There's a big hole in the Fed's theory of inflation --- incomes are falling at a record 10.9% rate

[progree]

(that's after adjusting for inflation)

There’s a big hole in the Fed’s theory of inflation —- incomes are falling at a record 10.9% rate, Marketwatch, 4/30/22
(no paywall, its an msn.com link -Progree)

The most concerning thing about Thursday’s report on U.S. gross domestic product for the first quarter wasn’t that the first line of the first table showed that real GDP fell at a 1.4% annual rate. It was the little-noticed news on line 34 showing that real disposable incomes fell for a fourth straight quarter.

Over the last four quarters, the purchasing power of after-tax household incomes plunged by $2.2 trillion (in 2021 dollars). That’s a 10.9% decline, by far the largest in the records dating back to 1947.

Of course, the decline in incomes is merely the unwinding of the massive support that households received from the government in 2020 and 2021 via direct pandemic stimulus payments, the child tax credit, and enhanced benefits for unemployment insurance, food stamps and Medicaid, and more.

. . . But the Fed is determined to quash demand. That’s what raising interest rates is all about: Slowing demand in an overheated economy by raising the costs of borrowing. ((the article argues that quashing demand when inflation-adjusted incomes are falling like this is only going to make incomes fall more -Progree))

. . . The prospect for stagflation—low growth with high inflation—is real. “The appropriate solution to inflation would be to work to alleviate supply-side constraints,” say Nersisyan and Wray. To do that, unfortunately, “we need more domestic investment, not less.”

More: https://www.msn.com/en-us/money/markets/there-s-a-big-hole-in-the-fed-s-theory-of-inflation-incomes-are-falling-at-a-record-10-9-rate/ar-AAWHEFQ?ocid=msedgdhp&pc=U531&cvid=15f1a5a79a714edd9e40436aeb6fdd32

The Personal Income Report he is referring to is at:
https://www.bea.gov/news/2022/personal-income-and-outlays-march-2022
The full release with all the tables is at: https://www.bea.gov/sites/default/files/2022-04/pi0322.pdf

I can't find the Line 34 data he is talking about. But in Line 46 of Table 2 of pi0322.pdf, it has

Disposable Personal Income, Total, billions of chained (2012) dollars: quarterly,

2020 Q4: 15,443.0,   2021 Q1: 17,221.6,   Q2: 15,805.6,   Q3: 15,640.0,   Q4: 15,418.0,   2022 Q1: 15,339.2

And yes, there are 4 straight quarters of decline, and 2022 Q1 over 2021 Q1 is a 10.9% decline:

(2022 Q1 / 2021 Q1 - 1) * 100% : (15,339.2 / 17,221.6 - 1) * 100 = -10.93%

Table 2 Line 22 "Government social benefits to persons" shows a huge amount in 2021 Q1 relative to the preceding and following quarters.

Future such comparions of quarterly real disposable income vs. the same quarter a year ago will likely be much less dramatic declines, with the unusual 2021 Q1 falling out of the comparison. For example, comparing 2022 Q1 to 2021 Q2 (that's the last 3 quarters) is

(2022 Q1 / 2021 Q2 - 1) * 100% : (15,339.2 / 15,805.6 - 1) * 100 = -2.95% (-3.91% annualized)

2022 Q1 vs. 2021 Q4 (one quarter) is a 0.51% decline (-2.07% annualized)

but its still in the wrong direction, just not so apocalyptic.

Edited to add the personal savings rate graph below (#7)

[PoindexterOglethorpe]

1. Inflation can be experienced at a highly individual level.

I'm single. Older, 73. I own my own home, am paying a mortgage. And paying somewhat more each month than required, so that I can pay it off early.

I was around for the inflation of the 1970s and remember it quite well. I also remember the largely forgotten wage and price controls instituted by Richard Nixon, which made inflation vastly worse. At the time he mandated them, those who understood those things essentially said, "Bad idea. It will come back to haunt him." Instead, Jimmy Carter got blamed for inflation he had nothing to do with, other than the misfortune to be in office at that time.

Because I live alone, and because I'm happy to cook all of my meals for myself, and freeze portions, my food costs are far less than they used to be, before the pandemic, when I'd eat out several times a week. Because of the way I budget my money, by taking out a fixed sum of cash from the bank each week, putting most of it into envelopes labelled: health and well being, yard work, cat, entertainment, Christmas club, clothing, and miscellaneous; budgeting is really simple. If I need to buy clothes, I spend what's in that envelope. If I want to go out with friends, I have that envelope to pay for it. There really is a lot of flexibility, and notice the miscellaneous one. That is very useful.

The rest of the money I take out each week mainly pays for groceries. When I get gas, which is at best every third week, I put it on my credit card. I used to include a gas envelope, but since the pandemic I'm driving so little, that simply using the credit card makes sense.

And if I haven't spent all of my weekly money it goes into an envelope I think of as Super Miscellaneous. And I can draw from that as needed.

So I am not experiencing much in the way of inflation, and I'm doing quite well, even saving money. Lucky me.

[progree]

2. One can have enough income to save and still be experiencing inflation

I know I am. Both saving and experiencing higher prices in most of the things I buy. The latter is inflation. The former means that inflation isn't putting me in the red, in that, on net, I add to my savings/investments rather than drawing from them.

