Managing "inflation expectations."

Macro Perspectives: Wed 13 Apr 22

Inflation for March came in at 8.5% (compared to March of last year).

That's a hot number, above expectations, but not the double-digit number I was expecting. In fact, when I saw it, I thought immediately about the very strange trend in payroll data we've seen over the past year.

For eleven consecutive months, the labor department has undershot the final payroll number, every single month, by an average of 158k jobs. This, as the administration was pushing hard last year to justify another (massive) fiscal spend (the "Build Back Better" plan). The initially "disappointing" jobs numbers were quietly revised much higher in the months that followed, with little attention.

Is the government playing games with the headline inflation data?

If we look at the monthly inflation, it's an eye-popper: up 1.2% from February to March (one month).

That number, annualised, is 15.3%! Thit magnitude of monthly price jump has only happened four other times on record: 2005, 1980, 1974 and 1973. Each time, higher inflation has followed.

That said, the media was out in full force today running headlines suggesting that inflation has peaked. This looks like the media carrying the water, trying to manage "inflation expectations."

As we've discussed, the Fed is far more concerned about inflation expectations, than they are about inflation. If they lose control of expectations, people start pulling forward purchases, in anticipation of higher prices, creating a self-fulfilling upward spiral in prices.

As for prices, the only offset to the genie they (the government) knowingly unleashed in March of 2020 (through direct payments to businesses and consumers), is a wage reset (i.e. a broad-based shift in the wage scale, up). That's due to this chart...

Since the initial pandemic response, the money supply has grown at more than four-times the long-term annualised rate - the genie doesn't go back in the bottle. With that, we're getting a rise in prices (the CPI index) that's running better than four-times the pre-pandemic trend rate.