Good Friday Morning! Especially to Elon Musk, who turned the world on its head with his offer to purchase Twitter. It’s the sort of news story that’s funny to watch in real-time on Twitter, primarily because of the meltdowns. Who knew that Twitter’s moderation was one of the pillars of democracy? That’s the lunacy that Elon Musk forced to the surface with a bid of $54.20 per share (the 420 joke is pure Musk).
Is Musk serious, or is this a $43 billion joke for him? Who knows. It is entertaining, though, and for that, I thank him. This week, I will dig through the latest inflation numbers and discuss why I don’t think we’ve hit “peak” inflation. There are still too many unknown variables—links to follow.
Where you can find me this week
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[04/11/2022] Inflation is increasing political instability everywhere – Conservative Institute
[04/15/2022] Elon Musk the Pirate King – Conservative Institute
The US vs. China standoff over inflation and recession.
This week’s most important story is a continuation of last week: the lockdowns in China. COVID-19 is essentially over in the United States. I understand mask orders are returning in places like Philadelphia, and Democratic-run states and cities may follow suit in the future. But the lockdowns are done.
In China, it’s still January – March 2020. Zero-COVID is the policy there, and the tensions are building. PBS had a solid report going through the anger rising among the Chinese people over the government’s COVID-19 response. Chinese economic data is dropping as a result of the draconian lockdown policies.
COVID-19 is gone as a public health pandemic. COVID-19’s impact on the economy is raging louder than ever because of the Chinese Communist Party.
This all matters because of the global economy. I’ve written for weeks about the impact of Russia on various parts of the US economy. But that’s nothing compared to China. Russia is regional with a few global consequences; China is in everything and everywhere.
Many goods are stuck in China right now as a result of the Covid lockdowns and it could become a “big problem” for the global economy, according to business consultant Richard Martin.
“Many of the things that we use around the world that’re manufactured, have components from China and we’re about to see a logistics snarl that’ll dwarf anything in 2020 or 2021,” Martin, managing director at IMA Asia, told CNBC’s “Street Signs Asia” on Tuesday.
“China is 20% of global demand but its role in supply chains is much bigger than that.”
Since the early months of the pandemic, the global economy has struggled with supply chain challenges due to a mix of factors — such as logistics services struggling to keep up with trade volume, or Covid surges in parts of Asia that threatened to disrupt the flow of goods.
The war in Ukraine, which broke out in late February after Russia invaded the country, has further fueled those concerns.
“The outlook you’ve got for the global economy is getting pretty dim now — Europe faces a war on its doorstep, United States has got big interest rate hikes coming through which could hit the U.S. consumer and in China, they’re really slowing the economy down,” Martin said.
Later in the report, they add, “Referring to Nomura’s survey on the extent of the lockdowns across China, he said: “If we look at provinces where there’s partial or full lockdowns we estimate it covers around 40% … of China’s GDP.”
We’re starting with China this week because I wanted to write about the latest inflation reports in the US. But after those reports came out, I listened to constant debates on CNBC and other places saying that US inflation had peaked. Biden has claimed that every month has been peak inflation for the last 4-5 months. A piece on Seeking Alpha makes a decent case for March being peak inflation.
The issue with that case is China. It’s the 800 lb gorilla in the room. The shutting down of China and the continued war in Ukraine produce uncertainty. On the war front, various outlets point to May 9, 2022, a key date where Russia could declare victory or recommence war efforts. May 9 is a Russian celebration of their successes in WWII. I believe we’ll see Russia re-engage, bringing in new conscripts and more, but we’ll see.
Another possibility is freezing the war effort and shifting towards economically isolating Ukraine. The Atlantic Council is already warning of such a possibility. Since Russia controls the eastern regions, much of the farmland, and the sea, it would be difficult for Ukraine to recover economically. While the Ukrainian people suffer from that, Russia can reconstitute itself in the newly won regions of Ukraine.
