inflation

Grocery Inflation is Under Control, Fast Food Prices Aren’t

Jeremy Horpedahl3 Comments

Thankfully for US consumers, grocery prices have leveled off. They haven’t fallen, of course, which will still lead to viral complaints about egg prices, etc. But over the past 4 years, wages have almost caught up with grocery prices.

Not so with fast food prices (“limited service meals”), which have definitely outpaced wages over the past 4 years, and continue to grow at an annual rate of about 5 percent (also more than wages).

Furthermore, if we go back to 2014, we see it’s not just a post-pandemic effect on fast food. Prices since 2014 are up 54 percent for fast food according to the BLS, more than the 31 percent overall CPI-U increase and more than average wages (46 percent).

An article from FinanceBuzz puts together some more specific data on a dozen fast-food chains in the US. Consumer favorites for a quick, cheap bite to eat like Taco Bell and McDonald’s have seen menu prices increase by 80 or even 100 percent!

Check out the article for even more specific food item data at each of these restaurants. For example, the most famous of fast-food sandwiches is the Big Mac, which is up from $3.99 in 2014 to $5.99 in 2024, a 50 percent increase. A Whopper meal at Burger King is up 79 percent. All the more reason to seek out deals in the apps, or just good-old in-store discounts, like the “buy one get one for $1” promo at most McDonald’s. This deal would get you two Big Macs for $7, or $3.50 each… less than in 2014! Or since today is Wednesday, you might want to head to Burger King, where Whoppers are $3 at most locations (regular price: around $6).

Price discrimination is alive and well at the drive-thru window, and if you are just ordering from the menu without any discounts, you are really going to feel the pain of inflation.

How Long Does It Take Prices to Double?

Jeremy Horpedahl2 Comments

Let me start by saying high rates of inflation, especially unexpected inflation, is bad. Still, it is useful to have some historical context. We’ve experienced the highest inflation rates in a generation lately, especially in 2022, but past generations experienced inflation too. How to compare?

Here’s one approach. Using the latest CPI-U data, we can see that prices on average approximately doubled between March 1996 and February 2024. That’s 335 months to double, or just shy of 28 years. How long did it take prices to double if we keep moving backward in time from March 1996?

It only took 194 months for prices to double from January 1980 until March 1996, just a little over 16 years. Prior to January 1980, prices doubled even quicker, this time taking less than 10 years! Prior to that, it took 24 years for prices to double between WW2 and 1970, and before that you have to go back 31 years to 1915 for another doubling. Judged by this, our recent history doesn’t look so bad.

That doesn’t mean everything is OK. As I said above, unexpected inflation is the worst kind, since individuals and businesses aren’t planning for it. And we’ve had 20% inflation in the past 4 years — something not seen since 1991 over a 4-year time period. A 20%+ inflation rate is unusual to us today, but it certainly wasn’t in the past: basically all of the 1970s and 1980s had 20%+ inflation every 4 years, sometimes more than 40% or even 50%.

Finally, while unexpected inflation is bad, we also care about the relationship between wage increases and price increases. We can rightfully bemoan rapid, unexpected price inflation, but if wages are increasing faster than inflation, we are still better off (on average). The BLS average hourly wage series for production and non-supervisory workers only goes back to 1964, so we can’t do a full comparison with the CPI-U, but we can compare the three most recent doublings of prices.

Keep in mind with the chart above that prices (as measured by the CPI-U) increased by 100% for each of these time periods. So, for the 1970s and 1980-1996 periods, wages actually rose by less than rate of inflation — wage stagnation! If we used the PCE price index instead, those time periods still don’t look good: PCE prices increased by 88% for 1970-1980, 85% from 1980-1996, and 78% since 1996. With either price index, the 1996-2024 period is clearly the best of these three, and it’s not even really close.

Let me finish where I started: the recent inflation is bad. I don’t want to downplay that. But some historical perspective is also useful.

See also a similar post and calculation on inflation doubling that I wrote in June 2022, which includes some discussion of 19th century inflation too.

When Will the Fed Raise Rates?

James Bailey4 Comments

Everyone else keeps asking when the Fed will cut rates, and yesterday Chair Powell said they will likely cut this year. Either they are all crazy or I am, because almost every indicator I see indicates we are still above the Fed’s inflation target of 2% and are likely to remain there without some change in policy. Ideally that change would be a tightening of fiscal policy, but since there’s no way Congress substantially cuts the deficit this year, responsibility falls to the Federal Reserve.

Source: https://fiscaldata.treasury.gov/americas-finance-guide/national-deficit/

Lets start with the direct measures of inflation: CPI is up 3.1% from a year ago. The Fed’s preferred measure, PCE, is up 2.4% from a year ago. Core PCE, which is more predictive of where inflation will be going forward, is up 2.8% over the past year. The TIPS spread indicates 2.4% annualized inflation over the next 5 years. The Fed’s own projections say that PCE and Core PCE won’t be back to 2.0% until 2026.

