Tag Archives: Inflation

Strong Jobs and Weakening Global Oil Demand

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Strong September U.S. job data showed that the U.S. economy is still running faster than the Federal Reserve would like, making it all but inevitable the central bank will continue to raise the federal fund interest rates through the end of the year in an attempt to curb inflation, according to Charles Schwab’s Schwab Market Perspective.

The Federal Reserve is trying to slow down economic growth to prevent inflation from becoming entrenched. WSJ

Higher interest rates imposed by the Federal Reserve don’t affect the U.S. economy only—the pain spreads around the globe as other countries’ currencies weaken against the U.S. dollar.

The Fed combats inflation by slowing the economy through tighter financial conditions — such as higher borrowing costs and lower stock prices — which curb spending, further reducing employment, income and spending.

The Fed has raised its benchmark lending rate by three percentage points so far this year, but you wouldn’t know that from the burgeoning jobs market.

Fed Chair Jerome Powell has acknowledged that the central bank’s fight against inflation will likely involve “pain for some households and businesses,” alluding to the risk of recession and rising unemployment. However, the Fed’s moves are also causing pain beyond U.S. borders.

The Fed is often referred to as the “central bank to the world” because its policies have a big influence on the global economy. Because the dollar is the world’s reserve currency, U.S. interest rate changes ripple across the globe in the form of currency volatility.

Meanwhile, this month’s announcement by OPEC+ members that they will curb oil production may not have as big an impact on oil prices and global inflation as some investors fear.

Source: Charles Schwab, Bloomberg data as of 10/8/2022.

Historically, OPEC hasn’t driven oil prices—it has followed them. OPEC output tends to lag changes in oil prices by about three months, meaning the cartel tends to cut oil production after prices fall when demand weakens, and increase it after prices are already rising when demand improves.

And demand for oil has been weakening. The International Energy Agency’s September Oil Market Report projected that oil markets would be oversupplied by 1 million barrels per day (mbpd) in the second half of calendar year 2022.

As a result, the OPEC cuts aren’t likely to be a meaningful driver of global inflation or the economy, but could instead serve as a lagging indicator of the slowing demand for oil as the global economy weakens, projects the Charles Schwab Schwab Market Perspective.

  1. https://www.schwab.com/learn/story/market-perspective
  2. Nick Timiraos, Flush Consumers Vex Fed Strategy, The Wall Street Journal, October 31, 2022, pp. A2.

Inflation…a Monetary Phenomenon

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“Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output.” ~ Milton Friedman.

Inflation hurts all Americans and represents a crushing blow to the pocketbooks of working families and seniors living on a fixed income.

Inflation, in its most basic sense, is a lost of purchasing power. For example, a dollar held at the start of calendar year 2021 is now worth only 88.3 cents, according to .

Unfortunately, inflation seems likely to remain higher for longer than policymakers expected, and the Federal Reserve will therefore need to maintain a tighter policy stance of raising federal fund rate and quantitative tightening for an extended period of time, according to Franklin Templeton Fixed Income CIO Sonal Desai.

Consumer inflation remains at record highs across major developed economies: in September it ran at 8.2% year-over-year (Y/Y) in the United States, 10% Y/Y in the eurozone and 9.9% Y/Y in the United Kingdom (in August).1

These numbers represent inflation rates not seen in four decades. Many incorrectly assume the causes are the energy shock and supply chain disruptions which have played an important global role.

Additionally, the United States experienced a massive fiscal budget expansion during the pandemic, and fiscal stimulus continues to flow in the form of subsidies and debt forgiveness programs.

Excess demand therefore is a major inflation driver; in September, even as lower energy prices brought headline inflation down, core inflation (excluding food and energy) accelerated above expectations to 6.6%, the highest in 40 years.

Core inflation has averaged 6.2% so far this year and shows no signs of coming down—to the contrary, it’s rising. The last time it sat below 2% was in March last year.

Meanwhile, aggregate demand remains resilient and the labor market remains as tight as it’s ever been. Excess demand is an important inflation driver—as the Fed has belatedly recognized. So, the Fed can’t stop and won’t stop hiking rates anytime soon—Americans should expect that the federal funds rate could easily go above 5%.

