Weekly Wrap Up: Inflation, The Double Bailout, The Loss of the East Wing

Inflation is awfully sticky and it's not just tariffs; compounded policy mistakes: the Argentine bailout + the likely forthcoming farmers' bailout; memories of the East Wing.

My Inflation Consternation

I’ve been deeply focused on inflation, not just lately, but ever since it took off back in ‘21, as the combination of jammed supply chains and strong consumer demand unleashed price pressures we hadn’t seen in years.

Most of those pressures were due to pandemic-induced, global shocks—inflation went up in all the advanced economies—but other factors were in play:

—A series of historically large fiscal support packages;

—Excess household savings as folks couldn’t interact with face-to-face services and instead demanded more manufactured products, the very ones facing logistical jams;

—“Sellers’ inflation” wherein some firms used the fog of pandemic price pressures on their inputs to raise prices beyond what was needed to cover the increase, thus padding their margins;

—Related to excess savings and fiscal supports: a very low price elasticity of demand, meaning firms found they could raise prices more than before without much negative consumer response or loss of market share;

—The uniquely tight labor market, generating wage pressures, some of which passed through to prices.

When all these forces faded, and they did, inflation turned tail and begin to fall, from about 9% in mid-’22 (I’m talking CPI here) to the mid-twos by late summer of ‘24. Fed rate hikes played a role as well, but were secondary to the “organic” (as in time heals, supply-chains recover, stimulus and excess savings fade, etc.) healing.

All that is backdrop for the current moment re prices in America, where things are, to use the technical term, pretty messed up.

To understand that assertion, you have to separate inflation—the change in prices from one period to the next—with the price level, i.e., what things actually cost. While economists, myself included, touted the decline in inflation noted above, a lot of people remember what things used to cost, pre-pandemic, even after all these years, and they’re still deeply unhappy about price levels.

But here’s the thing: tariffs raise price levels. They make imported goods more costly. Not all of that cost has been passed forward to consumers, but at least half of it has, with more to come as the buffers—inventory front-running, margin compression—wind down. Specific items, like coffee, are through the roof, up 19% over the past year, a clear result of Trump’s 50% tariff on Brazilian coffee.

[Side note: As readers know, I spend very little time—perhaps too little—inveighing against the endless passes Trump gets on these price issues relative to the Biden admin, of which I was a member. But I must pause and elevate this one. If we did something like this, every single news show, every interview, would focus on nothing else. I mean, okay, our fingerprints were arguably on a minority part of the higher inflation, but his fingerprints are wholly on this one. And we were endlessly pilloried while he blathers on, unchallenged, about how the tariffs have no price impacts.

Rant over…back to previously scheduled programming…]

Here’s the great Ernie T on tariffs and goods inflation:

Ernie’s figure brings me to the point I wrote about earlier in the week with the release of the September CPI: the pressures of services inflation. I wrote:

Core services ex-housing…was up 0.4% (0.35%) in Sept and 3.2% yr/yr. This series remains elevated—pre-pandemic it ran closer to 2% than 3%—and continues to deter inflation’s path back down to the Fed’s 2% target…I’ve seen pressures [in this grouping] in recent months that arguably are not directly linked to tariffs, as they fall on (imported) goods.

This leads me to the following analysis. The table below shows, in each cell, the rate of yearly services inflation we’d need to hit the Fed’s core inflation target, given the goods and housing/shelter rates you see of the y and x axes. Take, e.g., the number 4.3% in the table’s upper-left-hand cell. That means that if housing inflation were 2%, goods were 0%, then services could be a high 4.3% and we’d still hit the target.¹

Source: BLS, my analysis.

In Sept, yearly shelter inflation was 3.6% and goods were a tariff-juiced 1.5%. The table shows you’d need core services running at around 1.2% to hit the target, two full points below its current rate. Of course, if the tariff effect fades, as the Fed expects, and housing inflation continues to gradually soften, services inflation wouldn’t have to fall nearly as much.

But there a two caveats re that potential development: First, Trump will never stop “negotiating” tariffs. Even in the unlikely case that the SCOTUS conservatives get a spine and uphold the law on this, he’ll find other ways to torment our trading partners, as with Canada over the weekend.

Second, and much more germane from consumers’ perspective, when I say “the tariff effect fades,” I mean it fades re its inflationary impact. It’s impact on price levels will remain in place, needlessly burning through consumers paychecks, which, with the weakening labor market, are slowing.

In sum, inflation would likely have been fine had Trump not screwed around with it. Price levels would still have annoyed people, but not as much as they are now. And I really wish the media would lean a lot harder into this story.

The Double Bailout

It’s time to say a few works about Trump’s wholly misguided $20 billion bailout of Argentina, which is holding elections today. The dollars represent of line of credit to help uplift the perennially beaten-down Argentine peso, but there’s no good rationale for this expenditure, which is unlikely to make much difference to the nation’s economic and political troubles. Argentina poses no systemic financial risk to the US, and they absorb less than 1% of our imports.

The reason for the bailout is that the country’s embattled leader Javier Milei is a Trumpian MAGA ally.

But here’s the rub. The news of the US bailout led Argentina to remove an export tax on their soybeans, which is likely to further ramp up their newly increased soybean sales to China. This makes Trump’s bailout a hard slap in the face of US farmers because China, in retaliation for Trump’s tariffs, has ceased buying US soybeans (our farmers previously exported half of their crop to China), replacing the imports with Argentinian product. This has led Trump to tout yet another bailout, this one to the farmers.

In this sense, it’s a double bailout: Billions in taxpayer $’s to prop up a political ally with no nationally strategic rationale, and billions more to compensate farmers for the folly of the tariffs and the loss of sales to the very country we’re bailing out.

Remembering the East Wing

I won’t say much here as I like to stay in my political-economy lane. Trump’s not wrong that the White House could use a facility to host large events. I went to one state dinner during my tenure, and they typically occur in a big tent, staked up for the occasion. It was definitely the nicest tent I've ever been in (though full disclosure: I haven’t been in that many tents), but I see the rationale for a permanent, on-site, sizable venue.

But as others have said, he’s a temporary resident (if that’s not the case, we’ve got much bigger problems) in the people’s house and his unilateral decision to make permanent changes is yet another kingly abuse of his power. The way to do this is to consult with the public, preservationists, and White House historians; to allow the people to weigh in on the change, aggregate their views as best we can, giving added weight to the views of those with expertise around such changes to a national icon.

My last office overlooked the White House from the EEOB, and I’m not exaggerating when I tell you that every day I marveled at the view. I felt it was akin to looking out over the Grand Canyon—that’s how iconic the view is. It’s heartbreaking to see it smashed by someone who no one can possibly trust to handle this delicate task with any historical or aesthetic sensitivity.

1. This exercise should also be done with the core PCE, as that’s what the Fed tracks more closely, but I decided to use the CPI since I had the most recent observation, and the piece is CPI-focused (note that the table’s target is 2.3% as the CPI runs a bit hotter than the PCE). Because housing gets a much lower weight in the PCE, the results are similar but show less of a lift to get back to target. Still, given average pre-pan rates of housing and goods inflation, PCE core services would need to be at 2.7% instead of its August level of 3.4% to hit 2% for the PCE core.