Inflation: "Transitory" Taking a Hit
Even as the Federal Reserve and its Chair, Jerome Powell, maintain that the surge in inflation is transitory, developments over the past week dented that argument. President Joe Biden, after initially indicating that he did not have the power to extend the ban on eviction for nonpayment of rent, subsequently did so through October 3. Based on legal appeals by landlords, the ban could end before that date. In either case, any subsequent hike in rents that I discussed last week could serve as a catalyst for sustaining inflation and increasing the fiscal stimulus package to an even higher level.
Extending the eviction ban is not a victimless measure. Even when landlords are prevented from legally expelling delinquent renters, they themselves are obligated to make mortgage payments to financial institutions and pay real estate taxes to government entities. Since making mortgages is a major source of revenue for some banks, expect defaults by building owners to translate into hits on bank earnings. Will the next fiscal stimulus be to banks with deteriorating loan portfolios, as well as directed to lessors to limit defaults?
The second signal for inflation came from the jobs front. Bureau of Labor Statistics figures released Friday showed total nonfarm payrolls increased by a much higher than expected 943,000 in July. Some of the increase in jobs may be traced to the end in 24 states on various June and July dates of the $300 weekly supplemental jobless benefits. Such federal assistance is currently scheduled to end September 6 and, should aid be extended beyond that date, measured job creation may again show a drop.
BLS numbers also showed that average hourly earnings increased by almost 4% during the 12 months ending in July, accelerating from 3.7% in June. Rather than just in the goods area, average hourly earnings in private sector services were 4.2% higher last month than a year ago. Don’t expect these wages to come down once the pandemic is over!
The jobs report released August 6 was the last one central bankers will have prior to their meeting in Jackson Hole, Wyoming from August 26 to 28. Although there is some expectation that the Fed will provide a better guideline regarding tapering bond purchases at the Jackson Hole sessions, the central bank is more likely to punt until it is sure that the substantial job increases will continue.
Even if the central bank should suggest a timeline for tapering later this month, reduced bond purchases are not likely to begin for a few more months. Expect the Fed’s balance sheet, which has doubled to over $8.2 trillion from $4.1 trillion at the start of 2020, to continue to increase over the next several weeks. A pandemic era stimulus measure is likely to be pursued in an economy in recovery. A hike in the Federal Funds rate that could translate to higher commercial lending rates to stem speculation? Not until 2022, at the earliest.
Inflation is not yet seen as a major political issue as it was in 1973, and again in 1979. On the other hand, employment and wage gains get the focus from the Biden administration and elected officials. And that will provide inflation staying power.
Dr. Komal Sri-Kumar
President
Sri-Kumar Global Strategies, Inc.
Santa Monica, California
srikumar@srikumarglobal.com
August 8, 2021
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