WHOOSH, Dollar Purchasing Power Plunges in February as Inflation Spreads in Services, Fed Still Pouring Fuel There

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That’s not even including the spike in food and energy prices over the past few weeks. They will appear later.

By Wolf Richter for WOLF STREET.

It would be hilarious, if it weren’t so bad, that the Fed spent a year trying to put a sack over everyone’s head that inflation was “transient” even as it was rising. spiraling more and more, and everyone knew that something had fundamentally changed in the inflationary mindset of businesses and consumers, after $4.7 trillion in reckless money printing in two years, a total crackdown on interest rates and $5 trillion in deficit stimulus spending.

It’s a horror show, the inflation data released today. But that still doesn’t include the bulk of the wild price spikes we’ve seen in commodities over the past few weeks, including wheat and fuel; and it does not yet include most of the raging housing inflation that the CPI will only gradually pick up. So it will get worse.

The broader consumer price index (CPI-U) jumped 0.8% in February from January and 7.9% from a year ago, the worst since December 1981, according to data released today by the Bureau of Labor Statistics. But at the time, inflation was down; now inflation is skyrocketing:

Inflation = loss of purchasing power of the dollar.

Inflation is not a sign of growth, and it is not a sign of anything positive. It’s just a sign of the loss of the purchasing power of the consumer’s dollar, including the purchasing power of labor denominated in dollars. And it’s a long-term, cumulative and relentless process that began to accelerate last year. In February, the purchasing power of $100 in January 2000 fell to a new high of $59.46. And that’s why Americans are in such a bad mood:

Inflation spreads through the economy.

The “core” CPI-U, which excludes the booming and still volatile commodity-dependent food and energy components, to gauge how inflation has seeped into the economy over the broadly, reached 6.4%, the highest since August 1982.

But there’s a huge difference: In 1982, the Fed was trying to fight inflation, and short-term interest rates were in the double digits.

The last time inflation hit such a high was in 1978, when the Fed pushed the fed funds rate towards 10%.

Today, the Fed continues to stoke inflation by clamping down on interest rates near 0% and ending QE for the moment after printing $4.7 trillion in two years. And its huge pile of assets on its balance sheet – the result of money printing – fuels inflation. Which makes it the most reckless Fed ever, having made two years of policy error after policy error:

Inflation in services has started to soar.

How far has inflation infiltrated the economy? Last year, the CPI surge was blamed on supply chains, chip shortages, factories in China, used cars, new cars – i.e. the prices of goods that have gone up.

But now inflation in services started to climb. The services CPI jumped 4.8% year-on-year, the highest since June 1991:

Inflation for durable goods and non-durable goods continues to rise.

The CPI for durable goods – which includes new and used vehicles, consumer electronics, etc. – climbed 18.7% in February, by far the highest in the history of monthly CPI data dating back to the 1950s. The previous high was set in 1975, at 14.4% (red line) .

The CPI for non-durable goods – which is dominated by food, energy and household supplies – jumped 10.7%, just slightly above November 2021, and the highest since July 2008 (11.0%), when crude oil was up (purple line):

Creeping housing inflation is gradually entering the CPI.

The main component of the CPI is the cost of housing, which accounts for 32.4% of the total CPI. They are followed by two different measures of rent – the cost of housing as a service rather than as an asset.

Both metrics began to increase in mid-2021, after the pandemic subsided, slowly picking up real market rent increases. Both metrics are lagging, ensuring that even if rents were to stop rising in March, both metrics would continue to rise through 2023. So we already know that the current peaks in market rents up to in February will put upward pressure on the CPI much earlier. 2023 (here is my discussion of this phenomenon).

“Rent of the main residence” jumped 4.2% in February (red in the chart below). This is based on what tenants have reported as their actual rent payments, including in rent-controlled apartments. It weighs 7.4% of the overall CPI.

“Equivalent rent owner of residences” increased by 4.3% (green line). This measure estimates the costs of homeownership as a service and is based on surveys that ask landlords how much their home would be rented for. It weighs 24.2% in the overall CPI.

Both measures are well below the CPI and are therefore still now CPI, but they maintain the CPI less than before, and they will maintain it even less in the future:

Real home buying costs are up 18.8% year over year, according to the Case-Shiller Home Price Index, and up more than 25% or more 30% in certain markets. I show crazy graphs of this raging house price inflation market by market in America’s most splendid housing bubbles.

Here, then, are juxtaposed the exploding house prices, measured by the Case-Shiller index (purple) and the CPI replacing the costs of ownership, the “equivalent to the owner’s rent” (red) which is slowly rising. Both indices are set at 100 for January 2000:

Inflation of “food at home” rose 1.4% for the month and 8.6% year-over-year. Main categories and year-over-year inflation rates:

  • Beef: 16.2%
  • Pork: 14.0%
  • Poultry: 12.5%
  • Fish and seafood: 10.4%
  • Eggs: 11.4%
  • Fresh fruit: 10.6%
  • Fresh vegetables: “only” 4.3% year-on-year, but they are taking off now, with a monthly peak of 1.3%.

Inflation of “out-of-home food” jumped 6.8% year-over-year, the highest since 1982.

Energy costs exploded 3.5% for the month and 25.6% year-on-year. They weigh 7.4% of the overall CPI. Among them:

  • Gasoline: +6.6% for the month and +38.0% year-on-year. This does not yet include price spikes over the past three weeks. They have yet to show up.
  • Utility natural gas at home: +1.5% over the month and +23.8% over one year.
  • Electric utility: -1.1% for the month, +9.0% year over year.

And for your viewing pleasure, here’s how Fed Chairman Pro Tempore Powell reacted to the fiasco he helped create via his strategies of printing money and suppressing interest rates, as captured by designer Marco Ricolli for WOLF STREET:

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