Despite big gains in the stock market today after wildly volatile trading, the Dow swung down about 1,500 points and then up, the fact remains: The CPI came in much worse than expected in its final pre-election reading.
There was a big drop in stocks on the news, and it looked like the short coverage took over the rest of the day. This kind of fluctuation is an unhealthy sign. Buyer’s responsibility. Whatever the reasons, I think the outlook for stocks and bonds is very risky in the coming months.
Meanwhile, the inflation account was very poor. Inclusive, CPI rose 8.2% for the year. Core, excluding food and energy, is up 6.6%, and this core rate is the largest rise since August 1982. Numerous signs of strong and widespread price pressures are throughout the report.
Average CPI, it’s a very useful indicator, and its spending weight is exactly the 50th percentile of all price changes, well, that’s up 7% year over year. It continues to rise steadily month after month.
Now, looking at the CPI cap, grocery prices are up 13% over the year, food prices are up 11%, shelter prices are up 6.6%, and used car prices are now down 1.1% in September — but auto parts are up. Eight-tenths, insurance is up 1.5% and maintenance and repairs are up nearly 2% on the month. Keeping that car on the road will cost you more, and by the way, prices for new cars are up seven-tenths this month.
Meanwhile, Medicare services rose a point for the month. Total services are up 7.4% for the year, and energy use is up – still up 6.7%. While it is quite true that the prices of goods have calmed down, behind the rise in services – and this is a key point – is the wage component, OK? With the Atlanta federal wage rate up 6.7% for the year, people are forgetting the importance of a wage increase in these service rates. It’s a big part of the ongoing inflation problem. Now I apologise, I hate to bore everyone with all these numbers, but the facts are important. I know this is a new idea, but it is important.
Meanwhile, some real median weekly wages since January 2021 have fallen by 5.5%. Real hourly wages have fallen 18 months in a row with the latest annual reading down 3.8%. In other words, Working people lose a lot of time. Their wages are going up, but inflation is going up even more. This is still the soft underpinning of Biden’s economy. Middle-class people are under fire for high prices, but if you think the inflation account is bad, cash accounts are just as bad – and possibly worse.
It is true that the Fed has decided to raise rates by 75 basis points, and more will come in November and December, and possibly next year. If it was up to me, I would raise the full percentage. Simply take the band-aid off, pour some cold water on the wound and it will heal, but there is still quite a bit of extra money in there. This is what the Fed has failed to deal with.
Bank reserves have increased by $3 trillion, twice what they were in the pre-pandemic period. The so-called “reverse repo agreement”, where the Fed drains money every day and then returns it overnight, is in any case $2.6 trillion. That’s like nine times the scanning process before COVID.
The Fed says it’s running out of $95 billion in bonds a month, but in reality, it’s not. In the past four months, they took only $164 billion. It must be double that. not enough. The total balance sheet does not exceed $9 trillion. Pre-pandemic – $4 trillion.
If inflation is defined as too much money chasing too few goods, we can still have too much money. This is the main problem. It raises prices, raises wages and deteriorates living standards.
I spoke briefly with Art Laffer today, who will be at the show tomorrow, and he said the Fed should only allow interest rates to seek their own level, while the central bank is dumping the excess money. What about that?
Now, the last point: One way to absorb excess money is to produce more goods, but we are not. Biden’s Socialists were spending heavily. Not a production tear, a spending tear.
The Central Bank of Oman has just repriced student loan cancellation at $400 billion. Actual values could potentially reach $500 billion to $1 trillion. The semiconductor bailout bill was about $300 billion. The so-called “Inflation Reduction Act” could end up with $800 billion in renewable tax credits. The budget deficit has been reinstated to $1.4 trillion this year. Business taxes were raised, stock market taxes increased, and the regulatory war on fossil fuels and business in general continued.
Biden blames Saudi Arabia and OPEC, when all he has to do is unleash production. There is a very new idea. Biden says inflation is falling, but his spending continues to rise. Instead of work effort, we have an end to work and work requirements. Instead of incentives to grow the economy, we have racial justice and ESGs spread throughout the federal government.
you know what? The best racial justice I can think of is to grow the economy by 5 or 10% to get out of the recession. After Trump’s successful tax cuts, minority unemployment has fallen, poverty rates have collapsed and inequality has fallen. Now that’s racial justice.
Growth is good. Growth will absorb the excess money. Supply-side growth will make the Fed’s job much easier. The Federal Reserve is not an angel. They backed all this crazy Federal spending and of course they were in denial about the inflation problem until recently.
Now, the last point: the elections are in two weeks. Inflation remains the number one problem. Inflation and the economy, a crime. I think the Biden Democrats are heading for whooping. They deserve it. Socialism never works. The cavalry is coming.
This article is excerpted from Larry Kudlow’s opening comment on the October 13, 2022, Kudlow edition.