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Wrong Direction

09/14/2022

Unfortunately, today’s release of the Producer Price Index confirmed yesterday’s Consumer Price Index.  Prices are still going up, although not as rapidly as before.  On a year-over-year basis, consumer prices went up 8.3%, while producer prices went up 8.7% – both more than expected!

We are already experiencing a mild recession, which suggests a “soft-landing”.  That means it won’t be necessary to trigger a “real” recession, in order to squash inflation.  However, three consecutive interest rate increases of 75 basis points (0.75%) does make us vulnerable to recession, and we expect another 75 point increase next week which makes it probable.

Earlier, I advocated an immediate 100 point increase — “to rip-the-bandaid-off.”  Raising interest rates, as a monetary tool, is a blunt instrument, hurting a broad group of Americans, reducing their ability to buy goods.  It also takes 9-15 months to see the impact.  That’s why I had hoped for a bigger rate increase sooner.

There are at least three new factors going into this recession.  One is the effectiveness of quantitative tightening (QT).  We know it will help significantly, but we don’t know how rapidly.   Another factor is the health of our job market.  Although hiring is slowing somewhat, the job market has gone from white-hot to only red-hot.  Getting workers back into the workforce would help tame inflation more than you might expect.  The third unique factor is the never-ending supply-chain problems, which originally plunged us into a mild recession and continues to confound the efficiencies of capitalism.

Now, before we feel too sorry for ourselves, let us remember Fed Head Volcker faced inflation of . . . 14% . . . making our 8% rate look puny?

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