Jul 14, 2022

Inflation (again).

The numbers from June don't look good.

I’m Isaac Saul, and this is Tangle: an independent, ad-free, subscriber-supported politics newsletter that summarizes the best arguments from across the political spectrum on the news of the day — then “my take.”

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Today's read: 12 minutes.

The latest on inflation. Plus, an interesting question about the ripple effects of Roe v. Wade.

Photo by Krzysztof Hepner / Unsplash

Tomorrow.

Reminder: Every Friday, we publish subscribers-only content. Thank you to the 6,500+ folks who are already paying members of Tangle. Tomorrow, I'll be publishing a members-only piece on misinformation: How to combat it, how to live with it, and where I think we are failing right now. If you are already a subscriber, keep an eye out for it, and please feel free to share it with friends (just ask them to become a Tangle member!)


Quick hits.

  1. President Biden arrived in Israel yesterday, where he is expected to announce the normalization of relations between Saudi Arabia and Israel this weekend. (The trip)
  2. An Ohio man was arrested for the rape of a 10-year-old girl, whose story of traveling to Indiana to seek out an abortion received international coverage. The judge overseeing the case believes the accused rapist to be an undocumented immigrant. (The arrest)
  3. Former White House national security adviser John Bolton sparked controversy after he admitted to planning international coups on CNN during a discussion about the Jan. 6 riots. (The comments)
  4. Buchanan County in western Virginia received six inches of rain in a matter of hours, setting off a massive flood that has left 44 people still unaccounted for. (The floods)
  5. Ray Epps, the man accused of being an FBI plant during the Jan. 6 riots, sat down for an interview with The New York Times. We covered the Epps story here. (The interview)

Our 'Quick Hits' section is created in partnership with Ground News, a website and app that rates the bias of news coverage and news outlets.


Today's topic.

Inflation (again). Yesterday, the Bureau of Labor Statistics released its inflation numbers for June, and prices have once again risen sharply.

Reminder: Inflation is measured by the Consumer Price Index (CPI), which is designed by the Bureau of Labor Statistics to measure price fluctuations for urban buyers, who represent the vast majority of Americans. The CPI tracks 80,000 items in a fixed basket of goods and services, representing everything from gasoline to apples to the cost of a doctor's visit.

In June, the consumer price index rose 9.1% from a year ago (estimates were 8.8%). Core CPI, which does not include the more volatile food and energy prices, rose 5.9%, compared to the 5.7% estimate. Core inflation peaked at 6.5% in March, but the rate of increase has been coming down slowly since then.

On a monthly basis, headline CPI rose by 1.3% while core CPI was up 0.7%, compared to respective estimates of 1.1% and 0.5%, according to CNBC.

  • Rent prices rose 0.8% in June
  • Gasoline rose 11.2% in June
  • Electricity rose 1.7% in June
  • Used vehicles rose 1.6% in June
  • Medical-care costs rose 0.7% in June
  • Meanwhile, airline fares and meat, poultry and eggs all came down slightly on a month-to-month basis.

We have covered inflation seven times in the last year, as polls consistently show it is the number one concern for American voters. Last month, we wrote about the Fed's attempt to rein in inflation by raising interest rates, which makes borrowing more expensive, thereby reducing spending and causing prices to fall.

After the latest numbers were released, Wall Street traders began betting the Fed would raise interest rates by a full percentage point this month (last month, they increased rates by 0.75%). The Fed is hoping to raise interest rates and reduce inflation without triggering a recession, which will be more and more difficult if inflation remains this persistent.

Because of inflation, we are also witnessing the sharpest decline in real wages in decades. Since December, average hourly earnings for private-sector workers have gone up 2.2%, but consumer prices rose 5.4% in that same time period. Over the last 12 months, non-managerial workers have seen their average pay go down 2.7% when adjusted for inflation — the steepest drop in real wages since 1980, according to Axios Markets. According to the Bureau of Labor Statistics, inflation-adjusted incomes based on average hourly earnings fell 1% last month and were down 3.6% from a year ago.

Americans on Social Security benefits, which include cost of living adjustments, could see their monthly benefit go up 10.5% in 2023 to account for inflation.

While June's numbers were broadly considered bad news for Americans and the economy, the Biden administration has emphasized that we've seen some deflation signals in the last few weeks (beginning in the end of June). Gasoline prices have fallen from their June peak, down 4.7% this month, and the S&P GSCI commodities index has fallen 7.3% so far in July, though it's still up 17.2% on the year. Wheat, soybean and corn futures are all down since July 1 as well.

Below, we're going to take a look at some reactions to the latest numbers, as well as what's been happening this month.


What the right is saying.

  • Many called out how inflation is crushing workers.
  • Some said the latest numbers should mean Congress stops its federal spending until inflation is under control.
  • Others criticized Democrats for how they have handled the issue.

