President Biden denies there is an inflation problem

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by Shaun Richards

The inflation issue is one that has been heating up on 2021. One way of looking at it is to simply note the rising numbers we see be it for consumer or producer inflation. To that we need to add house prices because they are usually omitted from consumer inflation measures. There is an issue with annual comparisons due to the pandemic but the monthly rises have reinforced the theme. Next we can look at it via the official response and also by who makes it. One effort has come from the US Federal Reserve and here is Mary Daly of the San Francisco Fed from the 17th of February.

Fed’s Daly: – “Too-high inflation” not a risk to think about at the moment

– Don’t see “unwanted inflation” around the corner

– Pressures on inflation are downward.

She has been proven to be spectacularly wrong on her third point and wrong on her third. Unless she wanted CPI inflation over 5% she was wrong on that too. Whereas in reality there were clear risks.

The problem for Mary Daly is that having expanded the Federal Reserve balance sheet to US $7.44 trillion there were always going to be consequences.

Another step was the deployment of Treasury Secretary Yellen and he she is from February 8th.

Addressing Summers’ fears that the package would cause inflation, Yellen conceded that it was “a risk that we have to consider”. But Yellen, who as former Fed chair oversaw US monetary policy, added: “I’ve spent many years studying inflation and worrying about inflation. And I can tell you we have the tools to deal with that risk if it materialises.”

So far no such tools have materialised and the Federal Reserve has done nothing apart from claim that the inflation it denied would happen will be short-lived. It has changed its view of transitory though which has gone from 2-3 months to 6-9.

President Biden

The President joined the debate on Monday.

President Joe Biden addressed voters who are worried about inflation on Monday, arguing that his domestic spending plans would help keep prices low over the next decade. ( CNBC)

You may note the shift from now to an unspecified future. Also it was pretty extraordinary stuff.

“My ‘Build Back Better’ plan will be a force for achieving lower prices for Americans looking ahead,” Biden said in a speech Monday at the White House.

Biden argued the infrastructure and family support investments contained in his $4.5 trillion domestic spending plan will fund decades of economic growth, increase the workforce and keep prices low.

“If your primary concern right now is inflation, you should be even more enthusiastic about this plan,” said the president.

These are classic political moves as he again makes claims about the future and implies they will deal with inflation now. His Treasury Secretary is mining a similar vein.

“We will have several more months of rapid inflation, so I’m not saying that this is a one-month phenomenon,” Treasury Secretary Janet Yellen told CNBC in an interview that aired Thursday.

“But I think over the medium-term, we’ll see inflation decline back toward normal levels,” she added.

If we switch to the Washington Post we see two other tactics in play.

Speaking at the White House on Monday, the president said “no serious economist” believes “unchecked inflation” is likely. He blamed the rising cost of living on the strains of economic reopening.

“You can’t flip the global economic light back on and not expect this to happen,” Biden said.

As I have already pointed out the Federal Reserve did not expect this to happen and throwing insults such as “no serious economist” only reveals the pressure they are feeling.

The Problem

Part of it was highlighted in the Washington Post.

Only once in six years had Mark Maguire raised prices at his North Dallas restaurant.

Then, some of his employees, no doubt noticing the banners touting $1,000 signing bonuses at other eateries, demanded higher wages. And his suppliers hiked the cost of chicken, beef and cooking oil.

Maguire’s costs rose so much so fast that he has had to rewrite his menu prices twice since March. Whether additional increases will follow depends upon a complex interaction of food supplies, labor availability and a shape-shifting virus.

Although there is for those who prefer theory over practice the analysis of Mark Zandi of Moodys which has been quoted by President Biden.

Worries that the plan will ignite undesirably high inflation and an overheating economy are overdone.

In a way that is true because you cannot ignite something which is already burning. Then we get his demand pull style theory.

The fiscal support it provides is only sufficient to push the economy back to full employment from the recession caused by the COVID-19 pandemic.

Yet only a sentence later the he seems to be not so sure.

Because the package includes a myriad of spending and tax initiatives, some of which are new and uncertain,

Renewable Energy

This is an associated problem for the inflation debate. President Biden plans a big increase in renewable energy but the UK which has already invested heavily in this is today highlighting what always was the obvious flaw.

GB Grid: #Wind is generating 0.11GW (0.33%) out of 33.61GW

So much for the UK being the “Saudi Arabia of wind power” as Prime Minister Johnson has claimed. Also something which we were supposed to be consigning to the past is seeing a surge.

COAL MARKET: Asian benchmark coal (Newcastle 6,000kc/kg) spikes to a fresh 13-year high of $163 per tonne. For a commodity that was left for dead, Australian (and other) coal miners are making this year an absolute killing ( Javier Bias Bloomberg )

We keep being promised electricity will get cheaper and yet the same source reports.

Spanish wholesale electricity prices have now surged to a record high of €106.57 per MWh, surpassing the previous peak set in 2002. Power prices are turning into a hot political potato in some European countries this summer.

Curious because we kept being told Spain’s solar power was booming and the price dropping. One factor I have spotted from the UK data is that solar takes time to build within the day. For example at 10 am UK production was 3.5 gigawatts out of a maximum of about 8. So even on a hot July day it takes its time.

See also  Markets no longer see inflation as a transitory phenomenon...

Thus unlike Moodys I am expecting longer-term inflation from this source. Hopefully there will be advances but with the plan to switch to electric vehicles we look to be creating a problem.

Comment

We have learnt over time that an official denial is tantamount to a confession. But as we survey the scene I see much that is familiar. One example of this is from Dylan Patel os semi-analysis.

Semiconductor shortage alone is causing nearly 2% of inflation! People often say inflation is going nuts, but most of CPI inflation is due to used car prices, vacation travel boom, and energy prices. Once you remove these, inflation is manageable.

We always see claims that there is little inflation via excluding the things which are going up! I note his chart uses only the lower core CPI. But if you are going to take things out surely you should put in things which are omitted like house prices. I am sure you have already figured why he has not done that.

Some elements will change and fade but others will emerge. For example whilst Imputed Rents are a fantasy  they will presumably pick up in response to higher hour prices. They will remain a poor guide but at 24% of the index even a small move will have an impact.

Returning to President Biden the idea that US $4 trillion of spending will not create inflation is an extraordinary effort. But in one area I do have sympathy because much of what is happening now relates to the decisions made before his term.

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