extended the loan on the Empire State Building when they could have foreclosed. But what would they do with it? It wouldn’t break even on an operating basis until 1954.

          This period is known as the Great Depression. Up until WWII, WWI was known as The Great War.

  15. raxadian says:

    [There are whole generations who never experienced this type of inflation, this type of destruction of the dollar’s purchasing power]

    Well yeah but I don’t think anyone from the Gold standard era is alive today, unless they lived in Uruguay that was the last country in the world to drop it.

  16. Phoenix Rising says:

    Wonder what the inflation rate would be if they were to use the traditional matched method used prior to the late 80s instead of the current hedonic quality adjustments…if for no other reason than to get an apples-to-apples comparison to the inflation rates of the 70s.

  17. TBP - West Coast says:

    Wolf,
    You wrote: “This is something we’re seeing that we haven’t seen in decades: The mindset has changed. Price resistance has gone away. Consumers and businesses are willing to pay these higher prices…”

    I don’t agree. I am easily in the top 5% in income/assets and I have changed my spending. Not buying that prime tri-tip and not redoing my kitchen because of the inflated prices. My daughter and her husband are not buying a house due to the skyrocketing prices. I suspect others are doing the same or will shortly.

    • nick kelly says:

      ‘I don’t agree. I am easily in the top 5% in income/assets’

      A reply to consumers spending at exorbitant levels.

      Leaving aside bragging rights, perhaps that is WHY you are there, presumably as a life time habit.

      However it would be more germane if you were only on the top 20 %. Anyone ‘easily’ in the top 5 % can redo or not their kitchen with no material effect on their finances.

      • RightNYer says:

        Doesn’t that argue against the point you were making. If he can redo his kitchen without any material effect on his finances, and he chooses not to do anyway, that shows that price inflation is the reason.

  18. Phoenix Rising says:

    The longer the Fed lets that acceptance psychology towards inflation set in, the more severe the recession that will need to be induced by the Fed. Think of it as a doctor needing to induce a coma in order to save the patient.

  19. MonkeyBusiness says:

    We should thank the Fed for saving us from climate change!!!

    How? Remember those green shoots that the Bernank used to rave about? With Powell’s help, they have become full blown forests!!!

    We LOVE THE FED.

    • HR01 says:

      Green shoots? Nope.

      Now we got gangrene shoots.

    • Crunchy says:

      Those forests are brown and dried out – ready for a spark to set them aflame. It’ll be up to our corrupt and power-hungry politicians to figure out how to best make hay (for themselves) out of the ashes.

    • MonkeyBusiness says:

      We are better than Europe. From Bloomberg:

      “Lagarde Tells EU Leaders They Must ‘Water The Green Shoots’.

      “European Central Bank President Christine Lagarde urged leaders to keep their fiscal purse strings loose, warning that a premature brake on stimulus measures could derail a nascent recovery.”

  20. Xavier Caveat says:

    A turn @ Missile Command circa 1983 set me back 2 bits, and now I can play online for free, deflationary.

    • Seneca's cliff says:

      That is true, but the last time I played Missile Command it was in college. I was at the Chapter House ( College Bar) with a pint of Molson Golden in one hand and the two most beautiful girls on Campus ( my now wife and her roomate) hanging over each shoulder. The Cars, the Pretenders and The Who were playing on the Jukebox. I think back on the 2 bits I put in to play as quite a bargin.

      • AmericanStandard says:

        right…
        im sure hot girls were totally mesmerized watching you play ‘missile command’.
        *eyeroll*

        how exactly did you accomplish that one-handed, by the way? i believe arcade games required two hands to play them correctly, no?
        wait.. i know.. you were such a stud, you balanced the beer on your head while playing, without spilling it! man, you must have been the coolest dude on campus, huh?

        perhaps get the story right before you post it on wolfstreet as a sort of nostalgic brag.. as if it matters concerning the topic being discussed.

      • nick kelly says:

        How’s the price of the pint doing?

        • VintageVNvet says:

          Made me remember the pints of Guinness in a pub in Galway in 1970 were ONE SHILLING…
          Last time I looked, admittedly on line, they were FIVE Euros!

  21. Seneca's cliff says:

    This will all be solved in the great reset. You will not own anything so you will not be buying anything and thus no price comparisons. You will pay your salary to Goocomamzo ( new mega conglomorate) and they will portion out your living space, rations, movie feeds and uber rides. The portions of these given to you will be adjusted by AI on the fly to minimize your disatisfaction and keep you on the hamster wheel. You will never be able to retire, but you will move to less physically demanding work as you age, but your rations will be cut accordingly.