Simply, inflation is a monetary phenomenon. It is a result of too much money, of a more rapid increase in the quantity of money than an output. “Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output,” states economist Milton Friedman.

Moreover, it’s important to recognize that governments control the quantity of money. So that as a result, inflation in the United States is made and produced in Washington and nowhere else.

It is a byproduct excessive printing of green pieces of paper we call the U.S. dollar (USD) that increases the money supply, funds uncontrolled fiscal spending and devalues the fiat currency.

References:

  1. https://www.heritage.org/budget-and-spending/heritage-explains/the-real-story-behind-inflation

Consumer Price Index (CPI) at 8.2% Inflation Rate

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U.S. inflation hits 8.2% in September — hotter than expected. Core CPI surges to 6.6%, the highest since 1982.

A key consumer inflation report, the Consumer Price Index (CPI), came in hotter than expected, signaling that the Federal Reserve will likely continue with aggressive interest rate hikes. Prices consumers pay for a wide variety of goods and services rose as inflation pressures continued to weigh on the U.S. economy.

The consumer price index for September increased 0.4% for the month, according to the Bureau of Labor Statistics. On a 12-month basis, so-called headline inflation was up 8.2%, off its peak around 9% in June but still hovering near the highest levels since the early 1980s. Core CPI, which strips out volatile food and energy prices, rose to 6.6% from 6.3%. Both numbers came in higher than economists polled by the Wall Street Journal had expected.

Source: Bloomberg

The report signals that inflation is a persistent problem even amid large interest rate hikes from the central bank. Going forward, the Fed will likely have to keep delivering increases and keep rates high until there are signs that inflation is cooling off.

References:

  1. https://www.cnbc.com/2022/10/12/stock-futures-are-up-as-investors-await-inflation-data.html
  2. https://www.marketwatch.com/story/u-s-stock-futures-plunge-as-september-cpi-comes-in-hotter-than-expected-01665664995

U.S. Has Vast Quantities of Untapped Oil

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Prioritizing climate change and green energy means that Democrats actually like high gas and fossil fuels prices. ~ American Enterprise Institute

The United States is sitting on 264 billion barrels of untapped oil — more than any other country on the planet, according to a new report from Rystad Energy. The vast quantity includes oil in existing fields, new projects, recent discoveries as well as projections in undiscovered fields.

More than half of America’s untapped oil is unconventional shale oil, according to Rystad. Thanks to fracking and the shale oil boom, the U.S. is sitting on more oil reserves than Russia.

Yet, the Biden Administration’s vow to make Saudi Arabia a pariah nation, to reduce the world’s dependence, and to curtail domestic fossil fuels production has made the United States more dependent on energy from foreign sources, writes Marc A. Thiessen, Senior Fellow, American Enterprise Institute. The hostility towards domestic hydrocarbons has also resulted in higher gasoline prices at the pump and in higher prices to generate electricity with natural gas.

Since taking office, the Biden Administration has leased fewer acres of federal land for oil and gas drilling, suspended all oil and gas leases in Alaska’s Arctic National Wildlife Refuge, and announced plans to block new offshore oil drilling in the Atlantic and Pacific oceans.

And the Biden Administration might be preparing to implement a ban on exports of gasoline, diesel and other refined petroleum products — a move that energy groups warn would backfire by reducing domestic refining capacity and further raising prices for U.S. consumers, explains Thiessen.

Prioritizing climate change and green energy means that Democrats may actually prefer high gas and fossil fuels prices. Higher gas and fossil fuels prices would encourage Americans to abandon fossil fuels. Rising gas and hydrocarbon prices would theoretically curb and ultimately end Americans use of fossil fuels.

References

  1. https://money.cnn.com/2016/07/05/investing/us-untapped-oil/index.html
  2. Marc A. Thiessen, With So Much Untapped US Oil, Why Does Biden Beg Dictators to Add Production?, The Washington Post, October 08, 2022

Inflation: A Hidden Tax

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Inflation is a loss of purchasing power over time, meaning your dollar will not go as far tomorrow as it did today. Its a “hidden tax” on your money.

Inflation is when the general price of goods and services increases across the economy, reducing the purchasing power of a currency and the value of certain assets.

