Introducing

Joseph G. Carson

Joseph G. Carson, Former Director of Global Economic Research, Alliance Bernstein.   Joseph G. Carson joined Alliance Bernstein in 2001. He oversaw the Economic Analysis team for Alliance Bernstein Fixed Income and has primary responsibility for the economic and interest-rate analysis of the US. Previously, Carson was chief economist of the Americas for UBS Warburg, where he was primarily responsible for forecasting the US economy and interest rates. From 1996 to 1999, he was chief US economist at Deutsche Bank. While there, Carson was named to the Institutional Investor All-Star Team for Fixed Income and ranked as one of Best Analysts and Economists by The Global Investor Fixed Income Survey. He began his professional career in 1977 as a staff economist for the chief economist’s office in the US Department of Commerce, where he was designated the department’s representative at the Council on Wage and Price Stability during President Carter’s voluntary wage and price guidelines program. In 1979, Carson joined General Motors as an analyst. He held a variety of roles at GM, including chief forecaster for North America and chief analyst in charge of production recommendations for the Truck Group. From 1981 to 1986, Carson served as vice president and senior economist for the Capital Markets Economics Group at Merrill Lynch. In 1986, he joined Chemical Bank; he later became its chief economist. From 1992 to 1996, Carson served as chief economist at Dean Witter, where he sat on the investment-policy and stock-selection committees.   He received his BA and MA from Youngstown State University and did his PhD coursework at George Washington University. Honorary Doctorate Degree, Business Administration Youngstown State University 2016. Location: New York.

Publications by Joseph G. Carson

• USA| Sep 14 2022

  Inflation Cycles Are Not Static; They Rotate and Broaden

  The August report on consumer prices should end the discussion of peak inflation, deflation risks, and the quick end to the Fed tightening cycle. But it won't. The happy prophecy of this inflation cycle ending without a lousy outcome fails to learn from past episodes.

  Lessons from past cycles show that inflation cycles are not static or linear; they rotate and broaden. Some items post significant increases in any given month, others smaller ones, and a few none at all. Months later, the composition of inflation could be completely reversed, with items that were not rising at the outset beginning to run faster than others.

  Earlier this year, rapid price increases in a few items were mainly responsible for the acceleration in inflation. For example, at the end of Q1, gasoline prices increased 48% from a year ago, used cars 35%, airline fares 24%, and new cars 13%. These price spikes reflected supply shortages and the rebound in demand from the idle days of the pandemic. Much of that inflation has reversed, but the more significant broad inflation cycle lives on.

  The Bureau of Labor Statistics (BLS) provides special aggregate price series that remove the noise from these factors, the spike in food prices, and the controversial shelter index. In August, BLS estimated that CPI less food, energy, shelter, and used car and truck prices rose 0.5% in the month and now stands at a new cycle high of 6.3% in the past year. The annual increase is the largest since 1982.

  Inflation cycles are complex, with many interconnected parts. Consequently, taming or reversing the inflation cycle is not as simply slowing or ending the price increases for those items that spiked early on. The drop in consumer goods or commodities, especially energy, is good, but inflation in the service sector is much more difficult to eradicate with monetary policy. That's because it is linked directly to labor costs, and labor nowadays is in short supply.

  Investors are waking up to the view that the Fed has much more tightening before it can confidently conclude the inflation cycle is over. Policy rates of 4% or higher are possible, given the changing nature of the inflation cycle. And because of that, I am reminded of what a former colleague and Wall Street strategist, Bob Farell, claimed bear markets have three stages, "sharp down, reflexive rebound and drawn-out fundamental downtrend." The last stage can last a while and be ugly.

  Viewpoint commentaries are the opinions of the author and do not reflect the views of Haver Analytics.

  by:Joseph G. Carson

  |in:Viewpoints
• USA| Sep 09 2022

  Inflation Cycle Shifts Towards Services, Making It More Difficult For The Fed To Reverse

  At the start of the third quarter, there were 10 million job openings in the private sector, and seventy-five percent were in the service sector. The imbalance in the labor markets, especially for service workers, creates a nightmare scenario for the Federal Reserve. That's because as it attempts to slow demand, dampen wage growth, and cool inflation, its monetary tools are much less effective in dealing with the less interest-rate sensitive service sector.

