The latest indicators of inflation are in, and they’re starting to look a little warm – bad news if you’re a bond investor. For March, the consumer and producer price indexes showed prices rising at their highest levels in years and well above the Federal Reserve’s 2% target.
The headline consumer price index jumped 2.6% on a year-on-year basis, the most since August 2018, and 0.6% since February, the biggest one-month jump since 2012. A good part of that rise was due to the steep rise in gasoline prices, so the so-called core CPI, which excludes food and energy prices, showed a more modest 1.6% YOY rise.
The producer price index, however, showed inflation running even hotter. Headline PPI jumped 4.2% YOY in March – its biggest spike in nearly 10 years – and a full 1.0% compared to the prior month. Excluding food and energy, the YOY increase was 3.1%, 0.6% on a monthly basis. Producer price increases often – but not always – turn into higher consumer prices, depending on whether or not manufacturers choose to, or are able to, pass along their higher costs to customers.
Whether these are momentary spikes or not, of course, remains to be seen. For his part, Fed chair Jerome Powell professes not to worry.
“We might see some upward pressure on prices,” he told Congress last month. “Our best view is that the effect on inflation will be neither particularly large nor persistent.” So, if we can believe him, maybe it’s a little premature to start worrying.
As we know, Powell and his predecessors at the Fed have been trying to raise inflation ever since the 2008 financial crisis, without any luck. We’ve had near-zero short-term interest rates, accommodative monetary policy, and massive amounts of Fed buying of financial assets with little to show for it in the way of inflation. Maybe that’s because we’re looking at the wrong indicators.
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While the Fed – and other major central banks – have been proven unable to stoke price inflation, they’ve been very successful at fomenting asset inflation. Yet Fed officials rarely take the blame – or credit, depending on your point of view – for raising asset prices, be they equities, bonds, houses, or other types of traditional investments. They never acknowledge their role in encouraging rank speculation in other assets, be they SPACs, digital currencies, “meme” stocks like GameStop, or the newest craze, non-fungible tokens (NFTs), the product of cheap money, and lots of it.
Now it looks like we may have reached an inflection point where price inflation may be starting to kindle. But the Fed, despite its endless supply of money and monetary tools, hasn’t been able to do it alone. It’s taken the federal government to do the same on the fiscal side to get the flame going.
Three rounds of stimulus checks haven’t been able to ignite inflation. But it now looks like President Biden’s proposed $2 trillion infrastructure plan has been the tipping point to suddenly get everyone’s attention, especially bond market participants. Although they’ve come down a bit in the past week or so, yields on long-term U.S. Treasury securities are still trading at their highest levels in over a year.
Needless to say, Biden administration officials have expressed little concern about massive government spending fueling inflation. As the New York Times reported, “Mr. Biden’s advisers believe any price spike is likely to be temporary and not harmful. The administration’s view mirrors the posture of top officials at the Fed, including its chairman, Jerome H. Powell, [who] has said that the Fed expects any short-term price pops to be temporary, not sustained, and not the type of uptick that would prompt the central bank to raise interest rates rapidly — or anytime soon.”
So, there you have it – there’s nothing to worry about. As long as the Fed is willing to buy up all the debt that the U.S. Treasury continues to rack up – now $28 trillion and counting – all is well.
For the past dozen years, the Fed and the government – really one and the same thing – have put Modern Monetary Theory into practice. So far, they’ve been able to pull it off, largely due to a weak economy and tons of technological innovations that have conspired to keep prices low. Now the combination of massive government spending, a strong economic rebound, and a commitment by the Fed not to raise interest rates for at least two more years will put MMT to a real test. Let’s see if inflation remains benign under this new scenario.
If not, that other part of MMT may have to kick in. That’s the part of the theory that says inflation shows government spending is getting out of control and needs to be reined in or taxes have to go up, neither of which is politically palatable.
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INO.com Contributor - Fed & Interest Rates
Disclosure: This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.