Horowitz: Ready for a surge in prices and decline in economic growth?

Our government printed so much money for COVID that now, despite tight monetary policies, prices are still coasting at near-record highs for vital goods. The only effects of the tightening monetary policies are restricting credit and pushing us into a recession. In other words, we are trapped in a vicious cycle of stagflation in which the debt will continue to keep commodity prices higher, which will induce monetary tightening that dampens the economy without fundamentally lowering prices.

When June’s CPI numbers were published, one would think we killed inflation. The headlines everywhere proclaimed the end of inflation. The reality is that most prices remain at extremely elevated levels; it’s just that they are not growing as quickly as during the extreme shock period of the initial Russian invasion and corresponding policy responses. However, we have not reversed those trends at all: 4.8% core inflation built on top of the past two years is actually reflective of astoundingly stubborn prices.

Taken as a whole, the cost of living is still much higher than pre-COVID levels. Here are the CPI numbers as of June relative to three years ago:

• Apparel: +13.6%
• Shelter: +16.7%
• Food at home: +18.5%
• Home prices: +38.6%
• Rent:+24%
• Food away from home: +20.8%
• New Cars: +22.1%
• Used Cars: +46.9%
• Electricity: +24.5%
• Gas Utilities: +30.3%
• Transportation: +30.3%
• Gasoline: +70.2%

Of course, the rate of increase is not going to continue to be as acute in perpetuity, but why are we not going back to some semblance of pre-COVID or pre-Russian war levels of pricing as we did on just a few items, such as eggs?

In fact, commodity prices are actually now accelerating again in July since the last CPI report. When analyzing the cost of living, one of the best indicators is the Commodity Research Bureau Index, which measures the aggregated price direction of 19 critical commodity sectors and is widely viewed as an accurate reflection of where prices are headed in the coming weeks. As you can see, it is now headed up again, gaining more than 2%, after leveling off the past year. The index is over 50% higher than pre-COVID levels.

The prices of many important commodities are still at very high levels and are now going up again. After spiking to unfathomable levels, wheat appeared headed back down to baseline, but is now on the rise.

Wheat is trading roughly 50% higher than during pre-COVID levels, rising precipitously from the levels in May when the federal government announced inflation was slowing.

We are seeing the same trend with corn, which is about 60% higher than pre-COVID levels and has gone up 15% in the past few weeks.

Many other vital commodities that skyrocketed either after COVID or the Ukraine war only receded partially from record levels and are now headed back up. Rice is on its way up and is trading 32% higher than when Biden took office. Coffee is up 60% from the pre-COVID baseline.

As for the price of oil, after stabilizing this spring, it is now headed up again.

So, after Biden tapped out our Strategic Petroleum Reserve, we have nothing to show for it but gasoline prices still elevated at $3.60. Now it will be off to the races. Moreover, now we will have to refill the SPR at higher prices. The White House promised to refill it when the price was closer to $70. Instead, the administration continued raiding the supplies throughout May and June, taking our inventory down below 350 million barrels for the first time since the early 1980s, when our country was much smaller.

The fact that these commodities are still rising – even with a sluggish economy, reduced consumer spending, and locked-up credit markets – suggests that we are now headed into an era of “sticky” resilient inflation that persists in a slow economy. In another sign of a weakening economy, the S&P Global U.S. Flash Composite PMI fell 1.2 points to 52 in July. Chris Williamson, chief business economist at S&P Global Market Intelligence, warned that this is a sign of stubborn inflation persisting alongside (and inducing) a slow economy:

“July is seeing an unwelcome combination of slower economic growth, weaker job creation, gloomier business confidence and sticky inflation,” said Williamson in Monday’s PMI release. He warned that current output growth is consistent with an anemic 1.5% annualized GDP growth rate. Paradoxically, despite “increasingly subdued demand from U.S. households and businesses," he observes that “the stickiness of price pressures meanwhile remains a major concern.”

The prices remain this elevated despite the government draining the SPR, the Federal Reserve hiking interest rates this precipitously, drawing down $700 billion of the near-$9 trillion balance sheet, and the M2 money supply decreasing. What this means is that the debt-driven inflation is so enduring, we will need to see many more painful measures to bring it down, likely triggering a deep recession.

The culprit for all of this is the vicious cycle of cascading second- and third-order magnitude effects of the debt and the servicing of it. Our government has issued an astounding $1.125 trillion in debt since June 2. That is simply unprecedented. Plus, the rate of interest has increased so much that it now costs 13 times more to service the debt than it did two years ago.

With our government on pace for a $2.25 trillion annual deficit, this is a recipe for permanently elevated inflation, regardless of economic activity. “Bidenomics” is indeed a synonym for stagflation.