  Up to now, the hottest inflation issue was commodities, even excluding food and energy prices. But the composition of the inflation cycle is quickly shifting towards consumer services, making it more difficult to reverse without a dramatic drop in demand due to a prolonged period of higher interest rates.

  Core inflation in consumer commodities stands at 6.8%, well off its double-digit highs from earlier than in the year. Yet, prices for core consumer services at 5.6%, the fast annual gain in roughly 25 years, are still accelerating. And core consumer services have nearly three times the weight of core consumer commodities.

  Thus, solving the inflation problem requires a fundamental change in service sector growth dynamics. And that cannot occur without a dramatic shift in the demand and price of service sector labor.

  Before the pandemic, the private sector service job growth was 1.5 to 2 million per year. So reducing the 7.5 million job openings in the service sector by half would take two years. But that would not mitigate wage pressures, the most significant source of service sector inflation.

  The average wages for the private sector non-supervisory service sector workers are up 6.2% in the past year. Excluding the spike in wages in the early months after the pandemic, service sector wages are running at their fastest pace since the early 1980s. And, they are running roughly 100 basis points above the gains in the goods-producing industries.

  Private service sector labor and price dynamics are the Fed's most significant hurdles in its inflation fight. Creating slack in the labor market for service workers will require a much official rate and in place for an extended period than it would if inflation was only a goods sector phenomenon.

  So Fed Powell's warning that "a lengthy period of very restrictive monetary policy" will be needed to stem the inflation cycle is something investors should not ignore, as it signals a volatile market environment.

  Viewpoint commentaries are the opinions of the author and do not reflect the views of Haver Analytics.

  by:Joseph G. Carson

  |in:Viewpoints
• USA| Aug 24 2022

  Investors Bet The "Bear" Is Over, But the "Bear Cycle" of Lower Inflation & Less Profits Is Not

  The recent rally in equities, bonds, and the narrowing credit spreads has been impressive. It hinges on the view that the Fed's war against inflation is over, or almost so, and a new economic and profit cycle will begin soon. Yet, the downcycle in prices and the fallout in the economy and company profits has not started yet.

  For investors looking beyond the economic slowdown, it is mathematically impossible for the Fed to lower inflation to 2%, from the current 8% to 9% range, without triggering a sharp decline in operating profits.

  In the last twelve months, nominal GDP has increased by 9.3%, with the price component rising 7.5% and the output component rising 1.6%. And what happens on the output side also occurs on the income side since nominal GDP and Income are mirror images.

  In the past year, nominal income has been up an estimated 10%, a bit more than the reported 9.3% gain in GDP, with employee compensation rising 10% and operating profits less than 3%.

  The Fed does not directly target GDP prices. Still, consumer prices make up the lion's share of GDP prices, so lowering consumer price inflation to 2%, down from 8% to 9%, would result in a dramatic drop of about 500 to 600 basis points in Nominal GDP growth, with a parallel downward move in nominal income.

  In the last 30 years, nominal GDP growth has dropped that much three times (1989-90. 2000-01, and 2007-09), excluding the pandemic non-economic recession. Each of the three sharp declines in nominal GDP resulted in an official economic recession, with 2007-09 being the worst one of the post-war period at that time. Aggregate operating profits posted negative numbers before and sometimes during the recessions.

  What makes the current situation unique is that the Fed is fighting inflation against a backdrop of a labor shortage. How does the Fed squash inflation when labor costs are rising? And for investors, the more significant issue is what happens to companies operating profits if Fed lowers inflation and nominal output and income growth slow accordingly, and employee compensation slows only half as much. That points to a sharper decline in operating profits far more significant than analysts and strategists expect.

  The scenario that could be a win-win for investors is if the Fed raises official rates, inflation slows, and real output increases. That would result in a smaller decline in operating profits. In my view, the odds of that occurring are very low as it has never happened before.

  Some may disagree, citing the 1994/95 slowdown. Back then, the Fed was trying to stop inflation from accelerating. This time the Fed is trying to lower a significant and broad inflation cycle, the biggest in 40 years. The economic and financial consequences are much different when inflation has accelerated. Price increases have already inflated income and profit figures, so unwinding inflation creates more harm and dislocation than trying to stop it from occurring in the first place.

