Inflation Sticking Around

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Quick Hits: Today’s Top Stories

• The Consumer Price Index rose 0.4 percent month-over-month and 6 percent annually in February, the Bureau of Labor Statistics reported Tuesday, down slightly from 0.5 and 6.4 percent in January, but higher than economists’ expectations. The data will likely keep the Federal Reserve on track to hike interest rates 25 basis points when officials meet next week, though concerns about the stability of the banking system could throw a wrench in central bankers’ plans.
• The Wall Street Journal reported Tuesday the Justice Department and Securities and Exchange Commission have both opened investigations into the failure of Silicon Valley Bank, probing stock sales made by SVB’s CEO Greg Becker and CFO Daniel Beck in the days and weeks leading up to the bank’s collapse on Friday. The pair sold about $2.3 million and $575,000 worth of SVB stock on February 27, respectively, but both sales were conducted under a 10b5-1 plan set up a month earlier.
• U.S. European Command announced Tuesday that two Russian Su-27 fighter jets had conducted an “unsafe and unprofessional intercept” of an unmanned U.S. Air Force MQ-9 Reaper operating in international airspace over the Black Sea, striking the propeller of the American drone and causing it to plunge into the waters below. “This unsafe and unprofessional act by the Russians nearly caused both aircraft to crash,” said Air Force Gen. James Hecker, commander of U.S. Air Forces Europe. Russia’s Defense Ministry denied its jets came in contact with the drone, blaming the drone’s operators for its demise.
• Drugmaker Novo Nordisk announced Tuesday that beginning in January 2024, it will dramatically cut the prices of its top-selling insulin products—NovoLog by 75 percent and Novolin/Levemir by 65 percent. The move comes about two weeks after Novo’s competitor, Eli Lilly, announced it would slash insulin prices 70 percent and cap out-of-pocket costs for most patients at $35 a month. About 8.4 million people with diabetes in the United States rely on insulin, and a RAND Corporation report found a vial of insulin cost nearly $100 on average in the U.S. in 2018—about five times more than the second-highest price of about $21 in Chile.
• California’s First District Court of Appeals issued a ruling on Monday allowing companies in the gig economy like Uber and Lyft to continue classifying their labor force as independent contractors rather than employees. Monday’s opinion largely reversed a 2021 decision from a lower court that declared a 2020 ballot initiative on this question unconstitutional after a majority of voters had supported the independent contractor position.
• Meta CEO Mark Zuckerberg announced another round of layoffs on Tuesday, slashing 10,000 jobs and taking down about 5,000 unfilled job openings as part of what he dubbed the tech company’s “year of efficiency.” Meta had already laid off 11,000 people—then about 13 percent of its workforce—in November.

To Raise Rates or Not to Raise Rates, That is the Question

To those who thought we were done with inflation: We hate to say we told you so, but it was probably too early to spike the football. 

The Bureau of Labor Statistics (BLS) released its February consumer price index (CPI) report yesterday with the numbers showing a mixed bag as overall inflation slightly ticked down from January, but was up in some key categories. Beyond that the collapse of two banks has raised questions about the Fed’s program of interest rate hikes. Poor Jerome. Guy can’t catch a break. 

According to the BLS, the annual rate of inflation fell to 6 percent in February, down from 6.4 percent the month before. The good news: that’s the lowest rate of inflation we’ve had in 18 months. The bad news: it’s still an increase, and some of the more relevant month-over-month data is heading in the wrong direction. Overall prices rose 0.4 percent from January to February, but core inflation—which excludes volatile food and energy prices and is considered a better predictor of future trends—increased 0.5 percent month-over-month. 

The core CPI categories that rose in February included recreation, household furnishings, and airfare. The lion’s share of the increase came from higher housing costs, which rose by 0.8 percent in February and accounted for 70 percent of the overall headline inflation for the month. But as we noted last fall, housing costs are a lagging indicator and what shows up in the current CPI often reflects higher prices from previous months. Recent data indicating cooling rental costs appear to bear this out.

