From the always interesting Energy Musings, April 28:
Cornell University economist Alfred Kahn, President Jimmy Carter’s advisor on inflation and chair of the Council on Wage and Price Controls, was famous for talking about recessions and depressions as necessary to win the battle with the raging inflation of the 1970s. He was chastised for using such scary language – remember we were not far removed from the Great Depression. Kahn switched to calling them bananas until a banana company took offense and he changed to kumquats. Who knew what a kumquat was?
Politicians in Washington hate talking about recessions, let alone depressions. But if inflation does not retreat to the Federal Reserve’s 2% target rate, people will continue suffering. The good news: the March Consumer Price Index (CPI) for all items posted an increase of 5.0%, the smallest monthly rise since May 2021. Energy falling 6.4% helped, with gasoline falling 17.4%, although electricity rose 10.2%. Fortunately, the latter counts less in the index than the former.
In the 1970s when the CPI was rising by 15%, Arthur Burns, chair of the Federal Reserve, asked his economists to develop an index that was less politically sensitive. They came up with Core CPI which strips out the volatile food and energy components. In March, however, Core CPI increased by 5.6%, largely attributed to an 8.2% increase in housing that represented over 60% of the total increase. So much for getting rid of the volatile categories. Compared to expectations, the March CPI was slightly better while Core CPI was slightly worse. Good news or bad?
On the bad side, since March 2021, the CPI has increased by 14.0% driven by food prices climbing 18.0% and energy soaring 23.6%. Without those categories, Core CPI was 12.4% higher – better but not by much. For consumers, food and fuel claim significant shares of people’s budgets but so do housing, autos, and health care expenses. Inflation hurts, no matter who you are.
Despite Main Street’s suffering, Wall Street cheered the CPI report. Investment managers and CNBC talking heads rejoiced at the lower rate declaring the “end of inflation!” They called the CPI’s steady decline since peaking at 9.1% last June a victory. For them, the CPI is heading directly to the Federal Reserve’s 2% inflation target. The stock market will soar. Break out the champagne!
At What Cost?
Two days later, BlackRock’s CEO Larry Fink appeared on CNBC and threw cold water on the lower inflation enthusiasm. Fink said the Russian invasion of Ukraine had accelerated the shift away from globalization. Additionally, the United States has embarked on an industrial policy that has us “reshoring” or “nearshoring” our supply chains. These moves will be inflationary.
An expanded U.S. manufacturing base will see more products made here. The electric vehicle (EV) industry is Exhibit No. 1. Its growth is driven by mandates, tax credits, and subsidies. Government largess can only be earned if a major portion of an EV is built in the U.S. with American or North American manufactured components.
One outcome of “reshoring” is that global trade will shrink as fewer goods are imported and more are manufactured here. Fink, who has been a long-time promoter of globalization, said he was not making a value judgment on the industrial policy, but asked, “At what cost?” A clue was in Fink’s March letter to BlackRock shareholders....
....MUCH MORE
As we saw yesterday reshoring hasn't really begun, meaning the higher costs of deglobalization haven't really been making their mark on prices.
Combined with the political and policy desire to force energy prices higher:
—Presidential candidate, Senator Barack Obama,
And we get to the outro of an April 17 post:
Related this last week"...only the dead have seen the end of war.”And inflation.—Moi