  Yet, investors disagree and are betting that ending inflation cycles do not trigger the economic harm, profit, and job declines of past cycles. It is hard to fight the tape, but it's even riskier to defy economic common sense.

  Viewpoint commentaries are the opinions of the author and do not reflect the views of Haver Analytics.

  by:Joseph G. Carson

  |in:Viewpoints
• USA| Aug 09 2022

  Recent Divergence Runs The Opposite; Household Employment Gains Outpace Payroll

  The Bureau of Labor Statistics (BLS) publishes two estimates of job growth each month: one based on a survey of households and the other based on a survey of firms. The increasing disparity in recent months has created confusion over the size of job gains, as the payroll survey shows robust gains, while household employment is down one month and up the next. Some analysts and portfolio managers have used the household employment data to support their view that the economy is in recession. They're wrong.

  The two surveys are not strictly comparable. But BLS publishes a household employment figure adjusted to payroll survey concepts. And, when modified, the household series shows solid gains, even outpacing the payroll's whopping increase in July.

  To estimate the household employment series equivalent to the payroll series BLS removes from the initial estimate of household employment agricultural workers, unpaid family workers, paid private household workers, and workers on unpaid leave and adds multiple jobholders.

  In July, the household series adjusted for payroll concepts rose 611,000, far above the published gain of 179,000 for household employment and above the 528,000 payroll gain. The series also shows that household employment rose by 131,000 in June, whereas the regular series shows a decline of 315,000. Since the start of the year, the adjusted household series has outpaced payroll jobs by 216,000.

  In the end, the divergence runs the opposite, with household employment outpacing payrolls, and the jobless rate at 3.5%, a 50-year low, confirms that strength. The labor market data says the economy is not in recession.

  Viewpoint commentaries are the opinions of the author and do not reflect the views of Haver Analytics.

  by:Joseph G. Carson

  |in:Viewpoints
• USA| Jul 28 2022

  Q2 GDP Does Not Confirm Economic Recession, But It Does Confirm A Corporate Profit Recession

  The preliminary report on Q2 GDP does not confirm the US economy is in recession, but it does suggest that a corporate profit recession is underway.

  Q2 Real GDP declined 0.9% annualized, following a 1.6% decline in Q1. Back=to-back quarterly declines in GDP are rare and usually occur when the economy is in recession. Yet, the drop in real GDP during the first half of 2022 is preliminary and not confirmed by the income side of the GDP accounts.

  For example, Real Gross Domestic Income (GDI) expanded 1.8% in Q1, or 340 basis points faster than real GDP. That's a record gap. The long-run average is zero. In other words, Q1 had $677 billion more real GDI and $836 billion in nominal GDI than real and nominal GDP. That makes no sense. Q2 GDI data is unavailable, so it's unclear whether the income side confirms the second quarterly drop in real GDP.

  Research has shown that the initial GDI reports are more accurate than GDP. Perhaps that is true because GDI has fewer data inputs. 80% of GDI comes from employee compensation and operating profits, whereas the GDP numbers include hundreds of series on sales, shipments, and inventories, many of which are revised a lot.

  The Bureau of Economic Analysis plans to issue a report in September on the record gap between GDI and GDP.

  The preliminary GDP report does not include an official figure on operating profits. But one can derive an estimate from the GDP data. Based on my calculation, Q2 operating profits will come in around $2,650 billion, off 6% from a year ago. That would be the second consecutive quarterly drop in operating profits, pushing the corporate earnings to their lowest level since Q1 2021.

  Back-to-back declines in corporate profits are more common than back-to-back declines in GDP. In 2015, operating profits fell for four consecutive quarters, and the economy did not enter a recession.

  Additional downward pressure on profits will probably come from further official rate hikes and slowing or declining economic growth. That might signal an economic recession down the road, but it would be wrong to conclude that the US is in recession today.

  Viewpoint commentaries are the opinions of the author and do not reflect the views of Haver Analytics.

  by:Joseph G. Carson

  |in:Viewpoints
• USA| Jul 20 2022

  No Recession Call Can Be Made Before BEA Explains The Record Gap Between Income & Output

  Before the academic arbiters debate whether the economy is in a recession, the Bureau of Economic Analysis (BEA) must first examine and hopefully find answers to the unprecedented and growing gap between income and output in the GDP accounts.

