For years, the Federal Reserve has been hoping for, indeed trying to create, “inflation”. Without much hard evidence, the Fed adopted a 2% inflation target as measured by the headline PCE deflator, which, if attained, would depreciate the purchasing power of the dollar by 2% every year, over 20% in a decade. The Fed plans to let inflation “run hot” for an indefinite period so that the average rate of inflation over a number of years is 2%. Whether or not the Fed can manage inflation to accomplish this is a matter of debate. There is also an employment target, “full employment.” In early 2020, the unemployment rate was 3.5% and was at record low levels for all minority groups. Currently, the U.S. unemployment rate is 5.8%, well above the 3.5% mark.

NFIB has surveyed a random sample of its member firms since 1973. The graph below shows the net percentage of owners who report raising their average selling prices (net of those cutting selling prices). The incidence of price increases is historically high, last seen in the early 1980s when the Fed was fighting inflation. There was a recent spike in price hikes in 2008 when oil was $145/bbl and energy costs were being passed on to customers. That ended with the start of the 2008 recession and the frequency of price hikes plummeted to historic low levels (a negative reading means more firms were cutting prices than raising them).

What happens on Main Street impacts the entire economy (indeed, small businesses produce nearly half of our GDP and employ nearly half of the private workforce). The graph below shows that as small business owners raise prices, macro-level measures of inflation are impacted. The blue line is the quarterly average PCE inflation rate. The red line is the PCE inflation rate based on the percent of owners reporting higher selling prices in the first month of each quarter (thus, the January survey is predicting inflation for the entire first quarter). Clearly the rate of inflation for the entire economy (PCE based) is well anticipated by the actions of small business owners.

At the Fed’s most recent meeting in June, policy was not changed (rates near 0 boundary, purchases of $120 billion in securities each month). The sentiment of the FOMC (18 members) did shift the likelihood of rate hikes to earlier in 2023 based on their forecasts of how close the economy is to full employment and 2% inflation targets. However, for the most part, policy will remain unchanged until the next meeting.


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