The Wall Street Journal editorial board decried the "inflation tax on workers."

"The greatest tragedy is for American workers, who are suffering the largest reduction in real wages since the 1970s," the board wrote. "Real average hourly earnings fell 1% in June alone and are now down 3.6% in the last 12 months. Average real weekly earnings fell even more, 4.4%, because of a decline in the average workweek. Real wages have fallen in 10 of the last 13 months, and they have now fallen more since President Biden took office than they did during the recession caused by the financial crisis. From December 2008 to a trough in real earnings in February 2012, real average hourly earnings fell 1.8% measured in 1982-1984 dollars, according to BLS. They have fallen 4.8% since January 2021.

"As for fiscal policy, rising inflation should take more domestic Congressional spending sprees off the table," the board said. "The return of virulent inflation didn’t have to happen, and the experience should discredit the policies that brought it on. The splurge of spending in 2020 and 2021, under Presidents Trump and Biden, spurred excessive demand. The Fed kept the monetary spigots open for too long, as Washington became enamored with Modern Monetary Theory. Whatever short-term financial help to Americans that Democrats provided with their trillions of dollars in welfare payments has been more than offset by inflation. The U.S. needs a return to growth economics rooted in stable money, supply-side tax policy, deregulation and fiscal restraint. That agenda hasn’t been as important since 1980."

In The New York Post, Brian Riedl criticized Biden and Democrats for not proposing any solutions to inflation.

"While many experts keep predicting inflation to slow down, the June rate soared at an annualized rate of nearly 17%. Nearly all parts of the economy are buckling under rising prices. Price increases in the past year have leaped for groceries (12%), gas (60%), electricity (14%), new cars (11%), and flights (34%)," Riedl wrote. "Inflation is slowing down in one key area: wage growth. Which means that real wages have collapsed by 3.6% in the past year, as workers fall further behind. And what are President Biden and Congressional leaders doing to combat this deepening crisis? Pointing fingers, deflecting blame, and little else. President Biden spent 2021 dismissing inflation as transitory — even as he pushed through a $1.9 trillion American Rescue Plan that poured gasoline on the fire.

"The White House became a punchline for releasing a video bragging that 'The cost of a 4th of July cookout in 2021 is down $0.16 from last year.' When inflation became too persistent to dismiss, the White House shifted to scapegoating," Riedl said. "It has blamed COVID and 'big meat,' termed it 'Putin’s price hike,' and endorsed the view that it is a 'high-class problem.' This empty rhetoric is meant to cover up the White House’s refusal to offer any concrete plan to bring down inflation. Even as President Biden published an op-ed asserting that 'I have made tackling inflation my top economic priority,' he offered no specific proposal to do so. Instead, his article punted the problem to the Federal Reserve, asserted the mundane reality that more productivity would help combat inflation, and then suggested deficit reduction would help (even as he pushed legislation to hike deficits). Nothing specific, substantive, or legislative."

National Review editors said "inflation still rages."

"When the current bout of inflation began, Democrats waved it away by pointing to volatility in energy prices and saying core inflation was doing fine," the editors said. "Now, they’re pointing to energy prices to distract from core inflation. Biden was, however, wise to conclude his statement by saying, 'I will continue to give the Federal Reserve the room it needs to help it combat inflation.' He has consistently held that line, breaking a long tradition of presidents of both parties harassing the Federal Reserve to help their political fortunes. The task of bringing inflation back under control is indeed mostly on the Federal Reserve. The Fed can’t do much about energy prices, but it can do more to tighten monetary policy. The total spending level in the U.S., unlike in Europe, remains above its pre-pandemic trend.

"And Congress must not make things worse by passing any major spending bills. News from Capitol Hill indicates that some form of Build Back Better is being discussed again. Even supposedly paid-for spending should be opposed, both because the federal government has enough budget obligations already and because Democrats’ maximalist strategy on budget gimmicks, as demonstrated all of last year, means their pay-fors can’t be trusted," they wrote. "U.S. bondholders must be reassured that the federal government intends to pay them back in real terms, not inflated currency, and that means a long-term commitment to basic fiscal responsibility. Even if headline inflation comes down next month due to a decline in gasoline prices, the fundamental task before the Federal Reserve will remain the same."


What the left is saying.

  • The left is a little more optimistic about inflation, noting that the most recent signals are positive.
  • Some still criticize Democrats and Biden for how they have navigated the issue.
  • Others argue the Fed's attempts to get inflation down may end up backfiring for working class Americans.

In Bloomberg, Matthew A. Winkler said the inflation alarm bells are actually getting softer.

