The Week in Review May 16, 2022
Inflation—Good News, Bad News
The U.S. Bureau of Labor Statistics (BLS) reported on inflation last week with the release of the April Consumer Price Index (CPI). We’ll get into the headline numbers in a moment, but the report can be summarized with two graphs, which suggest both good news and bad news.
First, the good news. Early on, inflation was driven by a surge in the cost of consumer goods. As Figure 1 illustrates, prices jumped 0.8% in April 2021. But the recent trend is encouraging.
Although used vehicles are not included in Figure 1 (and prices remain elevated), used cars have fallen over the last three months, per U.S. BLS data.
While we can be cautiously optimistic that the rate of inflation for consumer goods is slowing, the same can’t be said for the broad-based service sector.
As Figure 2 illustrates, the cost of services is accelerating. Services rose almost 0.8% last month (blue line). If rent, which has been rising, is removed, services jumped nearly 1.1% (red line).
Further, energy prices remain a problem, and food prices continue to rise.
Overall, the U.S. BLS reported the CPI slowed from an annual pace of 8.5% in March to 8.3% in April, and the core CPI, which excludes food and energy, slowed from 6.5% annually to 6.2%.
Yet, both were disappointing, as they remain high and overshot expectations, per Bloomberg.
For now, the Fed has its work cut out as they attempt to slow an overheated economy and rein in inflation, without tipping the economy into a recession.
As Fed Chief Jerome Powell said last week in an interview with Marketplace, “Whether we can execute a soft landing or not, it may actually depend on factors that we don’t control.”
If you have questions or would like to discuss any other matters, please let me know.
Two for the Road
The phrase “menu costs” is often used by economists to describe how e-commerce has enabled inflation – if a restaurant wants to raise its prices, it needs to reprint all of its menus, often at significant expense. If however, the restaurant menu is a QR code, raising prices is just a matter of changing numbers on a single web page. - Articleqs.com, April 22, 2022
For many decades, Western living standards have been boosted by a massive “peace dividend.” For example, U.S. defense spending fell from 11.1% in 1967, during the Viet Nam War, to 6.9% of GDP in 1989, the year the Berlin Wall fell, to just over 3.5% of GDP today. If the U.S. defense spending as a share of GDP was still at the Viet Nam-era level, defense outlays in 2021 would have been $1.5 trillion higher- more than the government spent on Social Security last year. -Project Syndicate, March 2, 2022
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