“There’s almost no inflation on new leases,” Justin Wolfers, a professor of economics at the University of Michigan, told The Dispatch. “As we move forward through time, these low inflationary leases are going to become a larger share of the totals.” 

All told, the inflation numbers came in hotter than expected, but not by much. “If you’re someone who’s been deeply worried about inflation, and you’ve seen numbers like seven, eight, nine percent, I want to reassure you that we’re in a new world where that’s not true,”said Wolfers.  “[But] if you’re someone who’s been optimistic that inflation is falling rapidly, I want to suggest you pause your optimism because it looks like the decline in inflation we thought we were seeing three or four months ago turned out to be illusory, and inflation may be starting to stabilize at three-point-something or four-point-something.”

Under normal circumstances, yesterday’s numbers would likely keep the Fed on the path investors were expecting at this time last week: a 50-basis-point hike to bring the target federal funds rate between 5 and 5.25 percent. Fed Chair Jerome Powell’s testimony before the Senate Banking Committee last Tuesday seemed to confirm that was the plan. “If the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes,” he told the committee. February’s strong jobs report seemed to further confirm the likelihood of a higher rate hike. 

Then SVB imploded. 

As we wrote on Monday, SVB failed in part due to its disproportionately large stake in long-maturity U.S. Treasury bonds and mortgage-backed securities—investments that lose market value in a higher interest rate environment. The immediate fallout appears to be contained—regional bank stocks bounced back yesterday morning. But the failure of SVB—and Signature Bank in New York—has led some to question the stability of the financial system as a whole. Are other banks in similar situations? If the Fed continues with its aggressive rate hikes, what else could it break? (Disclosure: The Dispatch was a customer of Silicon Valley Bank.)

SVB and Signature Bank’s portfolio decisions were ultimately their own, of course, but some economists made sure not to absolve central bankers from their role in the fiasco. “The Fed is in part responsible for this situation by waiting so long to begin raising rates that it had to hike rapidly over a short period of time,” said Michael Strain, the director of economic policy at the American Enterprise Institute. “The Fed’s analytical errors led to a tightening cycle that was much faster than it needed to be. And that played a role in what happened this weekend.” 

After insisting for months that “transitory” inflation would dissipate after supply chains ravaged by the pandemic unfurled, central bankers had a come-to-Jesus moment a little over a year ago and embarked on one of the quickest rate-hiking sprees in recent memory. At this time last year, the target federal funds rate was still between 0 and 0.25 percent. Now? 4.5 percent and 4.75 percent. It’ll likely rise further soon, too: The Fed is currently in a communications blackout—the time period near Fed meetings where officials are barred from making public statements—before it convenes on March 21. 

The overwhelming consensus among investors as recently as a week ago was that the Fed would forge ahead with 50 basis points. But conventional wisdom has essentially flipped overnight. Analysts at Goldman Sachs, for example, said Monday morning they no longer believe the Fed will make a move next week at all, citing the “recent stress in the banking system.” But after yesterday’s inflation report, projections began to tick back up.

“I expect 0.25,” Wolfers predicted, noting that even if the Fed has zero increase, they’ll likely make it clear that it’s a temporary pause and more hikes are still coming. 

Given the expectations for the Fed, there may be less tension between putting the brakes on inflation and bolstering financial stability. “Shifting gears would tell the world that the steps taken during the weekend to backstop banks aren’t enough and that serious damage to the economy is already inevitable,” Bloomberg columnist Jonathan Levin wrote. “Normally it takes rate cuts to cement the perception of an economic calamity, but with inflation as high as it is, giving up the fight against high and volatile prices would send the same message.”

After all, monetary policy and stable financial markets are closely intertwined. “It’s not a simple tradeoff between macro and financial stability,” noted Jason Furman, a Harvard economics professor and former chair of Obama’s Council of Economic Advisers. “The biggest threat to financial stability is getting the macro badly wrong.”