"Minutes after the Associated Press — the wholesaler of news to broadcast, digital and print media — reported on June 30 that the 'key inflation gauge tracked by the Fed remains a high 6.3%,' the most visible measure of investor behavior signaled the opposite," Winkler said. "Bond investors showed that they expect inflation to cool by betting that the gap will narrow between the yield of inflation-protected US securities and ordinary Treasury bonds. The rates on these bets actually plummeted on that day, with the two-year breakeven measure falling to 3.29% from 3.45% and the 10-year rate declining to 2.34%, the lowest point since 2021, according to data compiled by Bloomberg.

"Consumers may be voicing alarm about inflation, but their behavior is surprisingly optimistic," he wrote. "Fears of continued inflation, the bane of the US economy during the 1970s before the Fed belatedly imposed the worst recession since the Great Depression, would show up statistically in higher demand for autos, washing machines and houses, in anticipation of future price increases. That's not happening, according to the University of Michigan Consumer Sentiment Index, the same indicator used to show how pessimistic Americans are even as unemployment remains just two-tenths of a percentage point above the 53-year low of 3.4%... The bottom line: Investors are pretty sure that inflation is less of a threat today than it was two years ago."

In The Washington Post, Catherine Rampell said if politicians aren't going to make inflation better, the least they could do is "stop making it worse."

"That message hasn’t yet made it here to Massachusetts, where Democratic state lawmakers have proposed sending out checks to most residents to help absorb the 'increased costs due to inflation [that] have cut into family budgets... 'Inflation relief' check proposals like this one, which have also been proposed or adopted in California, Indiana, Delaware and several other states, are likely to be actively harmful in the fight against inflation. That’s because these and other tax cuts or rebates will make red-hot demand even hotter," Rampell said. "Inflation has lately reached 40-year highs because demand is strong while supply remains constrained. Consumers have a lot of cash on hand, thanks to both pandemic-forced savings (delayed vacations, fewer restaurant outings, etc.) and federal policies that pumped a lot of money into their pockets as well as the broader economy.

"Meanwhile, global supply chains are still snarled and worker shortages persist across many sectors," she added. "How do you untangle global manufacturing and food supply chains, which are being disrupted by war, covid lockdowns and other freak events? How do you nudge more people into the labor force? How do you encourage oil companies to increase refinery capacity — which would help increase the supply of gasoline — when doing so requires expensive, long-term investments that these companies don’t think will pay off?... There are a few, more modest things federal policymakers could do to help with supply-side problems. These include allowing in more competition from foreign suppliers and ships. Or, fixing bottlenecks in our legal immigration system could increase the supply of workers."

In MSNBC, Kate Bahn said continuing to raise interest rates to get to 2% inflation (the Fed's goal) could backfire for many Americans.

"Very high rates of inflation hurt the families who spend more of their incomes on consumption — the daily costs of living — than they do on saving or investing, pinching their budgets and limiting their spending power," Bahn wrote. "But very low inflation also has lopsided benefits for asset holders — those with financial investments and stock holdings, whose wealth (and what others may owe them) maintains its value. Between these two levels is moderate inflation that benefits debt holders, whose liabilities decrease in value as inflation reduces the real value of what they owe. In this way, moderate inflation could essentially help redirect the vast flow of wealth from wealthier, older households toward younger, middle-class households.

"But what exactly is a moderate inflation target? In one hypothetical estimation, inflation in the range of 5% would redistribute wealth from households in the top 10% of the wealth distribution to middle-class households under age 45, which would essentially receive a bonus of up to 45% of their net worth through reduced debt," she said. "Importantly, the government would also benefit — inflation of 5% would reduce the real value of government debt in the range of 5.2% to 13.0% of gross domestic product. Still, you may hear economic commentators refer to the risks of 'overheating' the economy, leading to an upward spiral of costs and prices. But not only is there no evidence of a wage-price spiral in the current economy; the connection between a low target inflation rate and healthy economic growth is also tenuous, at best."


My take.

The June numbers are really bad.

There is just no other way to put it. The areas where a little relief is showing — like airline prices or gas — aren't going to make anyone feel better about rent, food, doctor's visits and energy prices having all skyrocketed. Your average American family is making about $60,000 per year and now paying $500 more per month for the same goods and services they bought a year ago.

Conversely, as economic writers like Noah Smith and Derek Thompson have been documenting, there are good signs on inflation. Disinflation seemed to start at the end of June and in early July. Smith and Thompson have been collecting those positive signals, and a few are worth pointing out:

The price of shipping containers is falling, which will inevitably be passed onto consumers (and suggests bottlenecks are finally being resolved). Commodities, the raw materials (like copper, grain or beef) that go into production, are seeing price drops. Rent, while having gone up in June, is also coming down so far this month. The prices for GPUs, the super valuable computer chips that go into cars and video games and cell phones, are also coming down. Gas prices are dropping sharply in the last two weeks (and have for 28 days in a row), with the average price down 38 cents since mid-June.

