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Moneybeat - Popping inflation misconceptions


WORLD Radio - Moneybeat - Popping inflation misconceptions

What does it really mean when goods get more expensive?

A sign for Wall Street hangs in front of the New York Stock Exchange, July 8, 2021. Mark Lennihan/Associated Press Photo

MARY REICHARD, HOST: Next up on The World and Everything in It: the Monday Moneybeat.

NICK EICHER, HOST: Financial analyst and adviser David Bahnsen joins us now for our weekly conversation and commentary on markets and the economy.

David, good morning.

DAVID BAHNSEN, GUEST: Good morning, good to be with you.

EICHER: Well, David, we received a couple of government economic indicators for August and I’d like your read on those.

One was the consumer price index—it’s a regular report from the Labor Department that you often hear referred to in media reports as “inflation.” Financial journalists will frequently interchange the term “inflation” and “cpi” and that can be misleading if you’re not careful. We’ll get to that in a minute.

I’d like to begin with consumer spending, that fraction of spending that happened in the nation’s retailers. So retail sales. According to the Department of Commerce, August retail sales bounced back month-on-month over July and registered a seven-tenths of a percentage point increase.

I think a lot of people hear the headline or the lead sentence and take the meaning of the report from that, and I want to read one typical mainstream media econ story on the retail number: “The U.S. economy is proving resilient in the face of the Delta variant. Americans briskly increased spending at retailers last month …” and then it went on from there. Seems like a suggestion of cause: retail sales growth—and effect: economic resilience.

BAHNSEN: Well, it's funny, I absolutely agree that the economy showed resilience through the Delta strain. And I don't think that the retail number is proof of that at all. So it's one of those cases where I think they're looking for evidence of a conclusion. And they have the conclusion, right, and then the evidence is disconnected. I want to keep saying this, though, to the world listeners, America's economic strength does not come from its ability to spend money. It's a fallacy, but it is sort of the major economic fallacy of the last 100 years. On the government side, we believe we can fix economic problems by government spending more money. But on the household side, we believe economic strength comes from our ability to go buy things. And my contention is that economic strength is always in forever, for since the Garden of Eden, all the way to 2021, Silicon Valley, Wall Street, K Street, Hollywood, economic strength is from production. And so despite the philosophical bias I have towards production, not consumption, which is both spiritual and economic. For me. The retail number in America is absurd. There is no question that Americans are very happy to spend money As long as they can. And so whenever we have periods where consumption drops the financial crisis, that one month of the COVID locked down and things like that, it's always because of credit. It's not because demand went down. There's no less demand for food and beverage, and vacations and toys, and cars and electronics. It's just simply that the ability to spend more went away when the housing crisis kept people from being able to refinance out of their homes, when credit cards get maxed when banks tighten where you know, and so I think that the retail number was a surprise to people because they expected auto sales to drop so much, which they did, that it would take the overall retail number down month over month. But second of all, the total retail number actually went higher by point 7%, even with autos dropping because people spent so much more money in malls, restaurants, etc. Well, I spent a lot of time in Southern California, I spent a lot of time in Manhattan. I'm in airplanes, I'm out and about. I didn't see one iota of indication this summer that people were going, Oh my gosh, delta strain, I'm not going to go spend money. And so the reality is that that narrative didn't make sense. And then the data just sort of smacked the narrative around this week a little bit.

EICHER: Let’s jump into that inflation question— the consumer price index for August—and it ticked up but at a slower pace month-on-month from July and June and again we hear these reports and hear that this is a sign that “inflation is easing.”

That goes against a political narrative. We hear Republicans decrying inflation and you do see pockets of rising prices, but you make a distinction about types of inflation and public policy choices that drive inflation. Could you address that?

BAHNSEN: Let me first address the issue about the politicians that are going to continue making hay of it. I happen to think they're Doing something and saying something that's politically wise and advantageous, but I happen to think they're getting it wrong, but I don't think they know they're getting it wrong. So I'm not down on them. But certainly to the extent prices are elevated, and it taps into an overall theme of attacking the competence of the current administration, I think that there's a lot of political wisdom in trying to hit the point home. But if one is talking in the world I'm in which is about the actual soundness of the economic claim, and projection. I just think there's no question you have rising prices in some areas, for reasons that are not inflationary. And this isn't as much of a debate as people say it is. Because we continue to have the only data points we need to answer the question. As money supply went up last year significantly, at first, it's still now projected about 6%, money supply growth, loan demand is still down 15%. And so there just isn't any proof of monetary inflation. But prices can go higher for other reasons than that. When there's a supply shortage like we saw earlier in the year with lumber skyrocketed up, it's now dropped over 70%. And I do think the better word to use this month was disinflationary, then deflationary prices still rose on the month, but they rose at a much lower rate than they had been. And so as that rate of inflation is dropping what we call disinflation, it will eventually change the political narrative. But in the meantime, I understand why whatever side of the fence, you know, would want to exploit the political data points. And I do believe that there are parts of policy creating pricing challenges. And the greatest example continues to be in housing. There's just simply no excuse for rates being so low for the Fed buying so many mortgage bonds, stimulating more borrowing activity, and then combine that with more state and local supply problems and housing, environmental regulations, zoning issues that keep more housing stock from getting built, which the Biden ministration is attempting to remedy some of that I don't think their remedies are going to go anywhere. They don't have the authority at a federal level to do much here. It's a state and local problem. But housing is an area where I think you have inflationary problems. I just don't think it's monetary inflation. And so there's a lot of lanes to cover and simplistic two-sentence you know, kind of analysis that a lot of people want right now. Inflation, bad. Biden, bad. You know, those things don't work in the present moment. We have to unpack it a little better to get this right.

EICHER: David Bahnsen—financial analyst and adviser. He writes at dividendcafe.com. And that’s your Monday Moneybeat. Thanks David, appreciate it.

BAHNSEN: Thanks so much, Nick.

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