Conversely, the same American’s paycheck covers less monthly goods, services, bills and debt payments. It is sometimes referred to as a “hidden tax,” as it leaves taxpayers less well-off due to higher costs and “bracket creep,” while increasing the government’s spending power, concludes the nonpartisan Tax Foundation.

Simply, inflation occurs when there is more money for the same amount of real goods and services, which forces an increase in prices.

The way this occurs is when policymakers put more money into the economy, through either deficit-financed government spending or Federal Reserve loose monetary action, both actions can result in an increase in the money supply of an economy.

A Hidden Tax.

This means that if any other type of tax has to be levied on the general population, it must be introduced in and approved by Congress or legislatures. However, this is not the case with the “hidden tax” of inflation.

Inflation tax is not an actual statuary tax paid to a government; instead “inflation tax” refers to the penalty incurred to purchasing power for the money you’re holding at a time of high inflation.

“Inflation is the one form of taxation that can be imposed without legislation.” ~ Milton Friedman

Inflation is an extremely destructive hidden tax, especially on working families. Inflation reduces the buying power of money. Put simply, high inflation means your money is not stretching as far as it once did. As prices rises, it is felt because wages and benefits are not rising in equal measures.

References:

  1. https://debtinflation.com/why-is-inflation-a-tax/
  2. https://taxfoundation.org/tax-basics/inflation/

“Taxes now impose a greater burden on the average American household than the combined cost of food, clothing, education, and health care.”

Will Higher Interest Rates Tame Inflation?

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Interest rates don’t determine inflation; the amount of money circulating in the economy determines inflation.  At this point, there are over $5 trillion in excess money in the system. Brian Wesbury

While inflation roars at its highest level in four decades, President Joe Biden tried to downplay skyrocketing inflation, insisting it was only up “just an inch” in the short term.

“Well, first of all, let’s put this in perspective. Inflation rate month to month was just– just an inch, hardly at all,” President Joe Biden on Sixty Minutes

Despite the fact that consumer prices rose in August by one-tenth of a percentage point to 8.3 percent, economists had expected inflation to go down. Additionally, median inflation hit the highest level ever recorded.

The median CPI, which excludes all the large changes in either direction and is better predicted by labor market slack, is extremely ugly at 9.2% annual rate in August, the single highest monthly print in their dataset which starts in 1983 (second highest was in June).

The Federal Reserve has been raising interest rates since March to slow the economy in a bid to tame America’s worst bout of inflation in four decades. However, the data suggested that their efforts have not yet had much of an effect.

The Federal Reserve raising interest rates may reduce economic growth, make capital more expensive and may throw the US economy into recession, however there is no guarantee that these actions will tame or fix inflation, opines Brian Wesbury, Chief Economist, First Trust Advisors L. P. Interest rates, supply disruptions or Russian’s war in Ukraine don’t determine inflation; the amount of money circulating in the economy determines inflation.  

“Inflation is always and everywhere a monetary phenomenon.” ~ Milton Friedman

The Fed’s balance sheet held $850 billion in reserves at the end of 2007.  Today, the balance sheet is close to $9 trillion.  Most of these deposits at the Fed are bank reserves which the Fed created by buying Treasury bonds, much of which was money the Treasury itself handed out during the pandemic.  At this point, there are over $5 trillion in excess money in the system.

Technically, banks can do whatever they want with these reserves as long as they meet the capital and liquidity ratio requirements set by regulators.

  • They can hold them at the Fed and get the interest rate the Fed sets, or
  • They can lend them out at current market interest rates.  

In turn, the big question is whether the Fed can pay banks enough to stop them from lending in the private marketplace and multiplying the money supply.

The Fed has never tried to stop bank lending in an inflationary environment by just raising the interest rate on excess reserves (IOER). Moreover, the Fed is now losing money on much of its bond portfolio because it bought so many bonds at low interest rates. At some point the Fed will be paying out more in interest than it is earning on its securities.

Inflation is a loss of purchasing power over time, meaning your dollar will not go as far tomorrow as it did today.

References:

  1. https://www.ftportfolios.com/Commentary/EconomicResearch/2022/9/19/will-higher-interest-rates-tame-inflation
  2. https://www.breitbart.com/economy/2022/09/13/underlying-inflation-reaches-scorching-new-record-high/

“Taxes now impose a greater burden on the average American household than the combined cost of food, clothing, education, and health care.”

