01.12.2023 0

Prices decline in December as inflation decreases to 6.5 percent past 12 months, but are still up 13.7 percent since Jan. 2021

By Robert Romano

Consumer inflation has fallen to 6.5 percent over the past 12 months as petroleum and gasoline prices continue declining according to the latest data published by the Bureau of Labor Statistics. In December, prices for all items actually declined 0.1 percent.

Which is what usually happens in recessions after peak employment is reached. Consumers max out on their credit cards and although nominally it appears they are spending a lot, they are not able to buy as many products from a quantity standpoint, and so prices cool. The vicious cycle sets in once the layoffs ensue.

Sure enough, continuing unemployment claims on a non-seasonally adjusted basis were up 165,000 the week after the new year. But that’s also what usually happens after the holidays and seasonal employees are let go, BLS reports: “The advance unadjusted level of insured unemployment in state programs totaled 1,873,668, an increase of 163,055 (or 9.5 percent) from the preceding week. The seasonal factors had expected an increase of 235,888 (or 13.8 percent) from the previous week.”

But the rub might come later as prices from consumers’ perspectives are still quite high. Overall, since Jan. 2021, the consumer price index is up a grand total of 13.7 percent from where they were. But their incomes are not up 13.7 percent. If prices remain at their elevated levels, it’s going to wear on U.S. household budgets over time.

For perspective, from Jan. 2017 to Jan. 2019 under former President Donald Trump, the consumer price index was up just 3.6 percent.

It wasn’t just the price of gas that went up — the price of everything went up.

Prices now going down just 0.1 percent is not enough of an offset for this imbalance to cure itself, so something’s got to give. Historically, that has meant recessions, but amid the Baby Boomer retirement wave, employers might not need to pare back as much as they have traditionally have. We’re having tremendous labor shortages at a time that would otherwise be quite tumultuous for U.S. workers.

Examples like Japan show that unemployment tends to be lower overall when you see aging demographics in advanced economies such as the U.S. is experiencing, combined with lower fertility—less than 2 babies per woman for many years now—and the characteristics of recessions have changed. There, unemployment never got above 6 percent in the 2001 and the 2008-2009 recessions, and barely got above 3 percent during the Covid lockdowns.

So, perhaps those demographic forces can soften whatever recession is occurring. In Europe, prices are starting to recede as well, where there was a massive price shock after Russia invaded Ukraine. Now, new supply chains for natural gas and oil too are being bolstered. But Europe similarly has Baby Boomer retirement wave well underway, and recently recorded its lowest unemployment rate overall since 1998. Europe is still hitting peak employment as the inflation wave is beginning to recede.

But wars are not entirely unpredictable from an economic standpoint. They also result in mobilizations. So, there might be higher prices, but there is also a lot of economic activity that surrounds them, which during the great wars resulted in massive explosions of Gross Domestic Product and inflation, and lower overall unemployment, usually owing to drafts being instituted and therefore an artificially smaller labor force.

The question might be less of whether there is or soon will be a recession, but a question of how bad it will be. If in Europe, which is the front door of the war, isn’t faring too badly so far from a labor market standpoint, will the U.S.? Stay tuned.

Robert Romano is the Vice President of Public Policy at Americans for Limited Government Foundation.

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