There is a group of people who are very important to the national economy that speak often but never receive adequate press coverage. There people are the various heads of regional Federal Reserve Banks. Over that last month, their message has been consistent: they are concerned about inflationary pressures in the economy.
Atlanta Federal Reserve President Jack Guynn on October 3:
“I consider inflation risks to be elevated at the moment, he said. “I think one has to give considerable weight to the fact that not only in some of the headline measures, but in some of these core measures, we may see the pass-through of at least some of the energy cost increases.”
Federal Reserve Bank of Kansas City President Thomas Hoenig on September 26:
Hoenig noted that the consumer price index has already pushed up significantly from a year ago, thanks to high energy prices, while unit labor costs were rising and economic capacity was being absorbed by the strong U.S. economy.
“When you see all three coming together you must be alert,” he said. “The mission of the Fed is to be sensitive to these pressures.
San Francisco Federal Reserve President Janet Yellen on September 27:
She said higher energy prices “put U.S. monetary policy on the horns of a dilemma” as policymakers balance possible passthrough of prices to core inflation against potential long-lasting cuts in consumer spending if high prices persist.
“Estimates of the extent of spending are escalating, and the recovery and bounce-back, fueled by massive fiscal stimulus, could propel the U.S. economy on an unsustainable upward trajectory,”
Chicago Feder Reserve President Michael Moskow on September 26:
Michael Moskow said there may still be excess capacity in the nation’s economy but that inflation is running at the upper end of the Fed’s comfort zone – a position he’s offered in other recent speeches.
First, let me offer some explanations. The Fed’s policy is accommodative when they was the economy to expand. This means lowering interest rates to a low-enough point to stimulate borrowing. The Fed’s policy is neutral when they feel rate levels are low enough to stimulate economic growth through borrowing and high enough to prevent inflation from increasing. The Fed’s policy is restrictive when rates are high enough to prevent economic growth and inflation. There is no empirical formula to derive these levels. It is largely based on the personal perception of various members of the Federal Reserve.
So, what are they worried about? First there is the increased cost of energy. That is concern enough. However, there are indications at other levels of the economy that inflationary pressures are increasing. Each month, various Federal Reserve regions issue a regional manufacturing report that is broken down into various sub-categories. The price categories of these reports have all shown a recent sharp increase in prices. The Empire State Index’s recent prices component increased by 20 points. The most recent Richmond Federal Reserve Survey showed an increase in the projected prices paid for future manufacturing inputs. The most recent Philadelphia Manufacturing Survey also showed a sharp increase in prices paid by manufacturers.
Several non-Federal Reserve Manufacturing reports have also showed a similar increase in prices. The recent National Association of Purchasing Managers Index showed a 14 point increase in its most recent survey. The latest ISM Manufacturing survey showed a sharp uptick in prices as well.
All of the above indicators occur in the economic chain before the consumer price index; they occur in the production of goods the consumer buys. As a result, these price increases may not have passed onto the consumer yet. However, it is only a matter of time. As a result, expect more Fed rate hikes.
Curious to get your informed reaction to Stirling Newberry’s diary over at dKos the other day, which predicts inflation and other apocalyptic results.
I am prone to the apocalyptic, probably unreasonably so, since the economy has been churning along these twenty years of my adult life, even though I always see the sky falling. But, I wondered what a more informed analytical mind would think of these things.
Of course, should you actually have a life (unlike me presently) please ignore my request. I don’t mean to make work for you.
As always, thanks for the economic updates.
It’s possible. I am bearish on the next year+, but not apocolyptic. At least not yet. However, there are a lot of elements coming together that are not promising for the long-term economic situation.
As a result, these price increases may not have passed onto the consumer yet.
Yep, they have. One example: A can of cream of mushroom soup was 54 cents two weeks ago; yesterday it was 64. Since I have not seen a demand increase on mushrooms, I must assume the jump is caused by increased transportation costs. Also, gas bounces between $2.89 and $3.09 around here, an increase of over 50 cents/gal in the last two months.
Someone on another page commented she can’t fill up her Honda on $20. That should scare everybody.
on $24.00
It cost me $37.00 to fill up our Honda Civic Hybrid last week.
One of the ways I keep our household prices down is by making a price book for things we commonly buy. I note the lowest sale price (so I can stock up) and the common price. These are the items that were above the common price yesterday:
unbleached white flour +30 cents/ 5 lb
apples +25 cents/ lb over last fall
squash, sweet potatoes + 45 cents/ lb over last fall
cheese – usually has a decent sale every month, one month overdue.
meat- legs and thighs on “sale” at $1.35 / lb. Ha. )I still have a freezer of london broil I got for $1.50/ lb.)
In general fruits and veggies are WAY up, and the seasonal price drop I usually get at this time of year hasn’t happened for the fall crop.
Also expensive are OJ and butter. I feel it everywhere. We’re living on one teacher’s salary remember!
Even filling the Prius costs more than $30, and it goes 450 miles on its 10.5 gallon tank. I either ride my bike to work or carpool in the Prius with my wife, so the direct cost of gas is just something to whine about for us, but every time I see an 18-wheeler, I wonder what pressures this is really creating…
We started shopping two days ago.
Excellent! Ignore the Consumer Reports spiel on hybrids. Even in the cold of an Alaskan winter, with no garage and a cold 3 mile drive to work we never got below 37 mpg. Now we average around 50 and I even have the automatic version.
Good luck and enjoy the tax break.
What do ya’ll knwo about used hybrids? Are there even any out there? I would love to get one, but I know we can’t afford a new one! Neither can we afford to drive the Explorer — I rue the day that my in-laws gave that things to us — I wanted to turn around and sell it right away, but thought that would be too insulting to them. It was a really great gesture, but even last October (when they gave it to us), I was appaled at the gas milage it gets….
