Let’s see if we can find a common string in today’s data.
Gross domestic product in the first quarter rose at a 3.2% annual rate, “driven by businesses stocking up on goods for a strengthening consumer demand stoked by the lowest core inflation number in 51 years.” The “core” inflation rate, excluding food and energy, rose 0.6% in the first quarter, a big drop from 1.8% in the fourth.
That was the lowest reading since 1959, back in the Elvis and Sputnik days. Oh, let’s twist again, like we did last summer.
Let me ask you this: how strong can consumer demand possibly be if inflation is downright disinflationary? We’ve seen the Fed pump more money into the system than at any time in its history, and yet inflation keeps slipping. That’s simply because consumers aren’t spending more money.
Inflation is driven by the velocity of money, basically how rapidly a dollar passes from one person to another to another. If people aren’t spending money, you won’t get inflation. Which is why despite the Fed’s ZIRP rates policy, despite the nearly $2 trillion cash injection, there’s no sign of inflation. People aren’t spending. Don’t get me wrong. People are spending some money — I’ve got to buy a Communion present this weekend, and I need some new work shirts, and we got pizza last night — but they’re not spending enough to drive even “normal” inflation, forget some kind of inflation the Fed would actually, like, have to worry about.
So you tell me where this big recovery’s coming from.
Yes, there’s been a much ballyhooed revival of spending, we even did some of the ballyhooing, but keep two things in mind: a lot of it’s coming from government stimulus. People aren’t maxing out their credit cards anymore, or using their homes as the proverbial ATM. Primarily because they are still digging out from under the credit implosion, and will be for quite some time to come.
That’s why the feds and the Fed are trying so hard to reflate the economy, because it is positively deflating, still, and our elected and appointed leaders have absolutely no idea how to structure the economy any other way. And I feel for them, too. Because spending borrowed money has sadly become a major crutch in this nation over the past generation or two. But the crutch itself is defective.
Businesses gearing up for a big surge in consumer spending, I fear, may be disappointed. Although I can’t say I’ve seen a single company reporting earnings that’s come out and said, we’re gearing up for a big recovery. They’re all very tentative. The only people pushing the recovery meme hard are Democrats and Wall Street. And Larry Kudlow.
But hey, here’s one bright note to the disinflationary trend: in the first quarter, wages almost managed to keep up with inflation. Wages rose 0.4%, the Labor Department reported separately this morning. Benefits were up a brisk 1.1%, bringing the cost index up to 0.6%. That 0.4% number is just a hair below the 0.6% core inflation rate. So congratulations, America, you just barely fell behind this quarter. Feel richer? Feel like taking on some fresh debt all of a sudden?
Oh, deflation, do…that voodoo…that you do…so well…