“Triggering substantial changes”
As the saying goes, the first step to recovery is admitting you have a problem, which means that perhaps the Fed is (to mix metaphors) on the path from Denial to Acceptance as far as inflation and supply chain problems are concerned.
In a research article from earlier this month, “Are Logistical Bottlenecks Easing Yet?” the Richmond Fed looked at an array of supply chain metrics. They concluded that while the I.S.M.’s Supplier Deliveries Index was getting worse, “other data are providing more encouraging signals”, including the Richmond Fed’s vendor lead time index, which had improved slightly in September. However, in a perhaps unusual admittance of some of the ways that data can miss the forest for the trees, their report conceded that “the knowledge that ‘things are getting worse, but not by as much as last month’ is of little comfort to businesses challenged by shortages of raw materials and intermediate goods.” They even broke from the “transitory” party line, admitting that supply chain problems raise “the possibility that today’s temporary supply bottlenecks might create permanent changes in ways of doing business – changes that might also make the inflationary pressures we’re experiencing today more persistent”.
In a speech a week later, “U.S. Economic Outlook and Monetary Policy”, Vice-Chair Clarida explained that “the reopening has been characterized by significant sectoral shifts in both aggregate demand and supply, and these shifts are causing widespread bottlenecks and triggering substantial changes in the relative price and wage structure of the economy”.
In his recent speech, Governor Waller went another route, offering “a Cautionary Tale on ‘Idiosyncratic’ Price Changes and Inflation”. After summarizing his outlook and the current state of both inflation and the labor market, Waller lives up to the title of his speech, offering “a simple example [of a three-good economy]” to illustrate his point. Waller concludes his example by warning that “one needs to be careful when selectively ignoring data series”, saying that in censoring “the tails of the price change distribution”, “we may be led to ‘falsely’ dismiss certain price movements and risk being misled as to the true inflation rate”.
Finally, Fed Governor Quarles also moved away from the transitory line in his speech on inflation this week, admitting, “supply bottlenecks and labor shortages… have been more widespread and persistent than may expected” and “changes in labor force participation could make wage pressures more persistent”.
P.S. China’s energy crisis and related economic fallout continue. As Chinese manufacturers continue to face power rationing, magnesium, “a key ingredient in aluminium and steel”, stocks in Europe are expected to run out by the end of November if not restocked by Chinese exports, potentially affecting car production.
P.P.S. Following Powell’s Jackson Holes speech, we wrote about why his five reasons for expecting inflation to be transitory were likely wishful thinking. Now, with a bit more time to survey the data, CNBC agrees, writing that “Federal Reserve Chair Powell’s five measuring sticks on inflation aren’t holding up very well”.
