Sobering economic news today: Rising inflation threatens recovery; US on track for second largest federal deficit in history.

We’ve had a run of mostly positive national economic news lately has hiring has picked up, despite a lingering labor shortage. and consumer confidence and GDP growth are both bouncing back. In addition, Geek Wire reports metro Seattle has led the nation in tech job growth

The Seattle region added more than 48,000 tech jobs from 2016 to 2020, an increase of more than 35% — growing at a faster rate than any other large U.S. tech market, according to a new analysis by the CBRE real estate firm.

The report confirms the meteoric growth of the region’s tech industry in the latter half of the past decade. The trend has been driven by the expansion of Silicon Valley engineering outposts in the Seattle area, the extraordinary growth of Amazon, the revival of Microsoft, and the emergence of heavily funded, homegrown startups, particularly in cloud computing and enterprise technology.

Although the report refers to the market as Seattle, CBRE confirmed that the stats encompass the greater Seattle-Bellevue-Tacoma metropolitan area.

But we shouldn’t forget that there are risks to the recovery beyond just the drag exerted by all of those unfilled jobs. Today’s news highlights two such risks: Inflation and the federal deficit.

The Bureau of Labor Statistics reports inflation over the last 12 months reached 5.4%.

The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.9 percent
in June on a seasonally adjusted basis after rising 0.6 percent in May, the U.S.
Bureau of Labor Statistics reported today. This was the largest 1-month change
since June 2008 when the index rose 1.0 percent. Over the last 12 months, the
all items index increased 5.4 percent before seasonal adjustment; this was the
largest 12-month increase since a 5.4-percent increase for the period ending
August 2008.

Calculated Risk notes

PI and core CPI were well above expectations.

Inflation concerns have been increasing in recent months, though many key policymakers continue to insist that the rises are temporary. The Associated Press reports,

Tuesday’s report from the Labor Department showed that consumer prices in June rose 0.9% from May and 5.4% over the past year — the sharpest 12-month inflation spike since August 2008. Excluding volatile oil and gas prices, so-called core inflation rose 4.5% in the past year, the largest increase since November 1991.

The pickup in inflation, which has coincided with the economy’s rapid recovery from the pandemic recession, has heightened concerns that the Federal Reserve might feel compelled to begin withdrawing its low-interest rate policies earlier than expected.

If so, that would risk weakening the economy and potentially derailing the recovery. Fed officials have repeatedly said, though, that they regard the surge in inflation as a temporary response to supply shortages and other short-term disruptions as the economy quickly bounces back.

We hope so. Then there’s this.

So far, investors have largely accepted the Fed’s belief that higher inflation will be short-lived, with bond yields signaling that inflation concerns on Wall Street are fading. Bond investors now expect inflation to average 2.4% over the next five years, down from 2.7% in mid-May.

Americans’ longer-term views on inflation have also leveled off. A survey by the Federal Reserve Bank of New York, released Monday, found that consumers expect inflation to remain near 5% a year from now. But they expect inflation to be 3.5% three years from now, down slightly from last month. Consumers typically overestimate future inflation.

The public’s expectations of inflation are important, because they can be self-fulfilling. If consumers foresee higher prices, they are likely to demand higher pay, and businesses will try to charge more to offset their higher costs.

Reuters also cites experts who doubt that the increases are problematic.

“June’s CPI numbers looked scary, but once again, we see that it was mainly temporary price increases that pumped up the figures,” said Robert Frick, corporate economist with Navy Federal Credit Union in Vienna, Virginia. “Overall, this report is consistent with inflation cooling off later this year.”


“The fact that the recent run-up in inflation has been dominated by a few categories should give the Fed leadership continued confidence in their view that it is mostly a transitory increase, a view which the market apparently shares,” said Michael Feroli, chief U.S. economist at JPMorgan in New York.

Again, we hope so. 

Those who worry about the federal deficit have another projection about which to worry.

The U.S. government’s deficit for the first nine months of this budget year hit $2.24 trillion, keeping the country on track for its second biggest shortfall in history.

In its monthly budget report, the Treasury Department said Tuesday that the deficit for the budget year that ends in September is running 9.1% below last year’s pace.

The deficit for the full 2020 fiscal year was a record $3.1 trillion. The Congressional Budget Office is projecting that this year’s deficit will total a slightly smaller $3 trillion. The deficits in both years were bloated by the multitrillion-dollar spending packages the government has passed to combat the economic downturns caused by the coronavirus pandemic.

Overall, we remain confident in a strong recovery. But it does make sense to pay attention to the risks.