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Prices went up a lot in August, which means that earnings went down again

The Bureau of Labor Statistics of the U.S. government released new data on price inflation today, and it wasn't good. Before taking into account seasonal changes, the Consumer Price Index (CPI) showed that inflation rose 8.3% year over year in August, according to the BLS. That's the seventeenth month in a row that inflation has been higher than the Fed's arbitrary target of 2%. It's also the sixth month in a row that prices have gone up by more than 8%.

Inflation also went up from one month to the next. From July to August, the CPI rose by 0.1% after taking into account seasonal factors. With the exception of July, when the month-over-month change was zero, the CPI has gone up for twenty-seven straight months.

The rise in prices in August keeps inflation close to levels not seen in forty years. June's year-over-year increase of 9.1% was the biggest CPI increase since 1981, but August's increase of 8.3% still keeps price inflation well within the same range as the inflationary years of the early 1980s. August's rise was the fifth biggest rise in the last 40 years.
Prices keep going up because of rising costs for food, energy, transportation, and shelter. In other words, the prices of everything important went up a lot in August compared to the same month last year.

For example, "food at home," or grocery bills, went up 13.5% in August compared to the same month the year before. The price of gasoline kept going up, going up by 25.6% year over year, while the price of new cars went up by 10%. The BLS says that shelter costs went up by "only" 6.2%, which is one of the smaller increases.

This is bad news for the Biden administration, which has tried many times to downplay the constant rises in the cost of living that Americans have had to deal with because of years of deficit spending, which has helped fuel inflationary monetary policy.

Last month, for example, President Joe Biden tried to explain July's growth as "zero inflation" by saying, "Today, we got the news that our economy had zero percent inflation in July—zero percent." Even though inflation was 8.5% in July compared to the same month last year, this may fool some people.

In terms of real wages, this has been terrible for a lot of people. The BLS says that the average hourly wage in August was $32.14. The price went up by 4.38 percent. This might be good news if prices hadn't gone up by 8.3 percent during the same time period.
So, the gap between wage growth and price inflation in August was –3.9. This ties for the largest negative gap between earnings and inflation growth that we’ve seen in more than a decade. It’s also the seventeenth month in a row during which that gap has been negative. It’s now even larger than what it was during the covid lockdowns, when earnings went down even in nominal terms.
Obviously, this is not what the current government wanted to see in the last sixty days before the midterm elections. But this is bad news for the Federal Reserve as well. Price inflation that doesn't go away is a constant reminder of how far behind the Fed is and how risky it was for the Fed to "print" nearly $5 trillion between February 2020 and April 2022. Over the past two years, the Fed has repeatedly told the public that making a lot of new money wouldn't be a problem and that price inflation would never be more than "transitory."

Once that story was debunked, the Fed started to admit toward the end of 2021 that CPI inflation was not temporary, but that it would not let it become "entrenched." Prices did keep going up, but it took the Fed more than six months, from the fall of 2021 to the spring of 2022, to start raising the target federal funds rate. The Fed's lack of real action is also shown by the fact that its portfolio, which grew by $8 trillion from 2008 to early 2022 by adding new money, has only gone down by 1.2% this year. That might be enough to scare the markets, but it's not nearly enough to get markets back to real prices or get monetary policy back to normal.

In other words, the Fed is just now starting to do real things after more than a decade of quantitative easing and two years of mega-QE. The fact that the Fed is afraid to take any real steps to stop inflation shows how much Wall Street is against any kind of sane monetary policy right now. The financial sector has become so used to easy money and low interest rates that even a target fed funds rate of 2.5% is called "tight." But this shouldn't be a surprise, since for much of Wall Street, the Fed's policy of "accommodation" is the only game in town, and it's what's driving the market right now.

This is why Wall Street will also see the latest report on inflation as bad news. But consumers won't be happy about it because inflation is bad for them. No, it's bad news because another sign of high inflation makes investors think the Fed will keep its "tight" monetary policy for a few more months. In other words, any economic news that keeps the Fed from "pivoting" toward easier money is bad news, and anything that might make a pivot happen sooner is good news. This is why Wall Street now hopes for job losses and bad employment data: Wall Street hopes that bad news about jobs will force the Fed to ease again. And when it's easy to make money, stock prices go up.

The Fed should, of course, stop trying to change the market in any way. It should stop manipulating interest rates and let the market decide what to do instead. It should also start selling off its portfolio. Would this make the economy slow down? Almost for sure. But it would also let the economy heal for the first time in twenty years, after decades of bubbles and booms caused by the Fed's inflation of money. For political reasons, this would never happen before the midterm elections. However, even after the elections, the Fed is not likely to give up its role as the central planner of the economy. Fed economists are just too far down the ideological path of giving up on markets and embracing planning by the government for that to happen.

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