News: Inflation sizzles ahead of Powell testimony — Larry Summers vindicated?

Wednesday, July 14, 2021

Inflation sizzles ahead of Powell testimony — Larry Summers vindicated? — Dems unveil go-it-alone plan

Jul 14, 2021

By Victoria Guida and Aubree Eliza Weaver

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Quick Fix

Inflation sizzles ahead of Powell testimony — Inflation is running hot, and for now, that's all we can say for sure in the debate about when or if it will begin to cool. The consumer price index rose 5.4 percent in June from the same month last year, the biggest jump since 2008 and higher than expected. The question that Federal Reserve Chair Jay Powell will get today at a widely anticipated hearing before the House Financial Services Committee is whether his argument that faster price increases will be temporary still holds up. But in that debate, it gets kind of lost that we're using the term "inflation" to cover a lot of scenarios.

Essentially, some of the inflation we're seeing now is a result of prices being compared to last year, when they grew less or even dropped because of the pandemic. And then we're getting some inflation from the sheer oddity of the current situation, where not everyone is ready or able to go back to work; and demand is unpredictable as the economy reopens, making it hard for suppliers to keep up.

The latter scenario — "transitory" inflation — actually doesn't have much to do with the kind that the Fed was seeking when it set up its new policy framework in August 2019, under which it pledged to wait for noticeably faster price increases before raising interest rates. What the central bank wants is slightly higher inflation caused by a healthy job market where employers have to compete for workers and growth is robust enough that employees see real wage gains, not just inflation-boosted pay.

There are other scenarios where we have transitory higher inflation that lasts uncomfortably long. For example, the housing market could boost inflation for a while; shelter costs started to jump in June. But the Fed still might not consider that a long-lasting shift in the inflation rate. "The Fed would likely view shelter inflation as yet another transitory factor associated with the pandemic," said Roberto Perli, founding partner of research firm Cornerstone Macro and a former Fed economist.

For now, the central bank's assumption is that the job market isn't as tight as it seems in many places across the country (job opening signs abound). When schools reopen, enhanced unemployment insurance benefits expire and the health situation brightens further, the supply of labor could suddenly grow.

What else would cause "persistent" inflation, other than a tight labor market? The Fed often cites a murky concept: "inflation expectations."

Basically, all we really need to have inflation continue to go up is for everyone to expect it to. Suddenly, businesses feel emboldened to raise prices because people are used to it, and/or they think they need to because their costs have gone up. And maybe people think they need a higher cost-of-living adjustment in their wages than they used to. It's an intuitive but vague concept that your guest host doesn't pretend to entirely understand, but it's measured through consumer and business surveys and bond market behavior.

In the meantime, all this inflation isn't irrelevant. It's eating up a fair amount of those wage gains that worker advocates have been cheering. "There's obviously a fair amount of nominal wage growth right now, but at the same we're seeing inflation really, really surge," said Nick Bunker, economic research director for North America at the Indeed Hiring Lab. "Part of the transitory story is that the pace of increase in the price levels will slow down, not that deflation will catch up. … Maybe we can have some of that recoupment where real wages pick up and account for this period of weakness."

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Driving the Day

Earnings season continues with Bank of America, Citigroup and Wells Fargo … Powell testifies before House Financial Services at noon

LARRY SUMMERS VINDICATED? — Our Ben White: "There is a new fear circulating inside the West Wing of the White House: Maybe Larry Summers was right. The former Treasury secretary has been warning since February that President Joe Biden's big-spending agenda was creating the risk of an inflation spike this year, potentially cutting into the economic recovery from the Covid-19 pandemic. For the moment at least, Summers is looking prescient.

" … The numbers beat Wall Street expectations and fueled fears that the Federal Reserve might have to act faster than anticipated to pump the brakes on the economy to prevent a runaway rise in prices. Summers has vexed the White House and infuriated Democrats with his repeated alarms about Biden's plans to spend trillions of dollars more in federal money, though he favors more infrastructure investment."

MM sidebar: Ben also reports that Larry Summers met with White House economic officials Brian Deese and Cecilia Rouse on Tuesday, a tidbit scooped by Bloomberg.

DEMS UNVEIL GO-IT-ALONE PLAN — Our Caitlin Emma and Jennifer Scholtes: "Senate Democrats announced a top line budget number late Tuesday that will propel their plan to enact the full array of President Joe Biden's social welfare and family aid promises without Republican votes.