  In Q1, Gross Nominal Income (GDI) exceeded Gross National Product (GDP) by a record $836 billion annualized. The gap widened by roughly $220 billion from the fourth quarter of 2021. That increase was sufficiently significant to produce two different outcomes--- GDI, adjusted for inflation, posted a small gain, while GDP, adjusted for inflation, recorded a decline.

  In theory, the two series measure the same thing (the economy). But, in practice, there are substantial differences, but nothing on the scale of the past few years.

  GDP measures the final output of goods and services, which involves many different series of sales, shipments (domestically and overseas), construction, inventories, and a wide range of private and public services. GDI measures the income associated with the output side, with employee compensation and operating profits accounting for 80% of the total and interest income and investment the remaining portion.

  The income side of the accounts is not as timely as the product side. For example, BEA offers a preliminary estimate on the output side less than 30 days after a quarter ends. But, details on the income side are delayed 60 to 90 days due to companies reporting on operating profits.

  Still, I have always felt that the income side is neater, as it has far fewer series and revisions than inputs in the output figures. And support for that view comes from a Fed staffer. He argued that GDI is probably a better indicator since his research found the initial estimates of GDI are much closer to the final numbers of both series.

  The consensus expects Q2 GDP to show a slight decline when reported on July 28. Back-to-back declines will surely increase talk of recession, but it would be wrong to jump to that conclusion when the gap between income and output has quadrupled in the past two years, and GDI is still increasing in real terms.

  BEA is investigating this issue. But it will take months before they issue any report.

  Viewpoint commentaries are the opinions of the author and do not reflect the views of Haver Analytics.

  by:Joseph G. Carson

  |in:Viewpoints
• USA| Jul 08 2022

  The June Employment Report Says the Fed "Job" of Reversing Inflation in the Economy Is Far From Done

  The June employment report has several important implications and consequences for policymakers and investors. In short, the Fed's "job" of reversing inflation impulses in the general economy is far from done. And with operating profits already in decline, higher official rates will only intensify the squeeze on margins and profits. Here's why.

  First, an economy generating over 300,000 jobs a month is well above its potential. June's gain of 372,000 followed an increase of 384,000 in May and 368,000 in April. Adding 1.12 million workers over the last three months should quiet talk of recession and put the focus back on inflation.

  Second, official rate hikes and tightening financial conditions have done little to undo the tightness in labor markets. The civilian unemployment rate stood at 3.6% at the end of Q2, off 0.3 percentage points from the start of the year. And it's near a 50-year low. The relatively low joblessness shields the Fed from politics as it fights inflation pressures.

  Third, rising wages for production and non-supervisory workers have much more significant inflation implications than the high inventory levels at a few large retailers. Average hourly earnings for production and non-supervisory workers, which cover 80% of the workforce, rose 0.5% in June and 6.4% over the past twelve months. In contrast, retail inventory of general merchandise, clothing, and furniture represents less than 8% of total inventory in the economy. Consequently, rising wage costs have more significant and broader inflation implications.

  Fourth, in Q2, the increases in jobs and average hourly earnings ( a proxy for employee compensation) increased at an annualized rate of 8.8%. The projected growth in nominal GDP is running well below that pace, so the implication is that operating profits fell in Q2 after declining in Q1. As the Fed continues on the higher rate policy path, the squeeze on operating profits will intensify.

  Viewpoint commentaries are the opinions of the author and do not reflect the views of Haver Analytics.

  by:Joseph G. Carson

  |in:Viewpoints
• USA| Jun 28 2022

  The "Income" Consequences of the Fed's Inflation Fight: The Main Reason Recession Risks Is High

  Recession risks are high, in my view, because of the "income" consequences of the Fed's inflation fight. The math is very straightforward: A significant reduction in price inflation means less nominal revenue or sales, weak or negative operating profits, and less labor income. Consequently, the subsequent drop in national income growth would be sharp, rivaling some of the most significant declines on record.

