Inflation Rate Down Again

Data released by the BLS this week shows that the rate of CPI inflation in the U.S. was just 3.2% in October.  The graph below shows annual inflation rates since 1990.

Inf 1123

This is monthly data, but it shows the percentage growth in the CPI over the course of one year. This is how we generally measure inflation, but drastic shifts in this inflation measure are rare because it includes data for the entire preceding year.  In fact, looking at the raw CPI data for October 2023 indicates no change at all for the CPI (zero inflation) for the month of October.

I like to point out that the battle to reduce inflation has been admirably fought by Jerome Powell and the Federal Reserve.  They have weathered many complaints about potentially rising unemployment over the past year and a half as they tightened monetary policy through interest rate rises.  And yet the unemployment rate in the U.S. is still just 3.9 percent.  

The Fed's increases in interest rates have reduced the quantity of money circulating in the economy.  The graph below shows the M2 money supply since 1990. 

M2 1123

Economists do not all agree on the direct link between M2 and inflation, but they are clearly not unrelated.  That is, many factors might influence inflation in the economy, but the M2 money supply is a clear contributor.

Mixed Jobs Report for October

On the heels of a great GDP report last week, the jobs numbers released today by the BLS are disappointing.  The good news is that 150,ooo new jobs were added to nonfarm employment. However, since 2020, we have gotten used to much larger increases in employment. For example, in the 12 preceding months, the economy added an average of 258,000 jobs per month.  The graph below shows growth in U.S. nonfarm employment since 2021.  Clearly, the increases are slowing since days just after COVID-19.


In addition, the unemployment rate ticked up to 3.9% in October (from 3.8% in September) and the labor force participation rate edged down to 62.7 % (from 62.8%).  Taken together, this is just not a strong jobs report.

The October numbers may be lower because the survey was taken during major work stoppages — notably the strikes by the United Automobile Workers and related layoffs. Since then, the U.A.W has informed the workers who were on strike to return to their jobs. The union has reached tentative contract agreements with the three major U.S. auto companies.

Real GDP up 4.9% in Third Quarter

New data released by the BEA yesterday indicates that the U.S. economy is growing at a rapid clip. The first (advance) estimate of real GDP growth in the third quarter of 2023 is 4.9 percent. The graphic below shows quarterly real GDP growth since the beginning of 2021. The growth estimate for our most recent quarter is the strongest in nearly two years!


If we take the GDP growth along with low unemployment rates (3.8% in September), it is clear that the U.S. economy is not struggling right now. 

Yes, there are some troubling issues on the horizon, like higher consumer debt, high and rising federal budget deficits, and relatively high interest rates.  However, the Federal Reserve has reduced inflation rates significantly over the past 18 months and the the economy still chugs along. 



Strong Jobs Growth in September

Total nonfarm employment grew by 336,000 jobs in September, according to the latest jobs report from the Bureau of Labor Statistics.  The big jump in employment  held keep the unemployment rate near historic lows, at just 3.8 percent.  The graph below shows total nonfarm employment in the U.S. since the beginning of 2012.


The graph makes it clear the the U.S. economy is back at (or very near) the trend line from before COVID-19 hit the economy.

This Wall Street Journal article includes a nice graphic (pasted below) that dissects the jobs growth into four major sectors: goods (manufacturing), government, leisure and hospitality, and other services.

As the graphic makes clear, most U.S. jobs growth comes in service-sectors, rather than goods-producing.  Manufacturing gets a lot of attention in the media and from politicians, but service jobs are really driving U.S. employment.




Inflation Ticks Back Up

New CPI data released today from the BLS indicates that U.S. inflation is not yet tamed. The graph below shows the one-year growth rate of the CPI on a monthly basis since the beginning of 2022.  


After consistent declines since June 2022, inflation has now increased slightly for two months in a row, and is now back up to 3.7 percent. This should worry anybody who hoped that inflation would continue falling down into the 2% range.

As for particular categories, gasoline prices rose drastically in August, up 10.6% in just one month. Rental housing expenses are also up 7.3% since a year ago. This is particularly difficult for consumers, since about 35% of monthly spending is on housing for an average consumer.

One word of caution: gas prices and housing costs do not cause inflation, they merely reflect inflation. Many other prices in the economy have fallen over the past year (for example, television prices are down 10.1% and washing machines are down 12.8%). Over time, when the overall price level rises (as opposed to changes in the relative prices of goods) it is due to changes in the overall quantity of money in an economy. The quantity of money is hard to measure, but the Federal Reserve does control a large chunk of it, and so monetary policy can definitely affect inflation rates.  This means that Jerome Powell's job is not yet done.

Inflation Stays Lowish

Today's CPI report indicates that lower inflation is probably here for a while. Year-over-year growth in the CPI was just 3.2% in July (see the graph below). This follows on the heals of 3.1% inflation last month.  You can see from the graph that inflation is now back down into its normal range.