The labor market remains quite tight: the unemployment rate is 3.7%, payroll growth is strong (353,000 in January), and there are still substantially more job openings than there are unemployed workers. The chattering classes underrate this because they are in some of the few sectors, like software and journalism, where layoffs are actually rising. Real GDP growth is strong (3.2% last quarter), and nominal GDP growth is still well above its long-run trend, which is inflationary.

I do see a few contrary indicators: M2 is still down from a year ago (though only 1.4%, and it is up over the past 6 months). The Fed’s balance sheet continues to shrink, though it is still trillions above the pre-Covid level. Productivity rose 3.2% last quarter.

But overall I am still more worried about inflation than about a recession, as I was 6 months ago. Financial conditions have changed dramatically from a year ago, when the discussion was about bank runs and a near-certain recession. Today the financial headlines are about all time highs for Bitcoin, Gold, Japan, and US stocks, with an AI-fueled boom (bubble?) in tech pushing the valuation of a single company, Nvidia, above the combined valuation of the entire Chinese stock market. All of this screams inflation, though it could also indicate a recession in a year or so if the bubble pops.

At least over the past year I think fiscal policy is more responsible than monetary policy for persistent inflation. But I can’t see Congress doing a deficit-reducing grand bargain in an election year; the CBO projects the deficit will continue to run over 5% of GDP. That means our best chance for inflation to hit the target this year is for the Fed to tighten, or at least to not cut rates. If policy continues on its current inflationary path, our main hope is for a deus-ex-machina like a true tech-fueled productivity boom, or deflationary events abroad (recession in China?) lowering prices here.

Shrinkflation: Not Just for Cookies

Jeremy Horpedahl2 Comments

Cookie monster is mad:

But he’s not the only one. President Biden is mad too.

By now, hopefully we’ve all heard of shrinkflation. But if you haven’t, it’s when the unit price (e.g., the cost per pound) increases not because the price of the good went up, but because the product shrank in size.

Let’s be clear about a few things. First, this is nothing new. Here’s an Economist story from 2019 (pre-pandemic and pre-Bidenflation) talking about shrinkflation. You can find many such anecdotal stories back even further.

Second, the BLS is aware of this. They track it, and price it into the CPI. Take a look at the price data which underlies the CPI: it’s all stated in units. Price per pound, price per dozen, etc.

Moreover, the BLS also recently gave us some data on how frequently this happens. It’s pretty rare. Even among food items, which are a category the includes a fair amount of shrinkflation, only about 3 percent of products experienced any downsizing or upsizing from 2015-2021. That’s right, sometimes packages get larger, not smaller, which effectively lowers the unit price. “Shrinkdeflation” anyone?

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A Contrarian View from Apollo: No Rate Cuts in 2024

Scott Buchanan2 Comments

The mainstream view for the last 18 months has been that Fed rates cuts are always right around the corner. Markets are acting like the cutting cycle has already begun.

Apollo Global Management is a well-regarded alternative investment firm. (Disclosure: I own some APO stock). Their Chief Economist, Torsten Sløk, recently published his outlook, which differs sharply from the mainstream view. He notes that by various measures, the economy is heating up (or at least staying hot), and inflation has started to creep back up, not down. In his words:

The market came into 2023 expecting a recession.

The market went into 2024 expecting six Fed cuts.

The reality is that the US economy is simply not slowing down, and the Fed pivot has provided a strong tailwind to growth since December.

As a result, the Fed will not cut rates this year, and rates are going to stay higher for longer.

How do we come to this conclusion?

1) The economy is not slowing down, it is reaccelerating. Growth expectations for 2024 saw a big jump following the Fed pivot in December and the associated easing in financial conditions. Growth expectations for the US continue to be revised higher, see the first chart below.

2) Underlying measures of trend inflation are moving higher, see the second chart.

3) Supercore inflation, a measure of inflation preferred by Fed Chair Powell, is trending higher, see the third chart.

4) Following the Fed pivot in December, the labor market remains tight, jobless claims are very low, and wage inflation is sticky between 4% and 5%, see the fourth chart.

5) Surveys of small businesses show that more small businesses are planning to raise selling prices, see the fifth chart.

6) Manufacturing surveys show a higher trend in prices paid, another leading indicator of inflation, see the sixth chart.

7) ISM services prices paid is also trending higher, see the seventh chart.

8) Surveys of small businesses show that more small businesses are planning to raise worker compensation, see the eighth chart.

9) Asking rents are rising, and more cities are seeing rising rents, and home prices are rising, see the ninth, tenth, and eleventh charts.

