Prices Rise Along With Rumblings About Tapering By A Fed Chairman Of Uncertain Tenure.

By the measure most Americans recognize, inflation is running at an annual rate of 5.4%, the highest in 13 years. There are other measures, and consumers who don’t eat, or drive a car, or worse yet plan to buy a new one or a house or rent a flat, will be less hard by hit by rising prices than others. But even the Federal Reserve Board’s preferred measure, 4%, is double the Fed target, and had Federal Reserve Board chairman Jay Powell confessing surprise. Raising interest rates, however, is “not something that is on our radar screen.”

Not Whether But When To Taper

Tapering $120 billion of monthly asset purchases definitely is, although Powell is for now content with current policy. James Bullard, president of the St. Louis Fed, is in a bit more of a hurry to tighten. He sees an “inflationary impulse” from the Fed program. It should, he says, start reducing purchases in the Fall and then cut them “fairly rapidly” so that the program ends early in 2022, . He believes labor markets are healing quickly, and that it would be foolish to risk “an incipient housing bubble.” Oh yes, he joins the policy-making 12-member Federal Open Market Committee (FOMC) next year.

Steve Rattner, a Treasury official in the Obama administration, an investment adviser to, among others, Mike Bloomberg, and economic analyst for MSNBC, took to the New York Times to attack the Fed and Powell for being “cautious to a fault about stepping out of the bond market” and for “shoveling more money into an economy that likely already suffers from too much money, not too little, raising the specter of overheating and accelerating inflation.”

Prices Up, Worse News For The Unaffluent Than For Others

Home prices in the middle of the national price range were 24% higher in June than a year earlier, with rents in many areas keeping pace. Buyers who succeed in a bidding war will find that the price of furnishing their new abode has jumped 8.6% in the past year. Airline fares are up 12% in the past three months. Prices of steel and tin are at all-time highs. Prices of Oreo cookies, Goldfish crackers, Folgers coffee, canned tomatoes, pasta and too many foods to list here have jumped. Major food and consumer products marketers are promising further increases in September.

“Consumers understand,” says General Mills’ (Betty Crocker, Cheerios, Häagen-Dazs) CEO Jeff Harmening. Besides, shoppers might not notice hidden increases from fewer discounts and ingenious price-pack architecture – changing packaging sizes to conceal higher per-ounce prices. Ask not for whom the cash register tolls, it tolls for thee, and most loudly for the least able to pay.

And while Santa’s sleigh can zoom around without incurring higher costs than last year, it will be packed with toys at prices that reflect higher material and labor costs -- about 20% higher than last year say Chinese manufacturers – and shipping costs that have skyrocketed. The Wall Street Journal reports that the rate for a 40-foot container from China to the U.S. is $18,346, compared with $2,680 last July and $1,550 in July 2019. Prices for L.O.L. Surprise and Little Tikes dolls are up 20%, and manufacturers are negotiating increases in most items with retailers. “The CEOs with whom I have spoken anticipate price increases in the 25% range,” Richard Gottlieb, head of Global Toy Experts, told The New York Post. The inflation Grinch might just steal Christmas from lots of kids. Contracts and hedges on input costs have kept booze prices down, but those come off at the first of the year when providers of liquid forgetfulness will reflect in prices the increases they will face in the cost of everything from labels and cans to barley.

Yes, the size of martinis in New York has shriveled, hitting the wallets and purses of professionals, and  increases in prices of favored Starbuck infusions may have forced more frequent refills of the over $1 billion in pre-loaded digital accounts the affluent make available to the company interest-free. But more consequential is the 9-12% increase in the price of disposable diapers since the end of 2019, forcing many families to rely on diaper banks, which report a 68% increase in distributions. And yes, wages are also rising, with callow lawyers and bankers now starting at $200,000 and $100,000 per year, respectively. But for many Americans, inflation-adjusted earnings are down, even after accounting for wage increases.

Temporary (Biden) or Transitory (Powell), New Higher Prices Are Here To Stay

President Biden, hampered by the absence of his usual supply of cue cards, assured one and all that these price increases are “temporary”. That was quickly corrected in a press release by the White House staff, and rebutted by Powell. The chairman labelled the price explosion “transitory”, not, “temporary”, and explained last week in his press conference that he does not expect producers “are going to take these prices back”, only that the “process of inflation” would be transitory. Once that transition period ends, the “process”, guided by the Fed, is expected to produce mere 2% annual increases over time according to Fed officials famous for a long series of forecasting errors. One bad forecast is a misfortune, a long series looks rather like a need for a new model.

But rising wages and costly perks are now embedded in the economy. Walmart, the people’s purveyor, and McDonald’s, caterer to the masses who now face 6% higher menu prices, are offering higher pay and generous benefits, including reimbursement of college tuition and related costs, to attract workers. Private-sector capitalism is turning its attention to its survival by creating opportunities for increased economic and social mobility. Those benefits are unlikely to prove “transitory”.  

 Nor is it likely that broken links in supply chains will be replaced overnight. Chip factories take years to build, and workers capable of making high-quality chips more years to train. That affects everything from Apple’s iPhones to Tesla’s planned Cybertrucks to the solar and wind products on which the administration is relying to green the power industry. Ports incapable of handling the volumes of goods needed to meet demands cannot be expanded quickly. New mines for many metals, often opposed by green groups, will take years to be permitted and become operational.

Demand Overwhelms Supply As The Left Takes Aim At Powell

While the supply-side struggles, the demand-side will continue to press hard on it. The economy is growing at an annual rate of 6.5%, and now is larger than it was before China exported Covid. Trillions in relief funds have resulted in abnormally high savings rates that are now making their appearance in the form of pent-up demand for goods and services. Consumers have added to their ability to spend by paying credit card balances down 10 % from 2019 levels. Retailers are stocked up for the first visit in almost two years by parents expected to break records equipping their little darlings with the latest high-fashion knapsacks and older ones with dorm-room paraphernalia, stuff needed for in-school learning, or at least attendance.

The “transitory” school is confident that, should the current inflation rate persist, Powell will know what to do. Except that he might not be in that seat. Massachusetts senator Elizabeth Warren, influential with the President, was the lone dissenting vote when the senate committee approved Powell’s nomination 22-1. She is unhappy with Powell because of what she regards as his relaxation of banking regulations.

Biden’s Left would prefer a minority, or a woman, or even better, a minority woman. Graham Steele, nominated by Biden to be the Treasury’s assistant secretary for financial institutions, has said, “It would be a huge missed opportunity to reappoint a conservative white male as Fed chair.” Steele will be among those making up Biden’s mind on Powell, who bears the additional cross of having been appointed by Trump.