Weekly Commentary

Federal Reserve Chairman Kevin Warsh is a very good economist and occasionally emphasizes the point by indulging in the long, nerdy answers that delight the profession. It would thus be interesting to see what would happen if, at the press conference following the Federal Open Market Committee (FOMC) meeting on October 28, someone would ask him about the likely success of “Index suppression” efforts. Economists generally view temporary actions taken by regulators, legislators and/or the executive branch of government (White House, Treasury) to reduce select prices and manipulate inflation indices as just that — temporary— and often having adverse consequences. Nevertheless, the political temptation can be strong and irresistible.

Inflation is a real problem.  If you are a central banker, anywhere, the proper response to that statement is “of course.” Some economists, pre-disposed to equivocating, might answer “maybe”; Exhibit No. 1 is John Maynard Keynes who famously observed that a little inflation can be a good thing when trying to pull an economy out of the doldrums. (Exhibit No. 2 would be Japanese economists who watched the country struggle with deflation for many years.) The US inflation numbers released last week for consumer prices, producer prices and import prices put great emphasis on the reality, however: upward pressure on prices has now spread across the US economy, appears to be accelerating, is no longer attributable to “special statistical circumstances” such as the calculation of rent, and has caused real wages — wage growth in excess of inflation— to fall.  Furthermore, as has become increasingly apparent, the cumulative effect of years of elevated inflation has raised price levels to a pain point for many households.

US exports increased in August, but not nearly enough to counter surging imports.  Energy played a role on both sides of the equation. As has been much discussed, diesel and LNG are exported in significant volumes.  Less commonly highlighted are the imports of crude oil required by Gulf Coast refineries  which are not configured to use the type of crude produced domestically; continued conflict in the Straits of Hormuz have kept the price of that imported crude high.  Capital goods imports, especially tech imports such as semiconductors, were also strong and at higher price points.

Euro Zone inflation rose to an uncomfortably high 3.8% in August.  More inflation and economic data for Europe will be forthcoming this week, along with a number of speeches by European Central Bank officials. Despite signs of a further slowing in economic growth, it is highly likely that the ECB will continue to take a tough line on raising interest rates in an effort to slow the escalation of prices.