Inflation Comes in HOT

Happy Tuesday! Or maybe not, as a higher-than-expected monthly reading on inflation sent stocks plunging, with investors betting that the Federal Reserve would respond by continuing its campaign of aggressive interest rate hikes. The White House was in a celebratory mood, though, as President Joe Biden held an event to tout legislation he signed four weeks ago.

Here’s what you need to know.

Inflation Hotter Than Expected in August

Consumer prices rose again in August, dashing hopes that the Federal Reserve’s monetary tightening campaign is helping bring inflation down on a smooth and steady path.

Despite a significant decrease in fuel prices during the month, the consumer price index rose 0.1% from July to August, counter to expectations of a 0.1% decrease. Core CPI, which ignores volatile fuel and food prices, recorded a worrisome 0.6% increase — twice analysts’ expectations — indicating that price increases continue to occur in a variety of economic sectors, including shelter, new cars and medical services.

The 12-month inflation rate was 8.3% — down from the 8.5% annual rate recorded in July, but only slightly, and a smaller decrease than many economists had expected to see.

“There's no sugar-coating it: August's inflation numbers were terrible news for everyone rooting for the economy to come in for a soft landing,” Axios’s Neil Irwin and Courtenay Brown wrote.

Former Treasury Secretary Larry Summers said that the latest CPI report “confirms that the US has a serious inflation problem. Core inflation is higher this month than for the quarter, higher this quarter than last quarter, higher this half of the year than the previous one, and higher last year than the previous one.”

Say goodbye to the pivot: The reaction on Wall Street, where the S&P 500 fell more than 4%, underlined just how distressing the inflation numbers were, as investors gave up their expectations that the Federal Reserve would soon “pivot” and ease its tightening campaign.

“Premature calls for the Federal Reserve to pause or pivot on its campaign to tame inflation should be politely dismissed given the 0.1% increase in top-line inflation in August,” wrote Joseph Brusuelas, chief economist at the consulting firm RSM. “Even though supply chain snarls are easing, gasoline prices are falling and global aggregate demand is cooling, for the Fed to pull back on its current policy path would be a strategic error of epic proportions.”

Rubeela Farooqi of High Frequency Economics said the report virtually guarantees that the Fed will move ahead with another large interest rate hike at its next meeting. “Overall, inflation readings remain unacceptably high for policymakers,” she wrote. “Coupled with a labor market that is still strong, the data seal the deal for another aggressive, 75-basis point, rate hike next week.”

Some analysts said the Fed may move even faster. “The CPI puts a 1% hike on [the] table, and given the hawkish tone the Fed has delivered, ups the ante they will do it,” said Diane Swonk, chief economist at KPMG.

And the outsize rate hikes may continue for longer than expected. “We thought they’d be stepping it back to 50 [basis points] in November,” Jay Bryson, chief economist at Wells Fargo, told Bloomberg. “At this point, you’d say 75 is certainly on the table in November.”

Hard landing ahead? The odds of a recession are probably greater now than they were before the inflation numbers were released, since the Fed is now more likely to raise interest rates higher and keep them high for a longer period of time. “The Fed is probably going to overdo it,” Mark Cabana, head of US rates strategy at Bank of America, told Bloomberg. “We think that the Fed will try and stick to this higher-for-longer mantra. That’s probably going to result in a recession.”

Biden Celebrates the Inflation Reduction Act

In a gathering at the White House Tuesday, President Joe Biden somewhat incongruously trumpeted the passage of the Inflation Reduction Act. Largely ignoring the downbeat inflation report released earlier in the day, Biden cited the one unambiguously good piece of news as far as prices are concerned — the steady decline in fuel prices.

“[Gas prices] are down more than $1.30 a gallon since the start of the summer,” Biden told hundreds of people gathered on the White House lawn. “We’re making progress. We’re getting other prices down as well, but we have more to do. But we’re getting there.”

In a statement, Biden noted that the battle against inflation is far from over. “It will take more time and resolve to bring inflation down, which is why we passed the Inflation Reduction Act to lower the cost of healthcare, prescription drugs and energy,” he said.

US Posts $220 Billion Deficit in August

The U.S. government ran a $220 billion deficit in August, up 29% from a $171 billion shortfall in the same month a year ago, the Treasury Department said Tuesday.

