It's Official: Inflation Is Getting Worse
The Recession Deepens
We now have the answer to last night’s question about what today’s CPI report would contain: A whole lot of bad news.
The Consumer Price Index for All Urban Consumers (CPI-U) increased 1.0 percent in May on a seasonally adjusted basis after rising 0.3 percent in April, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index increased 8.6 percent before seasonal adjustment.
Not only did the top-level number rise, but the internal subcomponents rose as well.
The increase was broad-based, with the indexes for shelter, gasoline, and food being the largest contributors. After declining in April, the energy index rose 3.9 percent over the month with the gasoline index rising 4.1 percent and the other major component indexes also increasing. The food index rose 1.2 percent in May as the food at home index increased 1.4 percent.
Which merely confirms what I said last night: The recession is here…and getting worse.
Zero Hedge Also Got It Right
Nor am I alone in this assessment. Zero Hedge’s predictions, which were grimmer than my own, proved to be prescient, as was their assessment that the White House is completely clueless about the economy.
Finally, when asked if the US is in a recession, the White House Official said that gains in the labor market & demand for goods don’t indicate we are in a recession. They said it is “very unlikely”. Official says the administration is in a “good spot to transition” the economy to stable growth. Which is great news, because judging how terrible the White House has been in its economic assessment of, well, anything, the US must now already be in a deep recession (if not depression) and the current burst of inflation is about to get Lehmaned as it did in 2008.
One hopes that ZH is not accurate about the prospects for inflation getting “Lehmaned”—as a price drop of that magnitude in a short time frame would be every bit as economically turbulent as the inflation the world is now experiencing.
The fear is that ZH will be proven right on that as well…which makes future inflation forecasts ever more “interesting”.
How We Got Here. A Look At April’s Inflation Data
We must never lose sight of the reality that inflation is not merely rising prices but a distortion in relative prices. The top-level inflation number tends to mask this effect, and so it is always essential that we explore the internals of inflation data to understand the full dynamics of what is taking place.
Thus, in April, even though energy price inflation eased from 32.0% to 30.3%, and All Items Less Food and Energy eased from 6.5% to 6.2%, food price inflation actually increased, from 8.8% to 9.4%.
Thus, even though inflation overall eased from 8.5% to 8.3%, consumers’ food budgets are in even worse shape in April than they were in March.
Moreover, the inflationary trend in food prices is across the board. Ground beef prices are continuing to move markedly higher since last summer, while egg prices are spiking in recent months as the avian influenza outbreak among poultry producers is creating a mini-supply shock in the available supply of both chicken and eggs.
Yet again, as the 20-year perspective illustrates, by far the biggest impact on consumers food budgets is the growing disparity in food prices. Rising inflation is always tantamount to rising disequilbrium—markets are becoming increasingly distorted and unbalanced.
Thus, even while April’s data was described by the current regime in the White House as “heartening”, the reality especially in food pricing was anything but.
Reality Check for the Current Regime: Rising food prices are never “heartening”.
Energy Erases April’s Declines
With a seasonally adjusted 3.9% increase during May, the overall cost of energy to consumers effectively obliterated the declines from April.
Once again, the distortion within the subcomponents is notable and distressing. Gasoline prices are now up nationwide by 48% year-on-year,while electricity prices are up 12% over the same period.
Not only is it becoming more expensive to drive anywhere, it is becoming more expensive to simply stay home.
Food Price Inflation…A Precursor To Food Insecurity?
We should also note a disturbing trend going back into last fall: the price for Food at Home is rising faster than the price for Food Away From Home.
When we look at food price inflation over the past 20 years, this inflation inversion only happens sporadically. The long term trend has generally been that is it cheaper to eat at home than it is to eat out. That dynamic is changing.
Does this inversion indicate a future rise in food insecurity within the US? The possibility cannot be overlooked. As the prices of staple goods such as eggs, milk, chicken and beef rise, the capacity of consumers particularly in the lower income brackets to purchase enough food steadily declines. If the inflation trend continues, the number of Americans unable to afford adequate food is almost certain to increase.
Food price inflation puts the country that much closer to food insecurity, which in turn puts us that much closer to outright hunger.
The Recession Is Here
The impact of inflation can be simply stated thus: consumers pay more to buy less.
The continued rise of inflation in the US and around the world means not only that consumers are unable to buy the same quantities of goods as before, the distorting effect among categories of goods and services means consumers are losing the ability to make reasonable substitutions for their purchases.
As the possibilities for purchase diminish, the economy necessarily contracts. Overall output is reduced from what it otherwise would have been.
In May 2020, annual inflation was 0.1%. During the brief technical recession that preceded, inflation peaked at 2.5%.
We are now more than two years into past that technical recession, and inflation is nearly three and a half times as much as the prior peak, and 86 times what it was in May of 2020. Whether either one of those orders of magnitude qualifies the current inflationary phase as “hyperinflation” I leave for readers to judge for themselves. It is sufficient to say that either order of magnitude is economically dreadful and destructive news.
It is cold comfort to say that inflation is demonstrably worse elsewhere. Rising prices—and rising food prices especially—are a problem period. That UK consumers have even greater difficulty purchasing food to eat or energy to power their homes does not mitigate in the slightest the challenge that is getting steadily worse for American consumers.
The times are indeed getting more “interesting”. Unfortunately, the trends suggest we have much more “interesting” times ahead.
I have said this before: Chaos is coming.