Worth Your Time 

• In a piece for the Financial Times, former FDIC chair Sheila Bair argues the agency she used to lead is setting a “dangerous precedent” by reimbursing Silicon Valley Bank customers. “Banking regulators have now decided that the failure of two midsized banks, Silicon Valley Bank and Signature, pose systemic risk, requiring the Federal Deposit Insurance Corporation to pay off their uninsured depositors,” she writes. “At combined assets of $300bn, these two banks represent a minuscule part of the US’s $23tn banking system. Is that system really so fragile that it can’t absorb some small haircut on these banks’ uninsured deposits? If it is as safe and resilient as we’ve been constantly assured by the government, then the regulators’ move sets dangerous expectations for future bailouts. The uninsured depositors of SVB are not a needy group. They are a ‘who’s who’ of leading venture capitalists and their portfolio companies. Financially sophisticated, they apparently missed those prominent disclosures on the bank’s websites and teller windows that FDIC insurance is capped at $250,000. Some start-ups that banked at SVB argued they needed their uninsured deposits to make payroll. But under the FDIC’s normal procedures, they should have received a sizeable dividend this week to help with their cash flow needs.”
• Despite being all the rage in the Democratic primary three years ago, you’re not hearing all that much about socialism these days from members of President Biden’s party, Ramesh Ponnuru notes in his latest column. “Today’s Democrats are indeed more left-wing than their forebears in many ways,” he writes for the Washington Post. “But it turns out the party’s left wing has spent much of the past few years fooling itself about its ascendancy. Sanders did well in the 2016 primary because he was running against Hillary Clinton. He fizzled in 2020, when she wasn’t in the race as a foil. Ocasio-Cortez and her closest allies in the House are in liberal districts where, as then-House Speaker Nancy Pelosi (D-Calif.) remarked a few years ago, ‘a glass of water’ with a D next to its name could win an election. They represent the voters Democrats already have, not the ones they need to win. Which helps explain why Medicare-for-all has languished. When Democrats had a House majority, from 2019 through the start of this year, it was because they prevailed in moderate districts. The number of co-sponsors for the legislation actually dropped a little.”
• For Dispatch readers wondering where Vital Interests author Tom Joscelyn has been for the past several months, now you know. “I served as a senior professional staff member on the January 6th Select Committee and helped write its final report,” he reveals in a piece for Politico on what Fox News host Tucker Carlson got wrong in his attempts to rewrite history. “I got a close look at some of the video evidence that Carlson obtained — and his manipulation of the audience was immediately obvious to me.” You can expect to see more of Joscelyn’s writing in the pages of The Dispatch soon!

Presented Without Comment

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Toeing the Company Line

• Is “wokeness” a luxury good? What makes a good marriage? And which Dispatch staffer’s family is growing? Sarah and Jonah discussed all that and more on last night’s episode of Dispatch Live (🔒). Members who missed the conversation can catch a rerun—either video or audio-only—by clicking here.
• In the newsletters: Haley interviews Democratic Rep. Hillary Scholten of Michigan, Sarah looks at (🔒) the politics of a TikTok ban, and Nick dives into (🔒) the Republican schism over Ukraine. “Even if we didn’t know already that Ron DeSantis was moving toward the Trumpist position on Ukraine,” he writes, “there was never a doubt he’d end up there.”
• On the podcasts: Jonah talks to psychologist Paul Bloom about the human brain and nature of consciousness.
• On the site: Gabriel Malor looks at the uphill battle facing Dominion Voting Systems in its defamation case against Fox News, Alec considers the claim that “wokeness” is to blame for Silicon Valley Bank’s collapse, and Jonah asks why—despite criticizing January 6 on numerous occasions—Mike Pence refuses to help hold those responsible to account by testifying.

Let Us Know

At what point over the last two years or so were you most concerned about inflation? If that point was a 10, where are you now on a 1-10 scale?