Doom and gloom projections of out of control inflation dooming the Biden economy appear to be widely overblown. A variety of economic data point to high inflation in October and November of 2021 being the result of a rapid increase in consumer spending as Americans emerged from Covid shutdowns and began spending at a record pace.
The December 2021 Monthly Economic Review from the National Retail Foundation included the following highlights: “Consumer spending rose by 1.3 percent in October, the largest monthly increase since March. There was no evidence of a pullback in consumer spending despite price increases that have come with supply chain disruptions and increased demand. Disposable personal income is up 4.1 percent in the past year, while spending has increased 12 percent. The increase in income together with very strong spending lowered the saving rate from 8.2 percent to 7.3 percent, the third monthly decline in a row with the latest figures beginning to return to pre-pandemic levels. Nonetheless, households have a savings cushion of around $2 trillion accumulated since the beginning of the pandemic to support spending and provide an important buffer against higher prices.”
“Official labor market data for October showed payrolls were up by 546,000 jobs, topping 379,000 in September and 483,000 in August, both of which had initially been reported far lower before revisions…NRF’s calculation of retail sales – which excludes automobile dealers, gasoline stations and restaurants – showed October spending increased 1.7 percent from September and was up 10.8 percent unadjusted year-over-year. For the first 10 months of 2021, sales were up 14.1 percent over the same period of 2020.”
Oil prices are also in decline. Oil futures prices provided by Marketwatch.com show that oil futures prices closed at $71.96 per barrel on December 10th, down from a recent high of $84.65 per barrel set on October 26th. RBOB Gasoline futures closed at $2.14 per gallon on December 10th, which suggests retail prices for January will be around $3.14/gallon for 87 octane unleaded, compared to a nationwide average of $3.33/gallon as reported by AAA on December 10th.
Home prices should also moderate nationwide as the Federal Reserve winds down their monthly purchases of mortgage backed securities, and initiates a series of interest rate increases. Although reports indicate the Fed chairs have not yet reached agreement on when to begin interest rate increases, a series of 0.25% to 0.50% increases in the prime rate should help to tamp down inflation rates. The prime rate as of December 11th, 2021 was 3.25%. The Fed should look to aggressively raise the prime rate to around 4.5 to 5.5%, putting it squarely within it’s historical average range.
Recent consumer spending data shows that all of the hyperbole about “supply chain disruptions” was really the result of a record bump in American consumption. Declines in economic stimulus and the decline in the savings rate suggest American consumers may be on the downside of that savings bump. Oil and gasoline prices are down from recent highs, and current futures prices suggest the national average retail price of gasoline could fall another 20 cents per gallon by January of 2022. The Federal Reserve has already announced that they will be accelerating their tapering of economic stimulus and the Federal Reserve can increase the prime rate by 1.25 to 2.25% and still be squarely within the historical average range for US interest rates. All of the harum-scarum talk on the 24 hour news channels of “hyper-inflation” is nothing but hysterical nonsense.