Whistling past the graveyard*

Fed Chair Jerome Powell may have sworn off describing the current level of inflation as "transitory", but his boss President Biden is still singing from the old hymnbook. Biden's response to the US CPI data for November that were released this morning shows that he realizes that the soaring cost of living is very much top of mind for American voters, seemingly overriding the feelgood effects of strong GDP growth and rising employment.

The raw numbers released by the BLS are startling, even if they are broadly in line with market expectations. Headline inflation rose 6.8 percent year-on-year, the highest print since June 1982,  when Paul Volcker was Fed Chair.  A 58 percent leap in gasoline prices was the most conspicuous contributor to the headline number. However, even stripping out volatile food and energy prices, year-on-year core CPI stood at 4.9 percent, its highest level since 1991 and obviously way above the Fed's comfort level.

President Biden's reaction smacks ever so slightly of desperation, not least in the fact that he tried to get his retaliation in early by speaking out before the data were officially released:  "Tomorrow, we will get a report on consumer prices that experts expect to be elevated again, driven in part by energy prices and used car prices. Fortunately, in the weeks since the data for tomorrow's inflation report was collected, energy prices have dropped. The price of gas at the pump has already begun to fall nationally, and real pump prices in 20 states are now lower than the 20-year average."

Well, maybe, but basing one's forecast on literally three weeks of anecdotal data seems very unwise. If you just want to look at recent data, here's another take. The monthly rise in headline CPI was 0.8 percent in November, versus 0.9 percent in October. So for those two months what we might call the running rate of inflation was edging into double digit territory. For core CPI the numbers are a little less extreme, but still annualize to something like 6 percent, suggesting that this more reliable measure still has further to rise, whether President Biden likes it or not. 

The FOMC's final meeting of the year is set for Tuesday and Wednesday next week (December 14-15). It should be a lively session. There is every reason for the Fed to accelerate its QE taper strategy and strike a clearly hawkish tone on the likely timing of rate hikes. Failure to get ahead of inflation risks a return to the Volcker era, which is surely something nobody wants.

* Yes, I know I have used this title before, more than a decade ago and in a very different context. My blog, my rules.