For the month, federal revenues grew 13% year over year to $304 billion. An increase of $25 billion, or 11%, in individual income tax withholdings accounted for most of the growth, Reuters notes. Outlays jumped $84 billion, from $439 billion in August 2021 to $523 billion last month — though that increase “largely reflected calendar differences in how payments were distributed in August 2021,” The Wall Street Journal says. “Adjusted for calendar differences, the deficit in August of this year and August of last year were roughly the same, the Treasury Department said in its monthly budget statement.”

Over the first 11 months of fiscal year 2022, the deficit has fallen dramatically, shrinking to $946 billion from $2.7 trillion for the same period in the prior year. That drop of almost $1.8 trillion represents a 65% decrease, aided by the end of pandemic relief spending and record tax revenue.

Has Biden Been Fiscally Responsible? He Says Yes, Budget Group Says No Way

President Joe Biden has frequently touted the deficit reduction under his administration. He did it again at the White House event Tuesday celebrating last month’s passage of the Inflation Reduction Act. “This bill alone is going to lower the deficit by $300 billion over the next decade,” Biden said. “And that’s on top of the $350 billion we reduced the deficit in my first year. … And for this fiscal year a trillion, 500-billion-dollar reduction in the deficit. So I don’t want to hear it anymore about big-spending Democrats. We spend, but we pay.”

Given those comments, Biden may not want to hear about a new analysis from the Committee for a Responsible Federal Budget, that finds that his administration has approved nearly $5 trillion in new borrowing.

“We estimate the Biden Administration has enacted policies through legislation and executive actions that will add more than $4.8 trillion to deficits between 2021 and 2031, or nearly $2.5 trillion when excluding the effects of the American Rescue Plan,” the group says in a new blog post. “This is on top of the trillions of dollars we were projected to borrow before President Biden took office.”

The CRFB, a nonprofit that advocates for deficit reduction, says the $4.8 trillion total consists of $4.6 trillion in new spending, about $500 billion in tax cuts and breaks and some $700 billion in added interest costs, all of which is partially offset by about $1 trillion worth of spending cuts and revenue gains. (See the chart below for more details.)

“Of the non-interest deficit increases, about $3 trillion is from legislation – including a net $1.6 trillion passed on a partisan basis and $1.4 trillion passed on a bipartisan basis. Another $1.1 trillion comes from executive actions,” the group says. It adds that the new borrowing approved under Biden is less than the $7.5 trillion added to the deficit under former President Donald Trump, but much more than the $2.5 trillion enacted at this point in Trump’s term.

In a withering Washington Post opinion piece accompanying the new analysis, CRFB President Maya MacGuineas blasts Biden’s claims of fiscal responsibility. “After 19 months and $4.8 trillion in new debt, Biden has done far more to add to our deficits than address them,” she writes. “He can claim the mantle of fiscal responsibility all he wants. The math tells a different story.”

US Poverty Hits Record Low According to One Key Measure: Census

Emergency aid provided by the federal government during the Covid-19 pandemic drove poverty levels in the U.S. to record lows in 2021 according to one key measure, the Census Bureau said Tuesday.

Relief spending during the pandemic drove the U.S. poverty rate down to 9.2% in 2020, using an alternative method of determining poverty rates called the Supplemental Poverty Measure, which takes government aid programs into account more thoroughly that the standard method. The supplemental poverty rate fell again in 2021, to 7.8%, the lowest level since the Bureau started reporting that data in 2009.

The number of people living in poverty fell to 30 million in 2020 and to 25.6 million in 2021.

Child poverty saw a particularly sharp drop, with the child poverty rate falling to 5.2% in 2021, the lowest level on record, down from 9.2% in 2020. The 46% decline was driven largely by the enhanced child tax credit, which the American Rescue Plan made larger and partially payable in cash throughout the year. That increase was temporary and has now expired, despite Democratic efforts to make it permanent.

Older Americans, however, fared worse. The poverty rate for those 65 and older rose from 9.5% to 10.7%, with inflation eating away at the fixed incomes that many retirees live on.

Meanwhile, the official poverty rate, which does not take stimulus checks and some government programs into account, remained relatively flat in 2021, inching higher to 11.6% from the 11.5% rate recorded in 2020.