Weekly Economic Digest for 9-15-23: Inflation; Retail Sales; Bankruptcies and Delinquencies

The views and opinions expressed in this post are solely those of the author and do not necessarily reflect the views of the Georgia Institute of Technology or the Georgia Board of Regents

The big news this week was the release of both the Consumer Price Index (CPI) and the Producer Price Index (PPI). In addition, we got new data on retail sales which sheds additional light on the strength of the consumer.

But first, we need to start a new feature called “stupid economic statement of the week.” We may not always have something to include here every week, but in our research, when we come across spectacularly stupid comments, we will highlight them here. The inaugural “stupid economic statement of the week” comes to us from Paul Krugman, Distinguished Professor of Economics at the Graduate Center of the City University of New York.

“The economic data have been just surreally good. Even optimists are just stunned.” So why do polls show most Americans don’t think the economy is doing well? “There’s a really profound and peculiar disconnect going on.”

Nobel prize-winning economist Paul Krugman

It is amazing what kind of stupid comments you can get away with when you have a Nobel Prize. No Paul. The economic data have not been “surreally good.” They have been particularly bad. In fact, as one friend of mine pointed out, if there is a “disconnect” it is yours….clearly you and the rest of the top 1% are living in a completely different world from the rest of us. Let me explain it to you…..


First, as another Nobel Laureate (and an actually smart economist) Milton Friedman noted, “inflation is always and everywhere a monetary phenomenon.” Inflation is simply an increase in the money supply. It is NOT an increase in prices. The rise in the overall price level is the RESULT of inflation…more money chasing the same amount of goods…and is measured various ways. The most common measure is the Consumer Price Index (CPI). As the name implies, the CPI measures inflation at the consumer level. Because the prices of both food and energy are volatile when compared to other components of the index, policy makers also look at “Core-CPI” which is the CPI less food and energy. The graph below shows the most recent annual growth for both CPI and Core-CPI.

What is most interesting here is that CPI has changed course and for the second month in a row is moving back up. On an annual basis, CPI was up 3.7% in August…quite a jump from the 3.2% increase it posted in July. Much of this increase was due to the increase in the cost of energy. As such, core-CPI continued to decline in August, but is still running 4.3% higher than it was last August. Policy makers usually like to look at the core-CPI number as it is less volatile and gives a better overall read of how inflation is trending. But to the average consumer, the overall number is still important because, let’s face it….we all consume a lot of food and energy!

It sounds good to say that “inflation is running at 3.7%” but overall, prices are much higher than they were in 2021. Keep in mind, that prices are 3.7% above August 2022, and in August 2022 they were 8.2% above August 2021! Overall, prices are 16.6% higher than they were in January 2021. Food is 19.3% more expensive now than it was in January 2021, and energy is a whopping 36.7% more expensive that it was in January 2021. Keep that in mind as winter comes and you get ready to heat your home.

Next, we have the Producer Price Index (PPI). This index measures price increases at the producer level, and it can be a leading indicator of how prices will move at the consumer level in the future. The graph below shows the most recent annual growth for the PPI as well as the PPI for core goods and the PPI for services.

Producer prices rose 0.7% month-over-month in August (up from 0.3% in July and hotter than the 0.4% that was expected). In fact, this was the hottest PPI reading since June 2022. This is the second month in a row that the index has shown increasing growth as producers are also feeling the effects of higher energy prices. On a price-per-barrel basis, oil is approaching $90…the highest it has been in nearly a year. That not only impacts consumers at the pump, but also producers at the wholesale level.

Both of these inflation numbers can not be what the Federal Reserve wants to hear. The market has “baked in” as many as four rate CUTS in 2024. But the market is ignoring not only these inflation numbers, but Chairman Powell’s own comments. On multiple occasions, Chair Powell has said that the mistake the Volcker Fed made was cutting rates too soon…a mistake he is determined not to repeat. Inflation is not going away…if anything it is heating up. Combine that with the slowing GDP growth and you have the classic definition of stagflation.

Retail Sales

Retail sales exploded in August at a 0.6% month-over-month rate, far better than the 0.1% that the experts were predicting. On a year-over-year basis, retail sales grew 2.5% in August. And that is what the media will report, and that is what Krugman will claim is “surreally good.” But, as we already pointed out, inflation is running hot, and if I purchase the exact same stuff I did a year ago, I will spend much more on it today than I did then. So yes, NOMINAL retail sales are up. As we have pointed out before, there seems to be no end to the extent to which consumers will whip out those credit cards. However, if you adjust retail sales for inflation, the story is much different. In REAL terms (i.e., inflation adjusted) retail sales were 1.2% DOWN from a year ago. In fact, they have been down for seven consecutive months, and for 9 of the last 10. That isn’t an indication of an economy that is “surreally good.” It is an indication of a consumer that is running out of cash because prices have been growing faster than income.

We have been saying for some time now that consumers are strapped. Prices increases that significantly out-strip wage increases are taking a toll. There is a reason why the United Auto Workers are about to strike if they don’t get 30%-40% pay increases! And corporations are feeling it too. For the last 12 months, bankruptcies have been growing on a year-over-year basis with corporate bankruptcies running 25% higher than last year, and personal bankruptcies running 16% above last year.

In addition, credit card delinquency rates are running 50% higher than they were a year ago, and the number of credit card balances that are newly classified as “seriously delinquent” (90+ days past due) is also running 50% higher than a year ago.

In summary, prices are up far more than wages, and they are starting to once again trend in the wrong direction. As those prices rise, people can afford less and retail sales, on an inflation-adjusted basis are down for the 7th month in a row. And we are starting to see big increases in bankruptcies and credit card delinquency. So no Paul. The economic data have not been “surreally good.” Not for people who have to spend the large majority of their weekly pay on rent, utilities, food, and gas. It is unfortunate that your Nobel Prize is blocking the view from your ivory tower in New York.