Wait a minute. Inflation? Who cares about inflation when there is a potential banking crisis forming? The latest US CPI (consumer price index) report came out, and it was decent enough to lend support to the Federal Reserve in a decision to either pause tightening or raise interest rates slightly by a quarter point. Still, despite the considerable slowdown in the annual growth rate, it should not be taken for granted that millions of Americans are experiencing a cost-of-living nightmare, with nearly everything up across the board from a year ago.
US CPI – Good News and Bad News
The US annual inflation rate eased to 6% in February, down from 6.4% in January, the lowest level since September 2021, according to the Bureau of Labor Statistics (BLS). This was in line with market forecasts. The core inflation rate, which strips the volatile energy and food industries, dipped to 5.5%, down from 5.6%. On a monthly basis, the US CPI and core CPI rose 0.4% and 0.5%, respectively. Here is the state of the leading year-over-year and month-over-month indexes:
- Food: +9.5% | +0.4%
- Energy: +5.2% | -0.6%
- New Vehicles: +5.8% | +0.2%
- Used Cars and Trucks: -13.6% | -2.8%
- Apparel: +3.3% | +0.8%
- Medical Care Commodities: +3.2% | +0.1%
- Shelter: +7.3% | +0.6%
- Transportation Services: +14.6% | +1.1%
- Medical Care Services: +2.1% | -0.7%
Now, what about some of the headline grabbers over the last year? It was a mixed picture. For the sake of simplicity, here is a look at how certain goods and services trended from January to February: beef and veal (+0.6%), eggs (-6.7%), potatoes (+2.8%), baby food (+0.5%), gasoline (+1%), utility (-8%), used cars and trucks (-2.8%), and rents (+0.7%).
Services inflation, which includes everything from personal care to medical to financial, was flat but remained highly elevated at 7.6%. This is a critical measurement for the Federal Reserve since this is where inflation remains primarily concentrated now and tougher on vanquishing. At the beginning of the inflationary crisis, the US CPI and Personal Consumption Expenditure (PCE) price index showed that goods had dominated the monthly reports. However, after the economy reopened and public health restrictions eased, consumers returned to the services arena.
Speaking of the Fed
Economists and market analysts have been joking this week about how uninteresting the US CPI is due to the failure of Silicon Valley Bank, Signature Bank, and Silvergate (and potentially First Republic). Indeed, this is understandable since a banking sector collapse might have far more dire consequences for the US economy than 6% inflation. At this point, it could be best described as a “trilemma” for the US government, the Federal Reserve, and the American people: inflation, interest rates, and banks.
Fed Chair Jerome Powell attained – to quote Press Secretary Karine Jean-Pierre – “a little bit of a breathing room” with this inflation report (unsure of the size of this breathing room). The Federal Open Market Committee (FOMC) can now decide to pull the trigger on a 25-basis-point rate hike or hit the pause button to prevent further meltdowns in the financial system. It is still a poisonous decision, mainly because the choices will continue to lead to disastrous consequences for the country. On the one hand, a 0% rate hike could facilitate higher inflation levels but offer some relief to the financial system. On the other, a quarter-point jolt could still add to liquidity concerns in the banking industry but trim inflation.
If only Powell and Co. responded to the inflation mess earlier. It kept monetary policy too loose for too long, fumbled the ball on price pressures, mischaracterized the inflationary debacle, and enabled the recklessness seen in the financial system today. This is not even Monday Morning Quarterbacking!
Pain and Panic
President Joe Biden will undoubtedly take a brief victory lap. He will continue to assert that more work needs to be done, which is code for expanding the size and scope of government and for politicians and bureaucrats spending more money. But the American people should take solace that Biden will tell anyone listening that this was all Trump’s Fault™ and that he is the nation’s savior, thanks to the deficit-financed American Rescue Plan and Inflation Reduction Act. If the US were a person, America’s pronouns would be pain and panic.
