Issue 44: November 15, 2021
Inside this Issue:
- Costing More at the Store: The Inflation Problem Worsens
- As Prices Inflate, Economists Debate: Is the Fed’s Transitory Story Stunted?
- G.E. Divided by Three: The Once-Vaunted General Electric Breaks Itself Up
- Wisdom, or Is Dumb? The Impact of Stock Market Crowd Trading
- Holy Bit! The Crypto Market Tops $3 Trillion in Value
- Chemical Origins: How Today’s JPMorgan Chase Came to Be
- America’s Homeless Crisis: How it Came to Be
- 1997 Heaven: A Golden Year for the American Economy
- Downtown Frown: How Remote Working Harms Cities
- And this week’s Featured Place: Des Moines, Iowa; Corn, Coverage and Clean Power
Quote of the Week
“Air travel demand is highly durable. The pandemic temporarily suppressed it, and travel restrictions have constrained it. But at the end of the day, people want and need to take trips, do business and connect with each other in person. Whenever we see travel restrictions lifted globally, there is an immediate surge in passenger bookings.”
– Air Lease Corp. CEO John Plueger
The troubling scourge of rising prices is getting worse, not better. That’s the chief takeaway from October’s consumer price index (CPI), published last week by the Bureau of Labor Statistics. Prices rose 0.9% just from September. And they’re now up 6.2% versus this time last year. That’s a far cry from the Fed’s longterm target of 2%. It’s also a far cry from 2019’s rate of 1.8%, though not yet in the neighborhood of 1980’s 13.5%.
Just as importantly, the current pace of inflation is starting to seem more pervasive and persistent. No longer are the high index readings driven by just a few categories like used cars or gasoline. Those remain elevated, for sure. But consider all of these other areas with annual gains exceeding 5% last month: food, electricity, new vehicles, furniture, home appliances, footwear, sporting goods and hotel rooms. But good news: The price of sewing machines dropped nearly 6%!
Joking aside, costs related to housing (which carry the greatest weight in the index) were up 3.5% y/y in October. Remember, that’s not reflective of prices paid when buying a house—that’s treated as an investment, not consumption; the costs relevant here are rents and their equivalent for owners (rents in particular are rising fast). Medical care, another big slice of the index, soothingly saw a gain of just 1.7%. But that stems from a big drop in health insurance costs, itself owing to anomalous factors (i.e., rebates paid to customers and the repeal of certain taxes). Hospital care and doctor services were up about 4%.
It’s all a lengthy way of saying that inflation is indeed a significant problem, at least right now. That’s not to say it outweighs other positives in the economy, most importantly that demand is strong, corporate profits are strong and household balance sheets are strong—the railroad Union Pacific for one says emphatically: “The underlying economy is feeling pretty darn good.” Nor is October’s CPI reading sufficient evidence to conclusively judge the Fed—still sticking to its “inflation is transitory” thesis—completely wrong. Maybe Americans will return to work as Covid strains ease, alleviating wage pressures. Even if they do, maybe age demographics are such that overall labor participation rates will continue their longterm downward trend, limiting the economy’s productive capacity. If the economy does become more productive, maybe it will be thanks to cost-suppressing technologies like automation and artificial intelligence. Maybe America’s severe income inequality problem will continue to suppress demand (because wealthier households allocate more of their income to savings, buying stocks rather than stuff). Maybe supply chain bottlenecks will disappear as Americans shift their spending back to services like travel. Maybe commodity prices will ease. Maybe waning government stimulus will dampen demand. Maybe the bond market’s lack of concern about inflation should relax everyone—the bond market, after all, continues to lend long at ultra-low interest rates, which are actually deeply negative now when adjusted for current rates of inflation. Why would any lender do that unless they expected inflation to ease? Inflation means, after all, that they’ll get paid back in future dollars that aren’t worth nearly as much.
To be clear, there are plenty of compelling arguments among the inflation worrywarts too. Maybe cost-suppressing forces like globalization, immigration and just-in-time supply chains are waning. Maybe there’s still too much money in people’s pockets—after trillions in government stimulus—chasing too few goods and services. Maybe labor markets were changed forever. Maybe the more influential impact from the growth in retirees is a shrinking pool of labor that drives up wages. Maybe the more important demographic trend is the entrance of the large millennial generation into their prime spending years. Maybe the Fed’s being too complacent. Maybe bond markets aren’t such a good predictor anymore, with so many government Treasuries owned by entities with motivations beyond mere maximizing their returns, i.e., central banks including the Fed itself. And when arguing that inflation is a problem, never forget the Three H’s: housing, health care and higher education; all three are characterized by low productivity gains and demand that’s artificially boosted by government spending and lending.
There you have it, arguments for and against the likelihood of inflation remaining a big problem. Relief, in any case, won’t likely come too soon, with supply chains now confronting the busy holiday shopping season. Corporate America, for its part, will find it frustrating that it can’t meet all the demand it’s seeing. But it will also feel thankful this Thanksgiving for pricing power that’s in most cases sustaining strong profits. The fast-food chain Wendy’s, for example, spoke of “overall results that are pacing well ahead of our initial 2021 plan,” despite higher labor and commodity costs. “We continue to expect very strong results in 2021.”