Thoughts From the Divide: Pandora’s Box

While the Whitehouse may have successfully avoided putting its foot in its mouth on inflation this year (We hope everyone stateside had a good Independence day), the topic remains at top of mind for more than just the bean counters, as policymakers and consumers alike grapple with a new version of Whitney Houston’s question, “How will I know if inflation is over?”. The last few weeks haven’t offered very clear guidance. CPI was cooler than expected, but PPI was above expectations. Both the ISM Manufacturing and Services reports saw strong price readings, but there were other signs of a retreat in demand.
BY JON WEBB
  • Posted on July 12, 2024
  • by MI2 Research

“What is the appropriate inflation target?”

While the Whitehouse may have successfully avoided putting its foot in its mouth on inflation this year (We hope everyone stateside had a good Independence day), the topic remains at top of mind for more than just the bean counters, as policymakers and consumers alike grapple with a new version of Whitney Houston’s question, “How will I know if inflation is over?”. The last few weeks haven’t offered very clear guidance. CPI was cooler than expected, but PPI was above expectations. Both the ISM Manufacturing and Services reports saw strong price readings, but there were other signs of a retreat in demand. Goods inflation would seem to be augured by the continuing rise in shipping costs (compare the smooth ski jump of the Drewry World Container Index against the whipsaw-filled march of the Baltic Dry Index). And yet… this week saw the release of a few earnings reports that continued to support the idea that the consumer is starting to demand cheaper prices (if you’ll pardon the pun). Pepsi said that “consumers have become more value-conscious with their spending patterns and preferences” and Delta airlines is learning that if you build it, they will come, but perhaps not at the price you were hoping for.

However, it’s service inflation that appears to be the source of the most worry, see Powell’s past comments about a dreaded wage-price spiral. Stateside, things seem to be well in hand. Powell noted in his testimony before Congress that the Fed has made “considerable progress” toward defeating inflation, adding the job market has “cooled considerably”, enough so that it “is not a source of broad inflationary pressures for the economy”. However, across the pond, things aren’t quite as rosy. Huw Pill reminded the UK of the uncomfortable truth of service inflation where “the rise in services prices, coupled with similarly rapid rises in wages, were signs of uncomfortable strength in underlying inflation”. And this is while “inflation has fallen to the BoE’s target for now”. The article added the caveat that “the decline since the middle of 2023 has been driven primarily by energy prices, which have tumbled on global markets”. Another member of the BoE’s Monetary Policy committee indicated “he would continue to vote against a rate cut”, supporting the article’s conclusion that “Policymakers at the BoE worry that when they [, energy prices,] level out, overall inflation will be driven higher by prices that are mainly responding to domestic pressures, including rapidly rising wages”. See Bernanke and Blanchard’s paper from last year: “Controlling inflation will… ultimately require achieving a better balance between demand and labor supply”.

https://www.gocomics.com/calvinandhobbes/1992/05/23

P.S. Despite warnings from its Central Bank, Ireland’s new budget will be increasing “public expenditures by 6.9% in 2025, again breaking the government’s own budget rule”. “The 8.3 billion euro ($8.9 billion) package was far ahead of the 5.7 billion euro assumed a year ago and will allow ministers to cut tax and increase spending in October, ahead of an election that analysts expect in November.” It is perhaps worth noting that Ireland runs a hefty surplus “entirely driven by booming corporate tax receipts paid by Ireland’s hub of large multinationals”.

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