The editors of the Wall Street Journal warn about rising inflation, of all things:
New Federal Reserve Chairman Jerome Powell can thank predecessor Janet Yellen for another parting gift: rising prices. The Labor Department reported Wednesday that consumer inflation rose 0.5% in January, or 2.1% over the past year, a bigger spike than most economists predicted.
The markets reacted better than expected with stocks rising after early losses. But the yield on the 30-year Treasury bond popped above 3.16% and is near its two previous peaks of the past three years. The yield on the 10-year Treasury note also climbed above 2.9%. The cost of money is going up, which by itself isn’t alarming as economic growth accelerates.
The bigger question is whether the Fed is repeating its mistake from the early 2000s when it kept interest rates too low for too long even as the economy surged after the 2003 tax cut. This fed the housing bubble, commodity price spikes and a general financial mania that ended in panic and crash.
The January report is at least a warning. Core prices, which exclude food and energy, were more restrained, rising 0.3% for the month, or 1.82% over the past 12 months. The price of oil rose above $66 a barrel in January and has since fallen below $61. But the overall increase in prices is still notable amid modest wage gains.
That’s basically alarmist poppycock. If you look at the Labor Department’s report, you’ll see that most prices increased below 2% on a year-over-year basis.
The exception was fuel oil and what the report tells us is that there been cold weather in New England and the Northeast. Gasoline prices have also risen sharply faster than other prices. That might mean higher prices for all goods and services down the line but higher fuel oil prices (22.5% increase YOY) and higher gas prices (8.5% YOY) are not something the Fed has much to do with.
There are other things that are increasing in price, too, notably insurance. I honestly don’t know why the insurance industry continues to offer liability insurance in California. Multi-million dollar houses built on hillsides in earthquake and mudslide zones aren’t insurable risks.
On a somewhat related note, our electric utility penned a new coal supply contract a couple of years ago in which the coal price was about a third of the previous contract. And it probably wasn’t even the lowest price available (Wyoming) because the city prefers local.
Oops, not the previous contract, the one in place ten years ago. Coal indexes show about a third drop in price from 2011 to 2016, but there has been a rebound.
For what its worth. Many wealth managers are planning for higher inflation. Mine is constructing projections around 2.75%. Only time will tell. Velocity has been low for quite some time.