Inf 0723

The lower inflation reflects the Federal Reserve's commitment to bring inflation down to the 2% target range.  Just one year ago, inflation was 8.4 percent.

Keeping in mind that inflation is the growth rate of the general (overall) price level, it is still interesting to look at changes in some individual prices.  The table below shows a selected few "big movers," or prices that moved a lot in the past year. The last column also gives the weight assigned to these categories in the overall CPI.  Recall that this weight is equivalent to the portion of a typical consumer's monthly budget spent on these categories.

CPI Table 0723

As you can see, gasoline prices fell by almost 20% over the past year and the typical consumer spends about 3.4% of their monthly budget on gasoline. Frozen vegetable prices rose dramatically over the past year, climbing 17.1 percent. 


Still No Recession

Today's jobs report brings more strong data and very little change from the past few reports. The unemployment rate (pictured below) remains at historically low levels, falling to 3.5% in July, and jobs growth remains robust, with 187K new jobs added.


On the other hand, the strong unemployment rate is probably overstating the overall health of the labor market.  As we have talked about previously, the labor force participation rate (LFPR) remains at low levels.  You can see in the figure below that the current level (62.6%) is still way below the pre-pandemic level, which was also very low relative to U.S. economic history. 


This low LFPR indicates that there are still millions of potential workers not in the labor force.

Unemployment Still Low but Jobs Growth Slowing

Today's jobs report brings some good news but also some sobering reality.  First the good: the unemployment rate remains near its fifty-year low, coming in at just 3.6% for June.  The graph below shows the U.S. unemployment rate. 

Unemp 0623

Part of the reason the unemployment rate is so low is that the labor force participation rate (LFPR) is still historically low. So unemployment is low but many potential workers are still "sitting on the sidelines," and not part of the labor force. The LFPR in June was just 62.6 percent.  While this is up from 62.2% a year ago, it is still way down from the 63.3% we saw prior to COVID-19.

Now, the more sobering news. Nonfarm employment rose by 209,000 jobs in June. Ordinarily this would be seen as solid overall jobs growth, but it is the smallest increase in jobs since the end of 2020.  The graph below shows monthly changes in nonfarm employment since January 2021.  

Nfe 0623

In the period graphed above, there has been tremendous gains, but these gains seem to be slowing down over the past five months.  

GDP Still Growing

New data from the Bureau of Economic Analysis (BEA) today shows positive real GDP growth in the first quarter of 2023. The BEA estimates that real GDP grew at a 2.0% annual rate in the first quarter.  This means three straight quarters of growth, even while economists have been bracing for recession as the Federal Reserve raised interest rates over the past year.  The graph below shows (annualized) quarterly growth rates for real GDP since the third quarter of 2021.


The past year has not been a year of excellent growth, but most economists are pleasantly surprised by consistent real GDP increases, even if these increase have been relatively small. 

While overall real GDP grew at 2.0%, there was significant variation in the four components.  Consumption (C), which makes up about 70% of GDP, grew by 4.2% in the first quarter, investment (I) fell by 11.9 percent, government spending (G) rose by 5% overall while exports rose by 7.8% and imports rose by 2.0 percent. 

Inflation Climbs Again

New CPI data released this week shows that, despite the claims and wishes of our government leaders, inflation is not going away anytime soon.  Inflation for the year ending in January is estimated at 7.5%, according to the BLS. As the graph below shows, this is the highest U.S. inflation rate in forty years.  


This is not good news.  Perhaps the most discouraging aspect is the reaction of many of our political leaders, who are blaming this inflation on supply chain issues and market power combined with corporate greed. On the one hand, yes, both of these are currently present and both can lead to higher prices. But while those issues might help explain a one time jump in the price level, there is no theory as to how they cause continued price level growth.  Overall supply chain issues are certainly not continually worsening over the past 18 months.  Similarly, corporate greed is not a new phenomenon that suddenly appeared two years ago and is now growing month by month.

Here is an idea - maybe just maybe inflation is caused by changes in the money supply. The graph below shows the U.S. M2 money supply since 2010.  Clearly there is a fairly constant growth rate right up until 2020, when the slope of the line steepens drastically.  That is, M2 didn't just jump at the beginning of the COVID era, the rate of growth increased (the slope of the line) and never returned to the previous level.  In fact, M2 has increased by 40% since the beginning of 2020.  

M2 2022

Granted, M2 is an imperfect measure of our modern money supply. That said, changes in M2 of this magnitude are not irrelevant and changes in M2 can be used as a proxy for changes in the overall level of money in an economy.

Finally, some economists might argue that the new money growth is completely appropriate or necessary in this era of instability and uncertainty.  Fine, but let's recognize and communicate this clear cause of the highest inflation rate we've had since 1982.