10) Financial conditions continue to ease following the Fed pivot in December with record-high IG issuance, high HY issuance, IPO activity rising, M&A activity rising, and tight credit spreads and the stock market reaching new all-time highs. With financial conditions easing significantly, it is not surprising that we saw strong nonfarm payrolls and inflation in January, and we should expect the strength to continue, see the twelfth chart.

The bottom line is that the Fed will spend most of 2024 fighting inflation. As a result, yield levels in fixed income will stay high.

[END OF EXCERPT]

The big question, of course, is whether these recent signs of increased inflation are just blips of  noise, or the start of a new trend. Time will tell if Sløk’s contrarian view is correct, but I have to respect his intestinal fortitude in putting it right  out there, without any weaselly qualifications. He refers to many charts which are in his original article. I will reproduce four of these charts below:

Videos for Teaching Inflation in 2024

Joy BuchananLeave a comment

I’m teaching principles of macro this semester. Making macroeconomics sound important to students is partly about explaining that recessions are painful and significant.

As Alex Tabarrok says, “The Great Depression is Over!”  Maybe Gen Z can appreciate the significance of the Great Depression, but it is history. Gen Z has heard of the Great Recession, but keep in mind that a student who is 20-y-o in 2024 was 4 in 2008. It’s a weird one, but there has been a recession more recently. The Covid Recession is what I like to link to, when possible, in class.

To teach the inflation chapter this week, I’m using video clips that I’ll put up here as resources for others.

To start off the inflation chapter and bring in a more global perspective, I show: “Zimbabwe’s inflation rate hits triple digits”  This 2-minute news clip was produced by Al Jazeera. They talk about lending and policy in addition to retail price increases.

After we have gone through some definitions, I show two clips of an economic forecast that was recorded in 2021. I don’t usually show such long clips in class, but I’m relying on dramatic irony to make it interesting. The students know the path that inflation took from 2020 to 2024, but Dr. Doti in the video does not. I stop the video occasionally to point out connections to our textbook.

Chapman University’s 2021 Economic Forecast Update was presented virtually on Wednesday, June 16, 2021.

Dr. Jim Doti predicts that an unprecedented increase in the money supply after Covid will lead to inflation. He’s not right about everything, but that’s what makes it so interesting. Right after showing students the quantity theory of money equation, I can show them someone trying to apply it from about minute 25 to about minute 35. (don’t start the video from minute 1)

Then, I go back to my lecture and introduce the Fisher effect. Next, we watch about minute 38 to minute 43 of the 2021 forecast because of the direct connection of inflation to interest rates. Partly this just helps illustrate how messy the real world is.

Also, I pull from one of Jeremy’s 2023 posts to illustrate the long run neutrality of money. “The Rate of Inflation is Falling, But Prices are Still Rising (And So are Wages)“

Food Inflation in the G7 and Russia

Jeremy Horpedahl1 Comment

Food prices are up a lot in the past few years. I’ve written about this several times in the past few months. In the US, we’ve seen grocery prices go up 20% on average in just 3 years. That’s much higher than we are used to: in the decade before the pandemic, the average 3-year increase was just 4%. In fact, the 3-year increase was negative for much of 2017 and 2018. To find increases this big, you have to go back to the late 1970s and early 1980s (when sometimes the 3-year grocery inflation rate was almost 50%).

But if it’s any consolation, this is not a problem that is unique to the US: food prices are up around the globe. That’s a relevant insight when we come to a recent viral video from Tucker Carlson’s visit to a Russian grocery store. Carlson says that the inflation and cost of groceries will “radicalize you against our leaders.”

So what has food price inflation looked like in Russia, the US, and the other G7 countries? (What used to be called the G8, until Russia invaded Crimea in 2014.) Here’s the chart:

Cumulatively since January 2021, when our current “leaders” came into power in the US, food prices are up 20% in the US, as I said above. But notice that this is on the low end for this group of countries. Japan, with consistently low inflation and occasionally deflation over the past few decades, has been the lowest over this timeframe (though even in Japan, food prices are up about 7 percent in the past year).

But notice who is the highest: Russia, where grocery prices are up 32% in the past 3 years. Certainly, their invasion of Ukraine and the resulting global sanctions plays a role in this, but even if we look at early 2022, the cumulative 15% food inflation was much higher than any G7 country.

So blaming our leaders for rampant inflation is probably not a good idea, especially if you are trying to portray Russia in a positive light.

Perhaps the more charitable interpretation of Tucker Carlson is that the nominal price of groceries is lower, rather than the rate of inflation (even though he does mention inflation in the video). The basket of food they purchase in the video comes out to the equivalent of about $100 at current exchange rates. Everyone on his crew guessed it would be around $400.

I can’t say whether their guess of $400 was accurate, but it would not be totally surprising if the prices of non-tradable goods were lower. This is what would expect in a country with lower wages. While we normally think of services as non-tradable, it’s also reasonable to assume that a lot of fresh food, such as produce, bread, and dairy, is also non-tradable (at least not without high transaction costs).

