Jackson Hole and The Ghost of Paul Volcker

The summer rally has just hit a wall. The Federal Reserve’s annual meeting Thursday in Jackson Hole, Wyoming, has investors on edge.

Fed Chairman Jerome Powell is due to deliver a speech on Friday morning, and Wall Street fears he could trigger a super-hawkish decision. Major U.S. stock indexes plunged across the board on Monday. In pre-market futures on Tuesday, stocks were trying to rebound.

In the past, Jerome Powell has expressed admiration for his predecessor, cigar-biter Paul Volcker. Will Powell follow Volcker’s lead? The evidence belies these fears. Let’s take a look at the latest signs that inflation has peaked.

Leg-breaking at the Fed…

First, a quick recap of history. Inflation as measured by the Consumer Price Index (CPI) rose from 3.4% in 1972 to 12.3% in 1974. At the start of the Reagan era, it took the harsh medicine of Fed Chairman Paul Volcker in the form of steep interest rate hikes to ultimately kill inflation.

In the process, Volcker also crushed the economy. By 1980, he had raised interest rates to 20%, an astronomical level that resembles the “vig” practiced by Tony Soprano. Recession ensued.

Pessimists fear the Fed will deliver a nasty surprise this week, but the latest inflation numbers are actually encouraging.

Of course, just because inflation is slowing doesn’t mean prices aren’t high. But the media tends to distort the image of inflation. In this election year, we hear a lot of demagogy about inflation. You have to come to terms with reality.

The annual “core” CPI rose at a rate of 5.9% for the 12 months ended July 2022, matching the previous increase, the US Department of Labor reported on Aug. 10. Core inflation excludes the volatile food and energy components.

This rise in core inflation represents a major deceleration from the 0.7% rate posted the previous month. Prices are falling on a range of crucial products and supply chains are starting to normalize.

In recent weeks, products that have racked up some of the worst price spikes have come down to earth:

  • Crude oil prices peaked at over $120 a barrel in March; they are currently down more than 25%.
  • House prices, which make up a large part of the CPI, have tumbled.
  • Motor vehicle prices soared in 2021 and early 2022, due to pandemic-induced shutdowns of manufacturing facilities. The latest data now suggests a sharp drop in prices from July to August.
  • Wood is no longer exorbitant. Remember when the press was raving about the high cost of wood? Soaring timber prices were at the forefront of the return of inflation, but they are currently down about 60% since March.

Prices are also falling among a wide range of other vital commodities, such as copper, steel, aluminum, iron ore, cobalt, grain, poultry, eggs and gasoline.

People often cite “time” as the most valuable commodity of all, and the cost of time, in the form of supply chain bottlenecks, is also decreasing. The supply chain is rapidly returning to pre-pandemic levels (see chart).

The chart above illustrates the widely tracked RSM Index, which is comprised of several different supply chain-related data from government and private industry reports. The index summarizes statistics that encompass inventory, delivery times, prices paid and volume of freight traffic, among other components.

The RSM index shows a substantial improvement in backlogs and delays in the transport of goods. Uncertainties related to the conduct of business fade.

Read this story: Is the Fed Waging the Wrong War?

Therein lies the rub with Fed policy. Inflation these days is largely the result of forces beyond the central bank’s control, such as shortages and supply chain imbalances. The danger is that Powell and his minions, in their quest for determination, will harm the economy wantonly.

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John Persinos is the editorial director of Invest daily.

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