Brown on Business
August 24-30, 2020
U.S. consumers face inflation, rising prices amid COVID-19 resurgence; confidence waning
By Wesley Brown
wesley@dailydata.com
Out of the ashes of the COVID-19 pandemic is one rising concern that most American consumers can do without right now – inflation.
Following the Federal Reserve’s last Open Market Committee (FOMC) meeting on July 29, Fed Chairman James Powell said the path of the U.S. economy will depend significantly on the course of the pandemic that has caused “tremendous human and economic hardship across the U.S. and around the globe.”
At that FOMC meeting, the nation’s monetary policymakers unanimously voted to hold federal interest rates at zero as the economy continues to struggle under the weight of the ongoing crisis. The committee’s action was largely expected after real U.S. Gross Domestic Product (GDP) growth sank to an all-time low of nearly 33% in the second quarter.
Besides keeping federal funds rate that banks lend to each other in a holding pattern, Powell also noted in his FOMC statement that the influential panel will continue to assess both real and expected economic conditions related to the Fed’s maximum employment and inflation objectives.
“This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments,” said Powell.
The Fed’s current goal for the U.S. labor pool of nearly 160 million workers is now a jobless rate between 3.5% and 4.7%. U.S. unemployment spiked to a high of 14.7% in April when U.S. jobless claims climbed to nearly 50 million. It has since declined to 10.2% but is still in danger after Congress failed to extend unemployment benefits under the emergency relief bill that expired on July 25.
In Arkansas, the state’s unemployment rate peaked in April at 10.8% as the number of sidelined workers topped 140,000. At the end of June, the state unemployment rate held at 8% and there were 105,338 out of work or seeking gainful employment.
Concerning inflation, the Fed’s other key economic objective, very few Americans are aware of how the central bank’s 2% target impacts their everyday life. The Fed and Bureau of Economic Analysis (BEA) respectively provide a monthly and quarterly update on the current Personal Consumption Expenditure index, or PCE.
This inflation index is a measure of the prices that U.S. consumers pay for goods and services across a wide range of consumer expenses, excluding food and energy prices and reflects changes in consumer behavior. In the recent “advance” GDP report that saw U.S. growth collapse by 32.9% in the second quarter, the PCE price index fell 1.1% compared to an increase of 1.6% in the previous three months.
The more familiar Consumer Price Index, or CPI, measures the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. CPI data is available for the U.S. and various geographic areas, plus average price data for select utility, automotive fuel, and food items.
The CPI, which is produced by the Labor Department’s BLS economic research group, rose 1% in July from a year ago as price for all items less food and energy jumped 1.6% over the past 12 months. Food prices also rose 4.1% year-over-year with prices for “food at home” spiking 4.6%. Energy prices, which generally rise during periods of strong economic growth and move in tandem with inflation, fell 11.2% over the last 12 months.
Not surprisingly, after consumers saw a retreat in the grocery store, restaurant tabs and energy costs when Arkansas and most U.S. states shutdown their economies between March and June, new data shows that prices for nearly all goods are now on the rise. And that is exactly why Wall Street powerhouse warned investors earlier this year that inflation would return with a vengeance.
“Just as the consensus underestimated the disinflationary trends of the past 30 years, it is at risk of underappreciating the inflation threat,” Morgan Stanley Chief Economist Chetan Ahya said in early May, noting that inflation is now at about 1%. “I would argue that the driving forces of inflation are already aligned, and a regime shift is under way.”
To bolster Morgan Stanley’s prediction, the Federal Reserve Bank of Dallas’s latest tracking of core of personal consumer spending shows the nation’s PCE inflation rate rose 0.9% in June from a year ago. New Fed data will be compiled later this month for July, and Wall Street economists predict the core PCE price index will jump even higher to 1.4%.
For years now, Federal Reserve policymakers have evaluated changes in inflation by monitoring the PCE, CPI and other economic indexes. By the Fed’s definition, inflation is simply the general increase in the overall price level of the goods and services in the economy. Percentage wise, it is calculated as a decrease in the purchasing power of the U.S. dollar.
Today, FOMC policy holds that inflation at the rate of 2% as measured by the PCE index is the most consistent barometer to help the Fed stay true to its statutory mandate to provide “stable prices for the goods and services we all purchase.”
“Communicating this inflation goal clearly helps keep longer-term inflation expectations firmly anchored, thereby fostering price stability and moderate long-term interest rates and enhancing the FOMC’s ability to promote maximum employment,” Powell said in his June FOMC statement.
Yet, a recent report release by BLS economists, highlights the devastating impact of COVID-19 pandemic on food prices indexes and the ability to even track such data. According to the BLS, recent U.S. demand shocks and problems with supply chains have contributed to increased volatility in import, export, producer and consumer prices after the onset of the pandemic.
For example, the Labor Department research group noted there were large price increases for meat products across the board. Disruptions in dairy and egg production and distribution have also led to the greatest price volatility in all BLS price indexes, the report stated.
Likewise, COVI9-19 has caused consumers to turn away from institutional or restaurant food consumption, shifting toward so-called “food at home” spending. That trend has created short-term disruptions and shocks in the economy for perishable foods with a short shelf life.
“These shocks rippled through the economy and affected the prices consumers pay in the grocery store,” concluded BLS economists.
What disturbs many is that consumer and producer prices are starting to rise again, just as the buying power of the U.S. dollar has fallen to an all-time low against other global currencies.
U.S. taxpayers are also on the hook for more than $10 trillion under the CARES Act and the Federal Reserve’s own securities buyback program that allows the central bank to literally print new money to keep the economy afloat. And around the corner, Congress is looking to spend another $1-to-3 trillion on a new COVID-19 rescue deal.
Based on all those factors, the Conference Board’s monthly U.S. “consumer confidence” survey shows that having the full weight of that economic burden is starting to take a toll on U.S. consumers. In fact, the highly watching economic benchmark noted that Americans’ confidence in their own heroic economic resilience took a hit in between June and July, about the same time consumer prices saw a huge spike.
“Looking ahead, consumers have grown less optimistic about the short-term outlook for the economy and labor market and remain subdued about their financial prospects,” said Lynn Franco, a senior economist with the nonpartisan research group. “Such uncertainty about the short-term future does not bode well for the recovery, nor for consumer spending.”
Maybe someone should remind Walmart, Amazon, Kroger, Target and other retailers and supply-chain producers that now is not the time to profit off the misery of most Americans.