  The Fed aims to bring consumer price inflation back to 2%, down from the current rate of over 8%, a drop of 600 basis points. Slicing 600 basis points off the headline and roughly 400 basis points from the current reading of the core index would cause an uneven distribution of price changes, with prices for many consumer goods posting significant declines.

  Commodities or consumer goods prices rose 10% in 2021. Given the stickiness in service sector prices, inflation for consumer goods would have to show no change or decline a few hundred basis points if the Fed successfully gets overall core prices back to a 2% rate. That would result in a sharp fall in revenue growth for a vast part of the retail sector.

  Yet, the consumer price inflation fall would extend much further. Producer prices for finished goods and intermediate materials are cyclically aligned with consumer prices but are much more volatile. In 2021, producer prices for core materials and supplies rose 23%, 4x the core consumer price index and the most significant increase since the mid-1970s. If the Fed kills consumer price inflation, a record deceleration in prices for materials and supplies is in store.

  The most significant reversal in materials prices occurred during the Great Financial Recession. In mid-2008, these prices were up 12% and one year later off 8%. If material price inflation drops to zero by early next year, it will exceed the price deceleration of 2008-09. As a result, the revenue drop for the materials producers would be substantial, crushing profits.

  In 2021, with significant and broad consumer and producer inflation along with large wage gains, national income, 80% of which is accounted for by operating profits and employee compensation, rose 12%, 200 basis points faster than GDP.

  If the Fed takes three-fourths of consumer price inflation out of the economy and all of the producer price inflation, the drop in nominal income would be sharp, especially when the hit to labor occurs.

  Aggregate income would rise marginally, no more than 4%, and down from the current rate of 11%. That 700 basis points deceleration of nominal income growth would match the drop during the Great Financial Recession. Yet, in this case, it would still be marginally positive. Depending on how quickly firms cut back on labor and other costs, the fall in operating profits would be sharp, off at least 20%.

  The Fed's inflation fight is in its early innings, and the biggest hit to company revenues, profits, and margins is months or even quarters away. Still, the process has started with reports of cuts in advertising and hiring freezes.

  Viewpoint commentaries are the opinions of the author and do not reflect the views of Haver Analytics.

  by:Joseph G. Carson

  |in:Viewpoints
• USA| Jun 07 2022

  Peak Inflation Is Hollow: It Provides No Context to Reduction in Speed or Duration of Cycle

  Peak inflation is not a meaningful statistic. In some ways, it is similar to peak growth or peak earnings. Indeed, it provides no context to the reduction in speed or the duration of the cycle. It is hollow. The Fed made a mistake in thinking that the spike in inflation was supply-side driven and, therefore, temporary. It would be equally wrong to conclude that peak inflation signals a quick end to the inflation cycle.

  There is a lot of talk of peak inflation as it somehow creates the impression that with inflation coming off its highs, the Federal Reserve has less need to tighten. Yet, peak inflation implies inherent linearity to inflation, which is not the case. Inflation cycles are non-linear. To be sure, inflation cycles rotate, move up and down, and broaden over time.

  The thinking behind peak inflation is similar to the supply-side driven view of the current inflation cycle. Supply-driven inflation, according to some, is temporary as it will fall on its own accord once the unique factors disappear or dissipate in intensity. Yet, the error in that analysis is that it overlooks or ignores the spreading effect of inflation. In other words, as certain costs rise, it forces different prices up over time.

  For example, in the 1970s, supply shocks (food and energy) played a massive role in starting the inflation cycle. After that, however, the inflation process spread, and for more than a year, inflation measures without food and energy costs were rising faster than those that included them.

  A similar script is starting to play out today. For example, consumer price inflation has accelerated by 400 basis points in the past twelve months. Unique factors, such as energy +30%, used cars +23%, and food +9%, accounted for a lot of the spike. Yet, prices other than food, energy, shelter, and used cars accelerated by 330 basis points, rising 5.8%, the most significant acceleration and fastest increase in this broad price index in over 40 years.

  Prices paid indexes are relatively high (low to mid 80%) for manufacturers and non-manufacturers in the May survey from the Institute of Supply Management, and wage costs for the rank and file posted their most significant monthly increase (0.6%) of 2022 in May. So as long as companies are saying costs for materials are increasing and workers' pay is as well, the Fed must conclude the inflation cycle lives on and ignore talk of peak inflation.