But regardless of the war, the inflation pressures haven’t let up. China still has issues. And second, the inflation pressures are shifting. You can see that in the economic data. First, the inflation report:
The all items index continued to accelerate, rising 8.5 percent for the 12 months ending March, the largest 12-month increase since the period ending December 1981. The all items less food and energy index rose 6.5 percent, the largest 12-month change since the period ending August 1982. The energy index rose 32.0 percent over the last year, and the food index increased 8.8 percent, the largest 12-month increase since the period ending May 1981.
We continue to set 30 and 40-year records for inflation. Because we’re comparing year-over-year, the topline numbers may soften. But inflation is still rising month-over-month. See, for example, how inflation is eradicating real earnings:
Real average hourly earnings for all employees decreased 0.8 percent from February to March, seasonally adjusted, the U.S. Bureau of Labor Statistics reported today. This result stems from an increase of 0.4 percent in average hourly earnings combined with an increase of 1.2 percent in the Consumer Price Index for All Urban Consumers (CPI-U).
Wages increased 0.4% across all categories from February to March. But that increase was obliterated by the 1.2% increase in inflation over that same period. According to the report, if you look at that, there have only been two months out of the last twelve with positive real earnings growth for employees.
China is dealing with inflation too. Inflation means that banks need to tighten interest rates to deal with inflation costs. The US Fed is raising interest rates and is expected to increase the pace of those rate hikes. The problem is that China needs to do the exact opposite. China faces economic headwinds and is seeking to loosen rates. China unexpectedly did not cut rates this month. CNBC reporting noted:
China’s economic growth is seen as likely slowing to 5% for this year as it takes a blow from the renewed Covid outbreak, a Reuters poll showed. That’s below the government’s target of 5.5%.
However, some analysts pointed out that China’s central bank has limited headroom to increase rates due to rapidly rising consumer prices.
“Rising food and energy price inflation limits the space for the PBOC to cut interest rates, despite the rapidly worsening economy,” Nomura’s chief China economist Ting Lu said in a note Monday.
China and the United States are in a predicament. On the one hand, inflation dictates tightening monetary policy to kill demand and control rising costs. On the other hand, because China faces real recessionary risks and its leadership has major political leadership battles ahead, loosening monetary policy to make money cheap and increase liquidity to promote economic growth is the more likely.
China’s plan, thus far, is to pass off inflation to the United States and other buyers of its goods. But if the United States and Europe engage in a complete tightening program to kill demand, China will get muted growth. Everyone expects China to loosen its monetary policy, pushing inflation higher.
Pretty soon, it’s likely we’ll have the US tightening its belt across the board. Housing costs are the major contributor to inflation, and it hasn’t started dominating the data yet. Mortgage costs are shooting up due to the Federal Reserve. If you remove the main drivers of inflation, energy and food, housing is showing up:
The shelter index increased 0.5 percent in March and accounted for nearly two thirds of the monthly increase in the all items less food and energy index. The rent index increased 0.4 percent in March as did the owners’ equivalent rent index.
The point I’m trying to make is this: it’s hard to make a case for peak inflation when no one knows what the economic conditions will be in the United States or China in the next three months. It’s possible we may have peaked on inflation, and conditions will improve. It’s also possible that new inflation drivers appear, which worsen all categories. For more than a year, the experts and political leadership have preached “transitory” and “peak.”
If the last two years have taught us anything, it’s that right when you get to a peak, something new arises.
Links of the week
Ulysses S. Grant, Forgotten Republican: The first civil-rights president – Allen C. Guelzo, National Review
Make the 1920s Great Again? A Superficially Appealing Story of The Republican Party – Avi Woolf, Ordinary Times
‘Censorship is free speech’ is the establishment’s Orwellian line on Elon Musk’s Twitter crusade – Glenn H. Reynolds, NYPost
The Assumptions About Ukraine Were Wrong. We Need New Assumptions. – Noah Rothman, Commentary Magazine
Twitter Thread(s) of the week
Satire of the week
Pigeon That Pooped On Biden To Speak At CPAC – Babylon Bee
Thanks for reading!