Carlson’s claim that people “literally can’t buy the groceries they want” is a much more apt statement of the state of affairs in Russia (and other poor countries) than it is in the US and Western Europe.

We can see this in a few ways. For example, here’s a chart showing the percent of consumer spending that goes to groceries:

The average Russian allocates about 30% of their spending to groceries, similar to the Dominican Republic. And this data is from 2021, just before the massive spike in food prices in Russia. Meanwhile, the US is by far the lowest, at just under 7%. The UK, Canada, and Switzerland are the closest to the US, but they are in the 9-10% range. Food in the US is cheap.

And those high average levels from Russia obscure a wide-ranging distribution of food insecurity. In a story from Russian state-owned news agency TASS, they report that over 60% of Russians spend at least half of their monthly income on food. Even Putin is publicly acknowledging that inflation is a problem.

The food inflation we’ve experienced in the US has been bad, the worst in a generation. But it’s not exactly clear that our “leaders” are to blame. And it’s also pretty clear that it’s much worse in the rest of the world, especially in Russia.

Why Was Federal Tax Revenue Down in 2023?

Jeremy Horpedahl3 Comments

The year 2023 was a pretty good one for the economy, whether judged by the labor market or economic growth. Despite this good economic growth, total receipts of the federal government were down about 7 percent from 2022 (note: I’m using calendar years, rather than fiscal years). Here’s a chart (note: in NOMINAL dollars) of total federal revenue since 2009:

I want to stress that these are nominal dollars (there, I’ve said it three times, hopefully there is no confusion). Nominal dollars are usually not the best way to look at historical data, but for purposes of looking at recent government budgets, sometimes it is. Especially when revenue is declining: if I adjusted this for inflation, the decline in 2023 would be even larger!

You’ll notice also that the decline in 2023 is even larger than the decline in 2020, the height of the pandemic when many people were out of work due to government regulations and changes in consumer behavior. The 2023 decline is big!

So, what the heck in going on with federal revenue in 2023?

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How the Economy is Doing vs. How People Think the Economy is Doing

Jeremy Horpedahl5 Comments

Lately many journalists and folks on X/Twitter have pointed out a seeming disconnect: by almost any normal indicator, the US economy is doing just fine (possibly good or great). But Americans still seem dissatisfied with the economy. I wanted to put all the data showing this disconnect into one post.

In particular, let’s make a comparison between November 2019 and November 2023 economic data (in some cases 2019q3 and 2023q3) to see how much things have changed. Or haven’t changed. For many indicators, it’s remarkable how similar things are to probably the last month before anyone most normal people ever heard the word “coronavirus.”

First, let’s start with “how people think the economy is doing.” Here’s two surveys that go back far enough:

The University of Michigan survey of Consumer Sentiment is a very long running survey, going back to the 1950s. In November 2019 it was at roughly the highest it had ever been, with the exception of the late 1990s. The reading for 2023 is much, much lower. A reading close to 60 is something you almost never see outside of recessions.

The Civiqs survey doesn’t go back as far as the Michigan survey, but it does provide very detailed, real-time assessments of what Americans are thinking about the economy. And they think it’s much worse than November 2019. More Americans rate the economy as “very bad” (about 40%) than the sum of “fairly good” and “very good” (33%). The two surveys are very much in alignment, and others show the same thing.

But what about the economic data?

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State Tax Revenue is Down a Lot in 2023 (but really just back to normal levels)

Jeremy Horpedahl2 Comments

State tax revenue is down a lot since last year. The latest comparable data from Census’s QTAX survey is for the 2nd quarter of 2023, and it shows a massive hit: state tax revenue was down 14% from the same quarter in 2022, which is about $66 billion. Almost all of that decline is from income tax revenue, specifically individual income tax revenue which is down over 30% (almost $60 billion). General sales taxes, the other workhorse of state budgets, is essentially flat over the year.

That’s a huge revenue decline! So, what’s going on? In some states, there has been an attempt to blame recent tax cuts. It’s not a bad place to start, since half of US states have reduced income taxes in the past 3 years, mostly reducing top marginal tax rates. But that can’t be the full explanation, since almost every state saw a reduction in revenue: just 3 states had individual income tax revenue increases (Louisiana, Mississippi, and New Hampshire) from 2022q2 to 2023q2, and they were among the half of states that reduced rates!

To get some perspective let’s look at long-run trends. This chart shows total state individual income tax revenue for all 50 states (sorry, DC) going back to 1993. I use a 4-quarter total, since tax receipts are seasonal (and because states sometimes move tax deadlines due to things like disasters, a specific quarter can sometimes look weird). And importantly, this data is not inflation adjusted. Don’t worry, I will do an adjustment further below in this post, but for starters let’s just look at the nominal dollars, because nominal dollars are how states receive money!

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