  Viewpoint commentaries are the opinions of the author and do not reflect the views of Haver Analytics.

  by:Joseph G. Carson

  |in:Viewpoints
• USA| May 16 2022

  The Many Links of Inflation Cycle: Hard Landing Is Needed to Crack Them

  Inflation cycles are complex, with many interconnected parts. Price changes flow unevenly through the distribution and production channels, lifting final product prices. For example, consumer price inflation doubled from 4.2% to 8.3% in the past year. Yet, that surge is directly linked to even more significant price increases for thousands of items in various processing stages. Indeed, producer prices for crude goods rose 48% over the same period, intermediate materials by 22%, and finished producer products by 16%.

  Consequently, taming or reversing the inflation cycle is not as simply slowing or ending the price increases for consumer goods and services. Instead, it requires a broad price reversal across various products and services, impacting production, distribution, and retailing businesses. And that "unwind" process is destabilizing and uneven, resulting in liquidity and cash flow squeezes and profit and income declines.

  The Fed's immediate goal is to bring consumer price inflation back to a 2% rate. Although there are many paths to a 2% inflation rate, the most common, based on recent experience, is a sharp slowing in consumer commodities (goods) prices, which accounts for 40% of the overall CPI.

  CPI commodities (goods) prices have increased by 13% in the past year. Not surprising, these retail prices are nearly perfectly correlated (86%) with producer prices for intermediate materials, which have increased by 22% over the same period. Moreover, the correlation is robust, even removing the volatility from food and energy, with core consumer commodities rising 9.7% in the past year compared to a near 17% increase in core intermediate prices.

  A few episodes have occurred, none recently, in which intermediate materials and consumer commodities prices dropped from double-digit increases to near zero. Fueled by restrictive monetary, prices of producer materials and consumer goods fell hard and fast in the mid-70s and early 80s. Both periods, heavily influenced by supply-side shocks, resulted in economic downturns that ran for sixteen months, nearly a half year longer than the average recession of the post-war period.

  So it is not surprising to hear Fed policymakers say, "it will be challenging, not easy," to bring inflation back to 2% from 8% without triggering a recession. That's because it's never been done. And very easy to see why.

  For a broad set of industries and businesses, equaling nearly half of the economy, there would be a "flash" crash in prices. On average, price increases would drop from annual gains of 10% to 20% in a year to zero. Yet, given the unevenness of price cycles, many firms would even experience price declines. Sharp price reversals would trigger an abrupt drop in revenues and profits, forcing cutbacks in output and labor.

  The unwinding of price cycles creates many losers because the Fed is negatively impacting the flow of commerce and finance through its restrictive policy moves. So far, the losers are in finance-- bonds, equities, and crypto, along with increased volatility. However, investors should expect much more since the Fed tightening cycle, which has just begun, needs to crack the many links of the inflation cycle.

  Viewpoint commentaries are the opinions of the author and do not reflect the views of Haver Analytics.

  by:Joseph G. Carson

  |in:Viewpoints
• USA| May 04 2022

  Peak Inflation & Fed Policy: A Relationship Which Should Worry The Fed And Scare Investors

  Some have used peak inflation to create the impression that the worse of inflation news is in the rear and that the Fed has less tightening to do than what many expect. Yet, peak inflation says a lot about what the Fed has to do, which should worry the Fed and scare investors.

  In three out of the last four decades, the US experienced a cyclical rise in inflation (4% and above) that compelled policymakers to raise official rates in response. It didn't matter if the inflation cycles were broad (the early and late 1980s) or narrow (oil spike in the mid-2000s). But policymakers had to raise official rates above peak inflation on each occasion to squash the price cycle.

  No one is thinking the unthinkable that the Fed has to raise rates above the 8.5% increase in consumer prices over the past year. Yet, past experiences provide painful lessons on the level of official rates required to reverse inflation cycles.

  Each inflation cycle has common and unique factors. However, many, including Fed officials, have argued that the current inflation cycle has more than a few items lifting prices temporarily. The Bureau of Labor Statistics (BLS) produces a special aggregate series that removes some things people have cited, so it helps remove some of the noise.