I have a 75 year-old friend who bought a used 2003 Prius earlier this summer. I think he traded up from a 2000 model. Fargo dealers offered him $6,000 on the 2000 model, he got $12,000 off the 2003 from a place in Dickinson ND, near the Montana border.
So it might depend quite a lot on the region you live in. I’d say a few calls out into the hinterlands within the mid west might be productive.
So far here in Fargo I’d say the hummers outnumber the Prius-es, but I see more and more of the latter, so there’s some hope.
My friend is very happy with Prius behavior regarding winter driving. We got 52mpg on a trip to MPLS. I think he said he gets 42 for around town driving.
Thanks for the info., NDD, of course, right now, we are stuck with what we’ve got, until the bankruptcy discharge comes through (about 6 weeks) and even then, I still need a job first, but it’s good to know that there are some used ones floating around — maybe by the time we can afford one, they’ll be even better ones available…but MAN, 42 MPG sure sounds incredible!!
$47.00 to fill up my Honda CRV. Luckily, I only drive it about 3 times a week (my office is in the house), but it still hurts, considering that when I bought it in 1998, I couldn’t put a whole $15.00 worth of gas in the tank.
We belong to our local CSA, so that has been a fixed price for produce for the summer, but I am not looking forward to the winter when we have to make do and pay the price for what’s at the store.
Impact on Trades
Truck w/trailer – 12mpg (Diesel) current price in MI $3.15/gal. Miles/year 40k.
Just upped my rates by 12% to cover fuel. Good news, Bio-diesel delivered in bulk is now about the same price as pump diesel +/- $.05/gal.
Ditched the minivan this summer, bought a used Saturn. Went from 21 mpg to 44 mpg.
Even so, filling up is a scary prospect.
I am very money conscious, we live on a fixed income! I always have a little extra money at the end of every month, I don’t have to balance my checkbook every time I write a check. Wow has the price of fuel face planted the consistency financially that I am used to. I am careful with credit cards and always have a repayment plan that is realistic when they are used. I am careful…..more so than most people I know. I am feeling it! My husband and I as of today have shifted to driving the economy car for myself and the kids and he is taking his motorcycle more regularly now. If careful people are having to make adjustments…people who are good at managing their finances….what is this going to do to those who aren’t? What is happening to those who live paycheck to paycheck? I have a good idea of what it has and will do to the poor, but the people who are one paycheck away from joining them are going to be devastated really really quick!
Suddenly, I’m getting a very bad feeling about the next few months. The ISM released their service sector report today. The prices paid component jumped as well. This is not good.
Is it just me, or is this really starting to look like we’re headed into the 1970’s stagflation scenario again? (ugh!) Are there things we learned from the 1970’s that the government should be doing now and isn’t?
I don’t know. But I think it is something I will write about.
Dallas Federal Reserve Bank President Richard W. Fisher says record energy prices have pushed inflation to the top end of central bankers’ tolerance zone.
http://www.dallasnews.com/sharedcontent/dws/bus/stories/DN-fisher_05bus.ART.State.Edition2.1395847e.
html
There’s been an additional chorus from other Fed presidents today. It’s a near unamimous chorus on the issue now, indicating they are really concerned.
Bonddad, Do you think all of this hand wringing from various Fed Governors is a foreshadowing of a change in policy post-Greenspan. In my view, Greenspan has helped to create various bubbles including the internet one and this housing bubble by keeping monetary policy too loose, and failing to account for our current government spending like drunk sailors.
The markets seem to share your pessimism. Perhaps the NYSE floor traders have also received their first upwardly revised heating oil bill.
That’s a really interesting comment, and one that I hadn’t considered. I can’t give a definitive answer either way.
Greenspan is definitely responsible for the housing bubble. With bush’s tax cuts the economy did not need the extra boost of super low interest rates. Greenspan has been spiking the punchbowl with his rate policy. He once was a smart man and I think he erred on the side of caution thinking we would tank. But he should have realized that when everyone is drinking the punch, things are going to get wild.
Clinton had to cut the deficit in half to 140 billion in order to get Greenspan to ease rates. Thats BEFORE Greenspan would ease. Greenspan is less demanding of the Republican president. He gave him the financial equivalent of the world with that kind of easy monetary policy after 9/11.
Especially after the massive and irresponsible tax cuts. If the dollar doesn’t fall off a cliff it will be a miracle.
I think we are seeing the start of the downturn that so many of us have been predicting for the last three years (you know the old saw — predicting four of the last 2 recessions, and all that). The housing bubble has obviously burst — the air is going out slowly, thankfully, but it is going out. The last two days of market slide are in my opinion, a harbinger of a much more prolonged slide, as interest rates rise, profits fail to rise in the degree required to sustain present valuations, and the decline in consumer confidence plays out in slower Christmas sales.
All of this is just talk, of course, but there are times — like before a blizzard in my part of the world — where you can feel a change. I think we are in that time. The economic chickens will come home to roost at a time when the government is under siege for its failures in Iraq, Plamegate, and the multitude of corruption cases. This looks like a force 5 hurricane forming.
It is beginning to feel like that.
We’ll have to see how the market ends the week. As of Wednesday night, the market is on very shaky technical ground.
IIRC you are a Houstonian.
What are all the plastics manufacturers saying/doing about $14/MMSCF nat gas? That’s the equivalent of $84 crude vs half that before Katrina. My limited knowledge of those ethylene manufacturers down there says that they are all natgas based and not set up well to take in naphtha as a substitute (not that that would help much at $2/gallon mogas).
If the plastics industry has a doubling of raw materials cost it has to flow through damn near everywhere in our economy once their hedges are gone….
I have no idea.