"The proposal sets an overall limit of $3.5 trillion for the spate of Democratic policy ambitions that won't make it into a bipartisan infrastructure deal, if Congress can reach one. Formal text of the Senate's budget resolution has yet to be released. If that measure can clear both chambers with lockstep party support, it will unleash the power to circumvent a GOP filibuster using budget reconciliation, the same move that Democrats used to Senate Democrats announced a top line budget number late Tuesday that will propel their plan to enact the full array of President Joe Biden's social welfare and family aid promises without Republican votes."

FED'S BULLARD: TIME IS RIGHT TO PULL BACK ON CENTRAL BANK STIMULUS — WSJ's Michael S. Derby: "Federal Reserve Bank of St. Louis President James Bullard is ready to start slowing the pace of central bank bond buying as soon as his colleagues are, worried in part that the purchases risk overheating the gangbusters housing market. 'I think with the economy growing at 7 percent and the pandemic coming under better and better control, I think the time is right to pull back emergency measures,' Mr. Bullard said Monday in an interview with The Wall Street Journal."

JUST IN: SURVEY: FEW UI RECIPIENTS FEEL BETTER OFF THAN PRE-COVID — Only 20 percent of people getting unemployment insurance who previously worked full time and only 28 percent of UI recipients who previously worked part time say the money does a better job of covering their expenses than the money they used to earn, according to a new Morning Consult survey. "These survey results strongly reject the narrative that all UI recipients are doing better financially than they were prior to the pandemic," writes John Leer, chief economist at the data intelligence firm.

Using the survey, Morning Consult estimates that 1.84 million jobs could be filled by the end of the year as a result of enhanced unemployment benefits expiring, leaving the economy still 4.7 million jobs short.

SEC HITS SPACE SPAC DEAL WITH $8M FINE — Our Kellie Mejdrich: "The Securities and Exchange Commission on Tuesday said it levied an $8 million fine against space transportation firm Momentus and a blank-check investment company seeking to take it public after they misled investors about the startup's technology and national security concerns surrounding its Russian founder.

"The SEC settled the charges with Momentus as well as with Stable Road Acquisition Company, its sponsor SRC-NI and its CEO Brian Kabot. Momentus founder and former CEO Mikhail Kokorich — a Russian citizen — is fighting the charges, and on Tuesday the SEC accused him of fraud in federal court."

GOP RALLIES AGAINST CFPB NOMINEE — Our Katy O'Donnell: "Senate Republicans are ramping up opposition to President Joe Biden's nominee to lead the Consumer Financial Protection Bureau ahead of a confirmation vote expected later this month.

"Every Republican on the Senate Banking Committee, which has jurisdiction over the bureau, signed a letter Tuesday saying that Biden's pick — FTC Commissioner Rohit Chopra — failed to answer lawmaker questions about reports of career staff being pushed out at the agency and that the lack of response was 'disqualifying.'"

DIMON SAYS THE U.S. CONSUMER IS RARING TO GO — WSJ's David Benoit: "JPMorgan Chase & Co. said second-quarter profit surged and customer spending is returning to pre-pandemic levels, evidence of a strong economic recovery that shows few signs of slowing. The nation's biggest bank posted a profit of $11.95 billion, or $3.78 per share, compared with $4.69 billion or $1.38 per share a year ago. That beat the expectations of analysts, who had predicted $3.20 per share."

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Fly Around

GROWTH STOCKS PUSH S&P 500, NASDAQ TO RECORD HIGHS — Reuters' Devik Jain and Shreyashi Sanyal: "The S&P 500 and the Nasdaq scaled new peaks on Tuesday, helped by a rise in mega-cap stocks and a positive start to the earnings season, while a solid rise in consumer prices in June weighed on sentiment. Only four of the 11 major S&P 500 sector indexes were trading higher, with the technology sector rising 1.1 percent to also hit a new peak, supported by heavyweights including Apple Inc. and Microsoft Corp."

MANAFORT BANKER CONVICTED IN BRIBERY SCHEME — Our Josh Gerstein: "A Chicago banker who arranged $16 million in loans for former Trump campaign chairman Paul Manafort was found guilty Tuesday on charges of seeking to trade the loans for positions on the Trump campaign and in the Trump administration.

"... Prosecutors alleged that Calk pushed to approve the loans to Manafort while seeking a post on the Trump campaign's Economic Advisory Board and sought a series of Cabinet posts and other jobs after Trump's win in November 2016, all while continuing to urge more lending to the lobbyist and high-flying political consultant whose career imploded soon after Trump took office."

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