Extraordinary Acceleration of U.S. CPI Inflation

November 10, 2021

The 6.2% consumer price inflation rate in October was its fastest pace since November 1990. Even more startling the 5.0 percentage point advance since 1.2% in November 2020 was the greatest 11-month acceleration of CPI inflation since such shot up from 5.7% in July 1973 to 10.9% by June 1974. Energy prices played a central role in both episodes. I was expecting to find a steeper acceleration than five percentage points sometime late in the 1970s or very early in the 1980s when a string of double-digit inflation results prompted a radical and successful experiment by the Federal Reserve of quantitative monetary tightening. Back then, however, the U.S. economy was well into a business upswing, not emerging from a devastating pandemic-induced coma. To break high inflation expectations, the Fed had to kill the economic upswing, and the United States was socially able to withstand that penalty. The same cannot be said about the present economic, social, and cultural state of the country. Moreover, inflation is now far beneath the heights hit in the late 1970s, and long-term inflation expectations have not become unhinged.

The first of two OPEC oil price shocks during the 1970s was a quadrupling charge engineered by the cartel at the start of 1974. The energy component of last month’s CPI data increased by 4.8% compared to September, well above the previous four month-on-month increases of 1.5% in June, 1.6% in July, 2.0% in August and 1.3% in September. In year-on-year terms, energy consumer price inflation leaped from 24.8% in September to 30.0% in October.

Delving deeper into today’s CPI report, food prices have been another source of stress, posting monthly gains of 0.7% in July, 0.4% in August, and back-to-back 0.9% jumps in September and October. On-year food price inflation of 5.3% was about two percentage points higher than in July. Car prices have been overwhelmed by cascading delivery delays. Used vehicles and parts jumped 2.5% on month and 26.4% on-year in October, while new vehicle prices went up 1.4% on month and 9.8% on year.  Non-energy service price inflation topped 3.0% at 3.2%, and the core CPI that excludes both food and energy registered a 0.6% monthly increase, the most since June, and an on-year advance of 4.6%, up from 4.0% in September and 1.6% as recently as April.

The persistence of upward price strains at the producer level plus today’s CPI figures leaves little doubt that inflation has still not crested and explains why analysts are revising forecasts outward for when a restoration of acceptably stable inflation might be restored and why more turbulence is apt to engulf financial markets believing that central banks will have to react more aggressively. That is clearly not the hope of monetary authorities. There remain 4.1 million fewer non-farm U.S. workers than the pre-pandemic peak of 152.4 million, and the theoretical trendline that merely extends employment growth experienced between end-1979 and end-1999 to the present time reveals an employment gap of about 45 million.

Also, the labor participation rate of 61.6% as of October within a range of 61.4% and 6.7% since June 2020 highlights a disturbingly unresponsive reaction to the reduction of Covid restrictions. The most effective ways to tackle the spike of inflation involve doing something about the absence of affordable childcare in America and achieving a more complete expansion of vaccinations to the entire population. Failing this, the Fed may eventually have to capitulate and run a tighter-than-ideal monetary policy.

Copyright 2021, Larry Greenberg. All rights reserved. No secondary distribution without express permission.




Comments are closed.