How to Protect Your Money from Inflation

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Inflation causes your money to be worth less over time. To hedge against inflation, you need to invest your money in assets.

Inflation in the U.S. is at the highest rate in four decades.

Inflation decreases the purchasing power of your dollars over time. Here are steps you can take to protect the purchasing power of your dollars, according to Forbes.

  • Trim your expenses. To minimize the impact of inflation, review your spending and identify areas to reduce or eliminate completely.
  • Wait to pay off low-interest debt. Paying off debt is usually good, but you may want to hold off on making extra payments if you have low-interest debt. Your debt becomes less expensive due to inflation. Use the money for other purposes—like paying off higher-interest loans.
  • Invest your money. Inflation causes your savings to be worth less over time. To hedge against inflation, you need to invest your money. If the prospect of investing is scary, consider a diversified portfolio of broad market index funds to lower your risk levels and costs.

Getting inflation under control

The Federal Reserve is tasked with keeping inflation at a healthy level by adjusting the nation’s money supply and interest rates.

When the economy is expanding too quickly and inflation rises, the Fed will typically raise interest rates or sell assets to reduce the amount of cash in circulation. These actions tend to reduce demand within the economy and can push the economy into recession.

References:

  1. https://www.forbes.com/advisor/investing/is-inflation-good-or-bad/

Federal Reserve Balance Sheet and Inflation

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The U.S. Federal Reserve’s balance sheet consists of the Fed’s portfolio of U.S. Treasury and government-guaranteed mortgage-backed securities (MBS).

The balance sheet is one of the Federal Reserve’s main instruments for conducting monetary policy and for fulfilling the Federal Reserve’s dual mandate that requires it to ensure both stable prices and maximum employment.

The traditional tool the Fed used to accomplish these goals was the adjustment of the federal funds rate, the short-term interest rate that determined how much it costs for banks to lend to each other overnight.

The 2007-2008 financial crisis, however, demonstrated that even lowering the interest rate to zero was considered insufficient to shore up economies in freefall, and the Fed turned to more unusual tactics.

One of these measures was what the Fed refers to as “large-scale asset purchases,” which is more commonly known as “quantitative easing.” Just as with any other firm, securities that the Fed purchases through quantitative easing are considered assets and therefore are represented on the Fed’s balance sheet.

The value of the balance sheet of the Federal Reserve increased overall since 2007, when it stood at roughly $0.9 trillion U.S. dollars.

As of September 6, 2022, the Federal Reserve had $8.82 trillion U.S. dollars of assets on its balance sheet.

This dramatic increase can be traced back to two black swan events that had a disastrous impact on the U.S. economy:

  • the 2008 financial crisis and
  • the COVID-19 pandemic,

Both events led to a negative annual growth of the real gross domestic product (GDP) of the United States, writes Thomas Wade is the Director of Financial Services Policy at the American Action Forum. Therefore, the Federal Reserve’s response to these crises was to adopt expansionary monetary policies to stimulate employment and economic growth.

Increasing the money supply — an expansionary monetary policies which intends to increase the amount of money circulating in the economy — tends to increase inflation, states Statista.com, which destabilizes the economy and erodes purchasing power. Currently, the inflation rate in the United States reached 8.5 percent in 2022, the largest value in four decades.

Bottomline is that by expanding its balance sheet—i.e., by buying government bonds and MBS—the Fed expands the nation’s money supply in the hope of lowering interest rates and stimulating the economy; contracting the balance sheet should have the opposite effect.

However, by expanding the money supply too much, the Fed ran the risk of igniting inflation [“Inflation is one form of taxation that can be imposed without legislation.” Milton Friedman], while overly contracting it may stifle economic activity, including increasing unemployment and triggering an economic recession.

Inflation’, quipped Milton Friedman, ‘is always and everywhere a monetary phenomenon, in the sense that it cannot occur without a more rapid increase in the quantity of money than in output.

Inflation is a loss of purchasing power over time, meaning your dollar will not go as far tomorrow as it did today.