I am frugal, but that doesn't mean I'm not experiencing inflation. I'm just not being harmed by it in a way that hurts. But my dental cleaning and checkup costs keep rising, my Medicare Part B premiums and Medicare Supplement keep rising, brocolli crowns costing $3.49/pound (and that's not organic), my instant coffee is now over $10, sheesh. Property taxes going way up, home owner association dues going way up. Year after year after year.

I eat at restaurants and fast food places a lot less than I did pre-pandemic. But when I do go out to eat, it does cost more for the same meal. That's inflation, even though I might be spending less total dollars on meals away from home.

And restaurant food is so full of salt and fat, is another reason I eat away from home less than I used to, now that I've broken the pattern.

I much admire your budgeting / spending system.

[PoindexterOglethorpe]

3. True, and thank you.

I am probably experiencing inflation more than I realize. It's just that my current level of spending, based on my weekly cash, which has not increased for at least five years, is still more than enough for me.

Oh, and my instant coffee (Maxwell House at my local Walgreens) is usually no more than $6.00. Heck, a week or two ago I paid less than that amount, and since it was on sale bought two of them.

I don't happen to buy brocolli crowns, so I can't make a comparison.

I tend to make soups and stews that make several meals. I also typically plan a week or so ahead of time. Tomorrow I will be having dinner with friends. On Monday, I'll go to the grocery store and get what I need for the next week or so. A boneless pork chop, which will be marinated in Teriyaki sauce. A catfish fillet which will be blackened, and will be two meals. They will be accompanied by Rice-A-Roni rice pilaf and veggies for stir fry -- onions, carrots, zucchini, red bell peppers, and snow peas, if available. I happen to have Grecian chicken already frozen. Those, with the addition of what I've already said, will give me at least six days of meals. I will probably also buy a can of biscuits, which goes well with this meal. I'll estimate each meal is well under $3.00.

Cooking almost all of my meals for myself, coupled with being willing to eat a somewhat limited repetition of food, has helped. It also helps that I have an extra refrigerator in the garage, already there when I bought this place in 2009. that I mainly use for the freezer. The two refrigerators are very close in size, and I am very grateful I can freeze what I can. Otherwise, at some point, possibly even before the Pandemic, I'd have purchased a stand alone freezer.

[progree]

4. Instant coffee -- here's what I get ..

https://www.amazon.com/Nescafe-Tasters-Choice-Instant-Canisters/dp/B001EQ4IES?th=1
Nescafe Taster's Choice French Roast Instant Coffee, 7-Ounce

Hmm even buying a 3-pack at Amazon, it's more than $10/jar. Interesting. (I buy all my instant coffee and all other groceries at stores, not Amazon nor otherwise online -- mainly because I insist on choosing my own produce physically there in person, and while at the store I might as well get the other things I need.)

Just about any other brand of instant coffee is less expensive, but also tastes well, more like instant coffee and less like real coffee than the other brands I tried (I don't know if I've tried Maxwell, I know I've tried Folgers).

On refrigerators etc. Having two would be nice. My one and only conked out for good in February (after 18 years), and that was it. No refrigerator, no freezer. But living in Minnesota, there was plenty of snow on the ground, and I'd put a dishpan full in the freezer part and the equivalent of a dishpan full in the fridge part. That would last more than 24 hours.

Of course the freezer wasn't really a freezer, but it did keep it at around 34-36 deg F, so it was kind of a colder cold than the regular fridge which ended up at more like 40 deg.

Oh, stuff that really needed to stay frozen, I put that outside. I experienced some thawing in some day times, but I didn't have that much and made it a priority to eat that first.

I lived like that for about 3 weeks I think it was. Not much of a hardship but more like an adventure that got tiresome after awhile.

[PoindexterOglethorpe]

5. I often say that good coffee is wasted on me.

I am very happy with my one cup of Maxwell House instant every morning.

And even though you live in Minnesota (I've lived there, specifically in Minneapolis from January 1981 to June, 1983), I also know that using the outside as a refrigerator is only good for a limited time. I do hope you find a way to acquire a real refrigerator and freezer.

[progree]

6. Oh, I got one, delivered March 13, a Frigidaire. I'm pleasantly surprised - it has larger door

shelves where everything on them is easily visible and reachable. (With the old refrigerator, the doors were less capacious, so more stuff had to be put in the regular part and I'd have stuff behind stuff, and I'd have to bend way down and look, and then reach way back). And the door closes automatically if its left open by 5" or less (which is good, because with the old one I have been known to leave it not fully shut a time or two).

Wish I could do with one cup coffee a day.

[progree]

7. The personal savings rate was much elevated during most of 2020-2021, but is now down to

approximately the average of the last few pre-pandemic years. This comports to what the OP's article is saying about personal income.

https://fred.stlouisfed.org/series/PSAVERT



Particularly with the expiration of the enhanced child tax credit and the enhanced earned income credits that expired at the end of 2021 if I'm not mistaken. (The stimulus checks and enhanced unemployment benefits have been long gone).

Date range of the graph: 11/5/92 to March 2022. Latest value: 6.2%. The personal savings rate is also part of the Personal Consumption / Personal Income / PCE report linked to in the OP.

[Backseat Driver]

8. LMAO, without corporate explanation, DH just received a $0.05 an hour raise

No one else seems to have received more than a dime. Not by review or merit - Think this bigbox retailer needed a little more HR expense to write off, so they micro-increased pay ranges? To meet gasoline costs so attendance wouldn't fall off? Higher inflation rates? So weird...