Inflation caught economic experts by surprise. What else are they missing?

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Why We Missed On Inflation, and Implications for Monetary Policy Going Forward,” wrote Neel Kashkari frankly for Medium on January 4, 2023.

Medium is an excellent place to explore complex issues in great detail and the economic expert didn’t hold back.

Mr. Kashkari, president of the Federal Reserve Bank of Minneapolis, is one of the rare economists willing to issue an unqualified mea culpa for joining the “Inflation is transitory!” deflectors who initially ignored the warning signs so many of their colleagues noticed.

“As I’ve discussed publicly for some time, I have been trying to make sense of the mixed signals the economy is sending,” Kashkari began, echoing a sentiment many Americans share.

Why, for instance, are some economic indicators — like low unemployment — so persistently positive while so many other economic indicators — like non-transitory inflation — are so negative?

Nonfarm payrolls rose 223,000 in December, as strong jobs market tops expectations,” announced CNBC triumphantly on January 6, 2023. Meanwhile, news like “Stock Market Losses Grow In Sour Start To 2023; Tesla Crashes 13%; Apple Hits 52-Week Low,” and, “Amazon will lay off more than 18,000 workers,” set a less hopeful tone to start the new year.

“When I travel across the Ninth Federal Reserve District, the overwhelming concern I still hear from businesses of all sizes is one of a labor shortage,” Kashkari described confusion over the discrepancies.

Layoffs and a labor shortage?

“And, yes, wages are climbing, but on average they haven’t been keeping up with inflation,” Kashkari admitted. “Real wages have been falling.”

“Is this really a tight labor market?” he mused. “Corporate profits are up, and the labor share of income is actually declining. If the labor share isn’t going to increase in this ‘tight’ labor market, when will it?”

Kashkari isn’t the only stymied economist. His laundry list of economic contradictions is shared in many expert quarters.

“I’ve also been wrestling with why we missed this high inflation and what we can learn going forward,” Mr. Kashkari wrote. “To state clearly, I was solidly on ‘Team Transitory,’ so I am not throwing stones. But many of us — those inside the Federal Reserve and the vast majority of outside forecasters — together made the same errors in, first, being surprised when inflation surged as much as it did and, second, assuming that inflation would fall quickly. Why did we miss it?”

More importantly, for U.S. consumers, workers, voters, and anyone else who participates in the economy: What else are economists missing?

In the complicated shell game that is economics, the increasing amount of high-interest debt being carried by American consumers is another major potential stumbling block.

The recent holiday retail shopping season is over, with after-Christmas and post-New Year sales concluded. This year, retailers held their breath after a very tough fiscal period, but the critical holiday shopping season was more successful than corporate advertising executives dared dream.

And yet, many consumers emerged from the holiday season less financially secure.

Out of cash, many Americans add to their credit card debt during the holidays,” reported Yahoo! Finance on December 22, 2022.

Worse, credit card users were adding to the already-vast swaths of credit card debt incurred over the past years.

Credit card balances jump 15%, highest annual leap in over 20 years, as Americans fall deeper in debt,” reported CNBC on November 16, 2022, just as the holiday shopping season was kicking off.

“In an economy that has produced the highest inflation rate since the early 1980s, Americans are struggling to keep up with day-to-day expenses,” began the CBNC report. “More consumers are now relying on credit cards to get by, which has helped propel total credit card debt to $930 billion in the third quarter, just shy of the all-time record, according to a new report from the Federal Reserve Bank of New York.”

The amount of credit card debt being carried by struggling consumers is quickly becoming America’s trillion-dollar problem. More and more households are relying on credit cards to supplement wages that are failing to keep pace with white-hot inflation.

These inflationary pressures may, or may not, be cooling.

How long can cash-strapped consumers keep up the balancing act? Troubling details are starting to emerge between the lines of economic news coverage. The tea leaves, read wrongly before, may foretell impending disaster.

“Delinquencies remain in line with historical levels for most credit products,” Michele Raneri, TransUnion’s VP of U.S. research told Newsweek. “However, levels have been rising over the past year, particularly among subprime consumer segments, and should be monitored in the coming months to look for similar increases in other credit risk tiers.”

It’s a seismic rumbling. Should layoffs continue across many industries, including retail and tech, subprime credit risks will likely be the first to default.

What kind of waterfall effect would that debt default produce?

No one knows.

But perhaps after all those predictions of transitionary inflation came to nothing, economists won’t be so shy about saying so.

(contributing writer, Brooke Bell)