Econ Update

In this new category of snapshots, I’ll grab some data and headlines and offer a few insights on a topic. This week is full of key economic data regarding inflation. Reading through the data for many can be a bit daunting. Likewise, lots of the data is more geeky than useful in daily life and business.

For healthcare, economic conditions of late (last eighteen months) have provided staunch and daunting headwinds. Capital costs have risen dramatically due to Federal Reserve monetary policy changes to fight inflation (interbank rate increases). Energy inflation has yanked utility costs upward and forced suppliers to raise prices on delivered goods and services. Supply chain issues have created product scarcity ranging from drugs to infant formula to food and consumables to big capital equipment items such as elevators and their parts and electric equipment such as switchgear. No provider type has been immune to harm from the shifting economic conditions, namely rising inflation and rising interest rates.

Quickly, inflation primarily comes about or occurs via an oversupply of money and not enough goods and services for the money to purchase. Simplistically, this is called “too many dollars chasing too few goods”. As the goods are fewer in number than the buyers with dollars, the goods escalate in price – sold to the highest payer. In some cases, such as energy, supply and demand are a bit tricker to sort through as energy tends to be inelastic in demand meaning, there are few if any substitute products for it. Eventually, buyers can use or consume less but in reality, price will not significantly alter energy consumption (gasoline for example or fuel oil/diesel).

In a more intellectual view of inflation, we see government policy taking the lead role in creation or stopping inflationary trend. The economist Milton Friedman noted that all inflation in an economy is basically due to government spending in or at levels, greater than economic growth measured by GDP (gross domestic product). Per Friedman, when government adds money to the economy by spending but does so unattached to productive output (no real return on investment), inflation will occur. Friedman suggests that the real remedy to inflation is for government to spend less or different.

So as we turn to this week’s economic data, we get results that suggest, we have a ways to go before the economy is “healthy”. I use healthy to mean inflation that is in equilibrium to GDP growth, or below. Until we get to this level, we will continue to see inflationary pressures or the alternative, recession and possible stagflation (inflation higher than GDP growth for prolong periods).

The numbers this week and what they mean (quickly).

  • Prices remain a bit hot with March’s increase a blip over February (.1) and year-over-year, up 5%. Removing Food and Energy components, inflation was a bit hotter at + .4% for the month and 5.4% for the year. What concerns me here is that the drop to 5% year-over-year is due principally, to energy and food. The current energy trend, however, is not indicative of future drops (see current gas price shifts “up”). OPEC production cuts and continued fed policy constraints on domestic oil and natural gas production may mean that this is the low point of energy softness. Expect the Federal Reserve to push another .25% in a rate increase taking the fed funds rate into a 5% base rate. Here’s the report:
  • The cousin to CPI is PPI or the final measure of price of products and services produced in the economy by manufacturers/business. It is the crystal ball so to speak, of where CPI will head and where the value of the dollar is trending. Hot PPI suggests future cost increases. Cold or declining PPI suggests economic demand softening (this is a demand side measure) and a weakening of the dollar. For March, the number continued to soften as Fed Reserve interest rates reduced economic demand, devalued the dollar and energy costs pulled back. The decline for the month was .05%. My concern with this measure is a bold signal of recession and erosion of the value of the dollar.  Here’s the PPI report: