There is almost no inflation, and the markets love it, as both stocks and bonds are rallying on news. The Consumer Price Index rose just 1.5 percent in February, and its core without more volatile food and energy prices was up just 2.1 percent. The Fed has even stopped raising their short term rates, in an attempt to boost inflation higher, but no dice. It won’t move at all, but is falling.
So where’s the inflation that should normally be rising close to 3 percent through most of 2017 as the graph shows? Then the Republican tax cuts gave artificial stimulus to economic growth, so much so that Q2 2017 GDP soared to a 4.2 percent growth rate.
But corporations and rich folk who benefited most from the cuts pocketed it, so growth slowed to 2.6 percent in Q4 and is predicted to be less than one percent in the first quarter of 2019. All that largesse wasn’t invested in much that was productive, in other words; what economists call capital expenditures; and corporations did not pass on its benefits to their employees in higher wages or benefits.
Growth fell because it didn’t affect the other 99 percent of income earners, whose incomes are slowly increasing, but not fast enough to push up their spending. In fact, retail sales are miserable at present, up just 0.2 percent in January, after declining a minus 1.6 percent in December, which puzzled many economists.
Stocks plunged in December as well, until the Fed reversed course and decided to be “patient” before raising their short term rates further, which had pushed the Prime lending rate to 5.5 percent, on which credit card and installment debt base their rates. Consumers then apparently decided to park their shopping carts rather than splurge during the holidays.
“But when excluding autos, where sales were very weak in January, the latest month shows a very strong 0.9 percent gain that hits the top of Econoday’s consensus range,” said Econoday. “The report’s two core readings — less autos & gas and the control group — also show outstanding gains, of 1.2 and 1.1 percent respectively that reverse tremendous weakness in December at revised losses at 1.6 percent and 2.3 percent.”
So what do we make of what is really disinflation, the economic term for falling inflation, that the Fed fears most of all because it signals consumers are buying less? It means consumers that make up two-thirds of economic activity are saving more with their personal savings more than double since the last recession. Could it mean consumers also fear another downturn; even another serious recession? Maybe the shock of the Great Recession hasn’t worn off, since most consumers have yet to benefit from the now 10-year recovery.
Harlan Green © 2019
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