  22. SpencerG says:

    This needs to stop quick. What a mess!

  23. Yamo says:

    The Fed continues pumping wallst as if the world´s value of the USA depends on their inflationary printing press of dollars and zombie US companies.
    Let´s hope Russia and China pretend ingorance about it….LOL, not

  24. Nickl says:

    Whole generations that have never seen this? ?? You mean like the poor, coddled millennials who somehow think they have to pay for all those Amazon, apple, Grubhub purchases according to the terms and Conditions… Like the coddled millennials who (according to CNN) has to witness parents getting laid off in the 2008 recession.
    The inflationiis now in discretionary items but people are continuing to spend money on these things like rental cars, Starbucks Lattes, new homes, home remodeling

  25. billytrip says:

    I visited a classic car museum today. 200 or so classics including about 40 corvettes, especially the early years. Each car had a placard explaining its features and original price. So, a Corvette in 1960 retailed for about $4,000. A “similar” car today would cost probably around $60K or more. I know that today’s cars are a lot more complicated and have a lot more features but 15X+? No. Just a stark and simple example of what inflation does.

    • economicminor says:

      In Az in the 1960’s the wages I earned at a car wash was $1.25/hr with No Benefits..

      • RightNYer says:

        And today people might earn $10/hour with no benefits. So the pay has gone up by 8x, while the Corvette has gone up by 15x. And don’t even get started on housing or education.

        • Happy1 says:

          Graduate school tuition from my alma mater in 1991, 5K, in 2021, 40K, out of pocket health insurance cost for family in zero dollars (no monthly premium, no co-pay for anything), now 1,200$ a month with 5K deductible and massive cost sharing for everything. Home in Denver 90K then, 585K now. 1 BR rent if you prefer, 400$ then, 1,600$ now.

          Real inflation in the most expensive things that most people buy, home, higher education, and health care, is completely out of control, 5 to 10% a year. With no end in sight.

  26. Minutes says:

    I went to a chain restaurant yesterday around lunchtime and walked in to find it mostly empty. Ask for a table, 15 minute wait. Huh? Turns out they had exactly 1 server in a place that sits 300 easy. I waited. And tipped her a ton.

  27. economicminor says:

    I don’t know of any period of time when income from labor ever kept up with the inflationary effects of money creation. Add to that the extreme amounts of Speculation, which is not creation and therefore has nothing to do with increased productivity. We have rising prices and IMO extreme instability while a large segment of our society that is either retired, can’t work because of children or elderly to care for and don’t have a support system. Others have found some way to live off the grid so to speak (including homelessness which may or may not be voluntary).

    I’m sure eventually this all gets worked out and some sort of re-balancing takes place. I just can’t come up with a scenario where there isn’t an extended period of chaos and turmoil.

    There is no way this can be a New Normal.

  28. Micheal Engel says:

    1) PCE was in a trading range between 1998 and 2020. In 1998 HK RE plunge 60%. BKX, the global banks ETF, buying climax was in 1998.
    2) In 2020 the PCE plunge to a higher low. Oof
    3) In 2021 PCE shows sign of strength, jumping > the TR to 3.4%.
    4) The PCE @ 3.4% reached the 1990/91 waterfall collapse backbone.
    5) BKX might test the 1998 BC, because banks assets from Greenwich Ct
    to Martha Vineyard and between San Diego to Seattle, ==> might be impaired.
    6) Blame China, the mini mills, the cement mixers, the cement mixers, the shody workers, the architect, the 2MM or the inspectors
    ==> BKX don’t care.
    7) Women smell a rate. Women smell the hypo stench. Women instincts
    are best.

  29. Micheal Engel says:

    Wolf PCE chart best in class.