References:

  1. https://www.statista.com/statistics/1121448/fed-balance-sheet-timeline
  2. https://www.americanactionforum.org/insight/tracker-the-federal-reserves-balance-sheet/#ixzz7esb8x4vu
  3. https://www.fxcm.com/markets/insights/federal-reserve-balance-sheet/

Social Security cost of living for 2023 could increase 8.7%

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Inflation is a loss of purchasing power over time, meaning your dollar will not go as far tomorrow as it did today. New York Times

More than 70 million Americans receiving Social Security benefits could see the largest annual cost-of-living increase in more than four decades in 2023, considering the government CPI inflation data.

The Social Security Administration will announce the formal 2023 figure around October 13, after the release of September CPI inflation data. However, the August CPI point to a Social Security cost-of-living adjustment, known as the COLA, of 8.7 percent, according to an estimate by the Senior Citizens League that lobbies for seniors and reported by The New York Times.

The COLA is calculated annually using a formula detailed in federal law. It uses one of the broadest government measures of inflation, known as the Consumer Price Index for Urban Wage Earners and Clerical Workers‌, or CPI.‌

Social Security averages together the CPI figures during the third quarter of each year, and compares that with the previous year’s figure. For example, the 2023 COLA will be calculated by averaging together the CPI figures for the third quarter of 2022 and comparing that with the same averaged figures for 2021.

Rapid inflation typically results in trouble for equity stocks and the overall market. Financial risk assets have historically performed badly during periods of inflation, while tangible assets like real estate have held their value better.

References:

  1. https://www.nytimes.com/2022/09/14/business/social-security-cola-increase.html
  2. https://www.ssa.gov/
  3. https://www.whio.com/news/trending/social-security-boost-cost-of-living-increase-2023-pace-be-largest-since-1981/

Social Security is a program run by the federal government. The program works by using Social Security taxes paid into a trust fund to provide benefits to people who are eligible. Eligibility for Social Security retirement benefits starts at age 62 (the earliest you can receive them) to age 70 (when you hit your greatest amount).

Inflation Remains at Four Decade High in August

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Inflation, which is a loss of purchasing power, is likely to stay elevated thanks to a variety of structural forces.

The Labor Department reported an 8.3% year-over-year increase in the total Consumer Price Index (CPI) for August. It was a bigger gain in inflation, which is a loss of purchasing power, than expected. Economists and financial strategists agreed that the latest data show inflation is sticky.

Sticky inflation is underlying inflation, or inflation in areas where prices tend to change relatively slowly. Additionally, inflation is structural, meaning the floor is higher than many might assume, and the potential implications go beyond recession.

Vincent Deluard, director of global macro strategy at StoneX Financial, says the current period of inflation is the result of three shortages: labor, energy, and trust.

  • Labor. The U.S. labor market is still about seven million workers short of pre-pandemic levels.
  • Energy. The transition to green energy requires moving down the energy-density ladder for the first time in history, meaning the green transition will consume more resources for similar output. And, when withdraws from the strategic petroleum reserve (SPR) stops, it will remove a downward force on oil prices.
  • Trust. Inflation is inversely proportional to the level of trust between a country’s citizens. “Inflation is a fever that tells you an economy has an underlying ailment of weakening trust, then the fever weakens the body, and it all worsens,” opined Deluard. Inflation is “always and everywhere a psychological phenomenon,” where the problem worsens the longer it persists, Deluard states, as he modifies Milton Friedman’s take on inflation.

Additionally, the August’s CPI report puts the “peak inflation” assumption into question and shows that the labor market and demand -– not supply — problems are driving price increases.

More volatile inflation in categories such as food and energy, which economists and policy makers back out of inflation readings to get to what they call core inflation.

The Fed’s attempt to front-load interest-rate increases is one attempt to regain public trust and restore price stability. The “transitory” inflation argument that has been retired in speeches but not in spirit.

Investors, and central bankers themselves, may therefore be underestimating what the Fed must do to curb inflation, while simultaneously underestimating the odds that inflation remains well above 2% for longer.

References:

  1. https://www.barrons.com/articles/inflation-cpi-labor-shortage-energy-prices-51660265410
  2. https://www.barrons.com/articles/cpi-inflation-report-july-2022-data-51660078098?mod=article_inline