  For example, BLS published a series of CPI less food, energy, shelter, and used car and truck prices. This series removes the recent temporary spikes in food and energy prices linked to the Russian invasion of Ukraine. It also removes the massive spike in used vehicle prices associated with supply bottlenecks owing to the pandemic. Yet, this dumbed-down price series still shows a 5.8% in the past year, matching the highest rate recorded in 40 years.

  So even if this is the inflation rate the Fed needs to target to reverse the inflation cycle, it still calls for a fed funds rate of 6% or more than twice the peak rate shown in policymakers' official rate projections made in March.

  Given how tight the labor markets are nowadays and everything else being equal, it would probably take a 6% fed funds rate to impact consumer demand and dampen inflation by creating more unemployment. At the end of March, there were a record 11.5 million job openings against a backdrop of 6 million unemployed. Never before has the Fed faced a significant inflation cycle with labor markets this tight.

  Yet, I would bet that long before the fed funds rate gets close to 6%, something else would break to stop the Fed. Things that stopped the Fed in the past were an abrupt and sharp drop in the financial markets or a cessation in the flow of credit that could lead to economic and financial instability.

  Given the current market environment, none of those conditions are present, so the risk, for now, is that Fed tightening course could look a lot like those of the past until something else breaks. Investors forewarned.

  Viewpoint commentaries are the opinions of the author and do not reflect the views of Haver Analytics.

  by:Joseph G. Carson

  |in:Viewpoints
• USA| Apr 14 2022

  The Truth About The Current Inflation Cycle

  Although a few presumably temporary factors have lifted reported inflation well above expectations, it is also true that some elements made it look less troublesome. So what is the truth about the current inflation cycle?

  The Bureau of Labor Statistics (BLS) provides special aggregate price series that remove the noise, or an underestimate from these factors. For example, BLS published a series of CPI less food, energy, shelter, and used car and truck prices. This series removes the recent temporary spikes in food and energy prices linked to the Russian invasion of Ukraine. It also removes the massive spike in used vehicle prices associated with supply bottlenecks owing to the pandemic. On the flip side, it removes the controversial shelter component that no longer captures house price inflation.

  In April, BLS reported this price series increased by 0.6% month-on-month, matching the gain in March and twice that of the 0.3% gain in the so-called core inflation series. This price series has increased by 5.8% in the past year, matching the highest rate recorded in the prior 40 years.

  The surge in this price series also represents a significant milestone. It breaks four decades of lower peak-to-peak consumer inflation rates in the business cycle. Business cycles have shown that there is a cycle in prices. Yet, up until the Volcker era, the peak-to-peak was progressively higher. And after the Volcker era, the peak-to-peak inflation rate has been progressively lower or stable.

  Also, the surge in this price series shows that the current inflation cycle is not a "blip." On the contrary, it is widespread and more embedded in the decisions and expectations of consumers and businesses.

  It is unclear if the current generation of policymakers is aware of the price cycles in the business cycle or how pipeline pressures feed into product prices. For example, the producer price report showed significant increases at all three processing stages in April. It's unlikely that monetary policy can break these price increases with modest increases in policy rates.

  Companies need materials and supplies to protect production schedules. Notably, the April survey of manufacturers from the Institute for Supply Management showed that customer inventories are near record lows. As a result, it would take exceptionally high-interest rates to force companies to pull back on the inventory investment needed to sustain production.

  Although policymakers have yet to list easy money as one of the causes of the current inflation cycle, it plans to make money much more costly to break the cycle. Yet, how far are policymakers willing to take official rates to reverse the price cycle?

  The current official rate projections of policymakers show a peak fed funds rate of 2.8% in 2023, less than half the inflation rate, excluding the unique factors. Never has an inflation cycle been reversed or broken without policy rates moving above the reported inflation rate.

  Investors will soon need to confront whether the higher cyclical peak inflation rate is a one-time occurrence or a sustained shift to higher rates? I bet its the latter because the current generation of policymakers is unaware of how price cycles start and end.

  Viewpoint commentaries are the opinions of the author and do not reflect the views of Haver Analytics.

  by:Joseph G. Carson

  |in:Viewpoints