  30. Cobalt Programmer says:

    Everyone is talking about the inflation in the 70s. Thank God, its not that bad. Its only 80s now. Way to go more boys…

  31. Auldyin says:

    “Inflation has surprised the Fed to the upside all year.”
    Looking at these numbers I would say anyone with a brain at the Fed must be way more than surprised, scared sh**less, I would say.
    On the fundamentals, inflation is rising prices, and prices rise when demand exceeds supply. The Govt has been monumentally wrong on both counts. They have pumped in massive demand via stimmies, etc, and they have totally underestimated the reduction in supply due to all the physical upheaval. They must be praying right now that supply will return rapidly to normal. (make your own predictions for that). On the demand side they must be praying that all the stimmies and reliefs will peter out quickly and return citizens to normal spending patterns (make your own predictions for that). The overnight RR’s look more than ever like a panic measure to get money out of the economy. They are so utterly desperate to keep rates low, they would rather risk crashing the plane altogether than give in. They got one lucky break, so far as I understand it, Americans have been saving quite a lot during lock-down and so have Brits. Saving and paying down debt is deflationary so imagine where you would be if you guys hadn’t increased your saving. You could still spend it of course and add further to the ‘fire’.
    Current Fed policy:- keep your fingers crossed and tell them everything is fine.
    There’s always a dog that doesn’t bark and this time it’s ‘wages’. If you guys can’t hold out for wages to go up by the same percentage, you are getting screwed. In the 70’s UK, trade unions would not allow wages to fall behind prices, so the Govt could not reduce demand by making people poorer, nor would they stop their spending, so the IMF had to come in and sort it all out.
    Even the IMF cannot control the US Govt so who does?

  32. John says:

    Wolf,
    You are the man. Thanks for all your writings. Inflation I think big part of fiscal policy Bernanke was always wanting. I wonder what to call a two dollar higher tax in the state of Maine should be called on cigarettes. Government theft without inflation?

    • Bobber says:

      I have no problem with that. Look at the additional medical costs that smokers place on society. You could put a $10 tax on each pack and still not cover the additional medical care required over the lifetime of a smoker.

      Now, if people could waive legal access to Medicare in exchange for the right to kill oneself slowly over several years, I’d change my mind.

      I am an ex-smoker.

  33. Robert says:

    “The Consumer Price Index (CPI) inflation index, released by the Bureau of Labor Statistics two weeks ago, jumped 5.0% in May compared to a year ago, and by over 8% on a three-month annualized basis.”

    I thought social security payments were tied to the CPI.

    When will recipients get increased payments? Can the government just ignore raging inflation or are they required to step in with cost of living adjustments?(COLA)

    • Wolf Richter says:

      Robert,

      Yes, SS is indexed to CPI-W (which runs a little higher than the regular CPI-U.

      There are some people here who stay on top of this. Check the comments about SS COLA earlier (above) in this thread. Great detail there about what you might expect in terms of SS COLA.

  34. Micheal Engel says:

    1) WTI @74 fill-A-pickup truck tank is painful. Rent rising 20% in San Diego don’t represent Manhattan. One lady serving 300 empty tables indicate mgt decisions.
    2) XLE monthly reached 2011, 2016 and 2018 fractal zones.
    3) XLE might rise further to Jan 2008 fractal zone backbone.
    4) If XLE turn down, PCE might form a new TR, a new higher layer above the 1998/2020 TR. XLE will test new energy options.
    6) The CPI will osc > US 10Y, constricted by the German 10Y, above mortgage rates, above rent yield and above the annual rise of co-up
    buildings prices in NYC, SF and Panama City.

  35. simonyoosen says:

    Not sure if the FED could jawbone the public on “transitory” inflation as they have the track record again and again to successfully bring the turbulence market into calm.
    Rate cannot go higher say 3-5% as US is badly indebted nation on the earth. Any sane person will know it cannot be repaid. On the other hand, inflation could made it GDP looks great and DEBT/GDP getting smaller, which can be used to promote it ability to repay debt. Arithmetic game in playing to fool others.
    Tiny rate high will spook the WALL STREET elites, so the FED is walking on the tight rope.

    • historicus says:

      We are set for a situation in which meager rate hikes will do little to coral inflation….so those in cash will still be hurt

      But the meager rate hikes will be enough to roll over the stock market…so those in stock will start getting hurt.

      Only if the Fed makes those hikes. These people get into things they cant get out of …..they counter the free market forces, and then suddenly they realize they shouldnt have.

      How convoluted this all is.
      Savers harmed at a 5% inflation rate….
      People paid thousands to stay idle and out of the work force…
      Home buyers able to mortgage 2% under the inflation rate…
      these things have NEVER happened before and are the wishes of the Federal Reserve. The policies they implement are directly responsible and there is no hint of a change.
      The Fed fails in all three of their mandates, but Congress loves that free money for the TRILLION dollar vote buying games.

  36. Hernando says:

    The IRS sent me a letter saying I’m getting 600 dollars a month for awhile because I have two kids … why? I don’t know. MacDowells is paying 16 bucks an hour, I’m going I tinge to a cola soon my wife also has recently gotten a raise. This is real forever inflation.