So, how do we hold all these things together? The truth is, nobody really knows. The nerdy economists I follow to learn more about the economy are describing our current situation as strange, weird, very wild, and all sorts of other "we've never seen anything like this before" descriptors. Inflation is very high while GDP growth is negative. The jobs reports are very good and wages are rising but real wages are plummeting.

The person behind the Neoliberal Project's Twitter account put it like this: "Most of the economists I talk to are so confused by these contradictory indicators that they're just assuming the data must be bad - either the jobs data or the GDP data is wrong, busted in some way."

I have a similar impression from reading endless articles about this, interviewing economists, and following a lot of their personal newsletters and social media accounts. Some things about this seem simple, like the idea that we shouldn't inject the economy with more government money (through stimulus checks or legislation), but other things — like what it will take to ease inflation, if that easing has already begun, and how bad the economy will get under the weight of higher interest rates — seem much less straightforward.

To me, next month's Bureau of Labor Statistics report will be the most important we've had yet. After June's historically bad numbers, but coming on the heels of a few weeks of data indicating  inflation may have peaked, the July report will be very telling. If the July CPI doesn’t reaffirm the early indicators we're getting now, the consternation you're hearing about inflation could evolve into something much more urgent.

As Smith said in his most recent post, "Hopefully I’m writing this post for nothing, and in a month or two we can all breathe a sigh of relief as disinflation finally takes hold."

Have thoughts about "my take?" You don't have to agree — just reply to this email and write in. If you're a paid subscriber, you can leave a comment.


Your questions, answered.

Q: With the overturning of Roe V Wade, I'm interested to hear your views on the potential impact on colleges and universities in states that have criminalized abortion? I am hearing from friends of soon to be collage age children, that they will not send their daughters to schools in those states for obvious reasons.

— Anonymous, West Nyack, New York

Tangle: Anytime a major decision like this comes down, I think you should expect a lot of the unexpected.

Honestly, I have no idea about how this will impact college admissions. Your anecdote sounds totally plausible to me, though, and I suspect there will be many pro-choice parents making similar calculations about both their sons and daughters over this. I also think there will be a lot of students making those calculations. In my work, I've encountered so many high schoolers who are passionately liberal, conservative, anti-abortion, pro-choice, etc. that I can imagine many of them making university decisions based on a state's laws — especially on abortion.

One thing I said when this ruling came down is it will have ripple effects we can imagine and predict, and also effects we can't. One such story is already coming into play: A French drugmaker is now seeking FDA approval for an over-the-counter birth control pill (which, for decades, have required prescriptions). That was not something I was expecting, although the drugmaker has said it spent five years navigating FDA red tape to submit the application, and also that it did not have to do with the Roe v. Wade ruling.

What does have to do with it, though, is the coverage the application got. And the popularity that such an over-the-counter pill may have, especially in states that ban abortion and for women who feel more comfortable getting birth control without going through a doctor in those states.

The other thing I'd expect on college campuses is a lot more protesting and political activism. Abortion rights are going to be a potent issue for many college-aged students, on both sides of the aisle, and I expect to see that become a lot more prominent on campuses in the near future.

Want to ask a question? You can reply to this email and write in (it goes straight to my inbox) or fill out this form.


A story that matters.

The United Nations, Russia, Ukraine and Turkey say they are making progress on a proposal to restart Ukrainian exports of millions of tons of grain. Since the beginning of the war, the grain has been stuck in a Ukrainian port and Russian ships have blocked supplies from moving through the Black Sea. Ukraine accounts for 8.5% of the world's global grain supply, and 22 million tons are trapped inside the country. The blockaded grain has driven up the cost of food globally, and could lead to many developing nations facing the threat of famine. The New York Times has the latest.


Numbers.

  • $4.60. The average price of a gallon of gas today.
  • $5.01. The average price of a gallon of gasoline a month ago.
  • $3.14. The average price of a gallon of gasoline a year ago.
  • 1.8%. The percentage drop in airline prices last month.
  • 34.1%. The percentage increase in airline prices over the last year.
  • 372,000. The number of jobs added to the economy in June.

Have a nice day.

A Missouri woman and her father recently performed a heart surgery together. Dr. Sophia Roberts had always wanted to follow in her dad's footsteps, and last week she got the chance. Dr. Harold Roberts, 66, has been practicing medicine for 32 years, and joined Barnes Jewish Hospital in Missouri as an associate professor last August. In May, he and his daughter ended up performing an aortic valve replacement, in an unexpected chance for the two to work together. "It was really very smooth. I wouldn't have done the case any better if I had another heart surgeon assisting me," he said. Good Morning America has the story.


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