the money game

The Case for Economic Optimism Is Over

Get ready for a shock. Photo: David Paul Morris/Bloomberg via Getty Images

Just about every month since December, we’ve heard the same thing: Inflation was getting worse, but it’s probably topped out, and relief was on the way. Last month, it looked like the predictions might have finally started to come true, as gas prices moderated and the supply-chain problems started to ease up. But today, the Labor Department released its May consumer price index, and it’s ugly. Very ugly. Prices, on average, rose 8.6 percent, the highest annual increase during the Biden-era price surge and the most since December 1981. The report has effectively shattered the cautious optimism that the economy could actually turn in any meaningful way anytime soon. The rest of the year looks bad for the American consumer, and the reality is that there is very little anyone can do about it.

Oil, at 15-year highs, is the biggest culprit. The price of all kinds of fuel oil has more than doubled over the past year, the largest increase since the federal government started measuring prices in 1935. Not that it’s a surprise to anyone who has passed by a gas-station sign anytime in the past year: The AAA states that the average gas price is about $5 a gallon, and it has reached as high as $8 in California (where it was about $3 at this time last year). May was a particularly bad month in this respect, with the cost of a gallon of gas rising 16 percent from April. An economist might note that the price of gas tends to get more attention than it merits in our public conversation: It’s something that people complain about loudly, even though it makes up a very small amount of most households’ total spending — some 3 or 4 percent. But even that little bit — and the psychological costs of filling up a tank — have broader effects on the economy. “Oil is a demand destroyer,” Gene Goldman, chief investment officer at Cetera Investment Management, told me. Which is to say, as gas prices go up, people get more tightfisted about other forms of spending.

But since pretty much everything we do or buy involves the use of oil at some level, the cost of filling up one’s car is really only the most direct way of looking at how rising energy costs are making life more expensive. Airline tickets — which the Labor Department considers part of its non-gas- or non-food-related items, even though they reflect the price of gas priced on futures markets — rose by nearly 38 percent last year. The cost of food has been rising, in part, because fertilizers, many of which are made with petroleum by-products, are more expensive than ever. Food has to get delivered to grocery stores and restaurants — and the increased diesel bills for truckers ultimately get passed along to the customer.

There are all kinds of reasons for this, from the Russian invasion of Ukraine to the lack of oil-refining capacity in the U.S. to booming demand. The measures attempted so far to improve the situation, like gas tax holidays and a small increase in international production, haven’t made a dent. The Federal Reserve, which is hiking interest rates at the fastest pace since the 1980s, can’t do a thing about getting oil out of the ground. Wall Street has gotten the message that this is likely to be the reality for some time. ExxonMobil’s stock is up 61 percent this year, as is every other major fossil-fuel company out there. Goldman Sachs sees a barrel of oil rising to $140 a barrel this summer, about $20 more than where it’s trading now.

In theory, inflation is the Federal Reserve’s problem to solve. But these new numbers show just how ineffective the Fed, which has pivoted to an aggressive stance and started hiking interest rates, has been so far in the face of today’s particular inflationary pressures. When the Fed raises rates, that ought to translate to reduced demand for housing and cars and other things that require borrowing — but to date, Jerome Powell & Co. haven’t made much of a dent, even in those areas. The monthly cost of shelter, which includes equivalent rent, actually rose in May. The problem with housing is the national shortage of supply, and it’s not like the central bank has the tool to make people build more homes. In Manhattan, the average monthly price of shelter rose to a new insane high of $4,000 a month. And because of the statistical quirk in how the Labor Department measures rent, the problem is probably far worse than today’s numbers suggest:

The worry here is that the inflationary mode of this economy is not going away. “Inflation keeps climbing and it’s becoming more entrenched,” Chris Zaccarelli, chief investment officer of Independent Advisor Alliance, said in a statement. The report gives the Fed more of a reason to keep hiking its interest rates aggressively, even though the consequences of that may be less and less effective and only lead to greater joblessness, which we’re already starting to see. Treasury Secretary Janet Yellen has said she doesn’t think the U.S. is heading toward a recession. Whether she’s right is anyone’s guess, but for most people, the economy is going to feel worse for a long time.

The Case for Economic Optimism Is Over