    I have to wonder if this is some sort of western economic war with China? I don’t fully grasp how it works but instinct tells me our inflation hurts our economic rivals.

  37. historicus says:

    The government is sending out Inflation Compensation Checks….
    in the form of “stimulus payments”….

    • Winston says:

      Which don’t even -BEGIN- to cover what I’m losing in money market dividends compared to just a few years ago let alone what I’d be getting if rates were at their historic norm.

  38. Swamp Creature says:

    The problem of supply chain disruptions has filtered down into the local grocery chains like never before. I was in my local Giant where I shop regularly and they were out of about 30% of the items I regularly purchase on a weekly bases. I complained to the new manager who just came aboard and he said that they were having serious problems with the truck driver shortage and demands for wage increases. He was citing Covid-19 aftershocks. I asked him why after 16 months of this why haven’t they gotten this problem straighten out. He could not answer the question. Need I say more.

    • zr says:

      what chapter in “When Money Dies” does that correspond to, Swamp?

      • Swamp Creature says:

        Every Chapter

        The whole book “When money Dies” talks about things like what I described above. The inflation created a dog eat dog atmosphere where it was every man for himself. The hell with the common good. People started resorting to general strikes to get their wages up to what they thought they deserved. Then they were not happy with that. One group started stealing from the next. We are now seeing the beginnings of the same things that happened in 1920/1921. Only things will fall apart faster because we have become an uncivil society and we have mass communications which was not available back then. People know when they are getting screwed.

  39. Helmut Beintner says:

    Inflation is tempura and transitory because it constantly moves UP

  40. Spencer Hall says:

    The FED uses money products to offset the idling of savings products. The utilization of savings has a positive economic multiplier that the injection of new money doesn’t have.

    No, contrary to Bankrupt-u-Bernanke’s claim that: “Money is fungible”…“One dollar is like any other”, pg. 357 in “The Courage to Act”, the utilization of savings is a catalyst, it is not a matching of economic accounts, not a 1-2-1 economic transaction (correlation between two sets). This is aptly demonstrated by debits to particular deposit accounts.

    The regulatory release (yes it is up to Congress), of savings invokes a spontaneous chain reaction, an expanding sequence of reactions, a self-propelling and amplifying chain of events. In other words, savings’ products have a positive economic multiplier (and $15 trillion are frozen), whereas new money products (QE forever) have a negative economic multiplier.

    How could this be? It is because lending by the commercial banks is inflationary, whereas lending by the nonbank public is non-inflationary (if savings are not expeditiously activated, put back to work, then a dampening economic impact is generated).

    And if savings aren’t activated, velocity falls, AD falls, and the FED must inject digital dollars.

    In the U.S. Golden Era in Capitalism, 2/3 was financed by velocity (by expeditiously putting savings back to work, by the thrifts/nonbanks, backstopped by the FSLIC, NCUA etc.).

    A dollar of savings (income held beyond the income period in which received), is more potent than a dollar of the money stock. R-gDp averaged 5.9% during 1950-1966 (in spite of the 3 recessions).

  41. Auldyin says:

    What should make this scary for the Fed is that inflation outcomes are normally 12-18 months behind the actions that caused them, so all they’ve done for the last 18 months has still to feed in, and that’s not good. The only thing that can save them now, in my opinion, is an incredibly rapid return of output. (How likely is that with chips in everything?)

  42. Swamp Creature says:

    Speaking of inflation, try getting a dental implant. Went through the whole process which took over 1 1/2 years. Shelled out nearly 6K even with good insurance coverage. Problem was they didn’t cover the bone graft which was part of the extraction. The good news, its working great. Money well spent. Finally can chew like a normal person. Also got 2x or 3x back from the insurance company above what I paid in premiums.

  43. Alan Harvey says:

    Sorry, inflation over a quarter or two after the Covid shutdown and the stimulus payments does not scare me. I expect real incomes to continue rising and business to boom, especially if there is an infrastructure program enacted by Congress on the scale they are talking about.

    Your “real incomes” conclusion is based on data that will change, both by revision and by expansion of the supply chains. Inflation may be messy, but it’s a sign of a welcome adjustment to lower incomes.

    • Happy1 says:

      This is devastating for those on fixed income.

      • Depth Charge says:

        The FED has been slaughtering the fixed income and low income crowd my entire adult life.

      • Swamp Creature says:

        The Fed does not care about people on fixed income. They regard them as collateral damage.

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