The past few days have produced a bumper crop of disappointing news on inflation. First, we saw that the consumer price index grew by 0.4 percent in February, the highest monthly increase since September 2023, resulting in a higher-than-expected 3.2 percent overall rate of annualized inflation. Costs for shelter and gasoline, two of the most important categories for households, contributed to the majority (60 percent) of the increase in prices in February. At the same time, the producer price index for final demand rose by 0.6 percent for the month, the highest monthly increase since summer 2023, contributing to the highest annual rate of increase since September 2023. Import prices have now risen for two months in a row, the first back-to-back monthly increase since the summer of 2023. Finally, global oil prices, a key input into overall price levels, have hit current cycle highs above $80 per barrel in recent days.
These data indicate that inflation is not only far from vanquished but also may be on a path to increase in 2024. This is unfortunate news for most American households, which are struggling to keep up with rising price levels on everything, including food, energy, housing, transportation, and medical care. Because we have been living with inflation for three years now, the overall price level is about 20 percent higher than at the start of 2021, and, for certain categories, such as energy, prices are up by more than 70 percent. Real wages (i.e., wages after inflation) only began rising in 2023, meaning that most American households took pay cuts (in terms of their purchasing power) for two years, and they remain worse off economically than at the start of the Biden administration.
In order to bring some balance back to household finances, prices need to not only stop rising but also actually fall to pre-pandemic levels. At this point, there seems to be no prospect of this happening. In fact, the weight of evidence suggests that inflation will persist through 2024.
While the increase in food costs has slowed recently, and energy prices have declined modestly from previous highs, other categories continue to rise relentlessly. Housing costs, which make up a substantial portion of most families’ budgets, continue to increase at an annualized level of nearly 6 percent. Transportation costs increased by nearly 10 percent annual rate in February. Food away from home was up by 4.5 percent last month compared with the previous year.
The recent rise in oil prices suggests that the moderation in food and energy price increases is set to reverse in coming weeks. Retail gas prices, which remain higher than a year ago, have been rising for three weeks now, a trend that is likely to continue at least for the next few weeks. The U.S. Department of Agriculture expects that food prices will continue to rise by an estimated 2.9 percent in 2024, with a risk that they may increase by as much as 5.3 percent. Wall Street’s expectations for inflation have risen by 6.5 percent since December 2023, throwing additional cold water on the idea that the Federal Reserve will be able to reduce interest rates anytime soon.
Yet the most fundamental reason to expect inflation to continue to run too hot in 2024 is that the U.S. money supply, which increased by 40 percent in the two years following pandemic-related monetary handouts and by threefold since the global financial crisis, has not normalized relative to productivity growth. National income growth has not kept up with the ballooning money supply, and the consequence has been a delayed but inevitable rise in the overall price level, a process that only began in 2021. This price-level adjustment has not run its course and, in fact, has a long way to go. At the same time, the federal government continues to deficit spend at multitrillion-dollar levels, with interest expense alone adding another $1 trillion to the national debt every 100 days or so. Deficit spending that becomes an increasing portion of gross domestic product not only stifles economic growth but also acts as a strongly pro-inflationary force and leads to the eventual debasement of the currency.
While the Biden administration and many voices in corporate media continue to tout falling inflation, this is, at best, a hopeful mirage if not an outright falsehood. The unfortunate reality is that inflation will remain persistently high through 2024, and American families will continue to suffer its effects.
