The Fed promotes “Core” inflation which excludes Food and Energy price increases – two of the largest expense categories for many Americans along with mortgage and car payments. I would be surprised if the two broad CPI components – Food and Energy – are not higher for the month of December with Food prices continuing higher for months.
Food prices continue to climb – whether “food at home” or “food away from home”. Egg prices continue to climb sharply (up 67% at my local farm over the past two months), as do dairy products. Other grocery items continue to climb, although perhaps not as sharply as 6 months ago. Food prices have climbed so much over the past two years that it does not matter so much if price increases are slowing on a percentage basis. Food price increases have been so pronounced that they have altered purchase behavior which means discretionary items (food and otherwise), will see slower growth or absolute declines depending upon the item. Those items will encompass everything from video games, to high-end baked goods, high-end cuts of meat to clothing items, travel and more. Some of these discretionary categories have already felt pain as have other discretionary categories). The damage is done and will be reflected in the broad economy for the duration of 2023 if not longer.
Energy pricing is more of a wild card than Food price increases. We had a cold snap in the Northeast over the past week but that has subsided. Colder weather is on its way later this week and January is historically the coldest month of the year. I don’t believe it is a safe bet to assume that energy prices will continue to roll over. Oil prices could very well maintain the upward trend they have enjoyed since early December. Oil is of course only one form of energy and time will tell if energy prices broadly-defined will strengthen or weaken.
The Fed can fix it. Or can it? Former N.Y. Fed President Bill Dudley states that the Fed can quickly reverse the recession that it is engineering simply by loosening monetary policy. I don’t see it that way. Let’s say CPI gets down to 4% or so during 2023 as the Fed-engineered recession kicks in and unemployment grows. How will lower rates, QE and fiscal stimulus make everything OK? Those actions would send inflation back on an upward trajectory, only CPI will be starting from a higher point than it did this past go ’round. The Fed playing the role of economic white knight over and over is not sustainable nor sound monetary policy.
Fiscal Policy is another wild card that could drive the inflation ship higher. We have a general election coming in 2024 and the Biden Administration will want to show nominal GDP growth which means more stimulus could be headed our way – inflation be damned. Fiscal Policy is the tail that wags the dog. Watch how quickly the Fed and Monetary Policy take a back seat to Fiscal Policy when election season rolls around. One would hope that a GOP-led House would kill stimulus in its tracks, but this GOP is feckless and certainly not the stuff of Presidents Ronald Reagan nor Calvin Coolidge.
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