How bad does Joe Biden’s economy have to be in order to find it hopeful that workers are losing even more ground to inflation? Between yesterday’s CPI report of inflation roaring at 9.1% and today’s PPI report putting it at 11.3%, the only sure bet is that the Federal Reserve will have to put its foot down onto the economy harder than a Terry Gilliam cartoon in Monty Python’s title sequence.

It’s so sure that the stock markets dropped like a rock in early trading as analysts now think the Fed may hike interest rates even more than first suggested:

The report was “a major league disappointment,” said Fed governor Christopher Waller in remarks prepared for delivery Thursday at a conference in Victor, Idaho.

“With the CPI data in hand, I support another 75-basis-point increase,” at the Fed’s July 26-27 meeting, Mr. Waller said. But he said that depends on incoming data, including reports due Friday morning on retail sales and consumers’ inflation expectations and on housing activity later this month.

“If that data come in materially stronger than expected it would make me lean towards a larger hike at the July meeting to the extent it shows demand is not slowing down fast enough to get inflation down,” he said.

The 0.75% increase last month was the largest single increase by the Fed in 28 years. It hasn’t ever issued a 1.0% rate increase since making the Fed rate the primary monetary-supply tool in their arsenal shortly before that time, although Paul Volcker certainly used it that way in the late 1970s. Now, however, the futures markets are expecting that move after the CPI report, the WSJ reported yesterday:

After Wednesday’s inflation report, investors in interest-rate futures markets and some analysts judged that the central bank would approve a one-percentage-point rate increase at its meeting in two weeks. The probability of a one-point increase rose to around 79% on Wednesday, up from around 12% before the report, according to CME Group.

I’d bet that the probability is closer to 90% after both the CPI and PPI reports showed no impact at all from the June rate hike. It’s clear that the Fed has to act more forcefully, and that means an abrupt intervention that will act immediately to tamp down demand — and investment. That will almost certainly trigger a recession of some sort if it’s effective at all, which means increasing unemployment and consumer shocks at least for a short period.

That brings us to Politico’s “hopeful sign” that the Fed won’t have to act quite so precipitously. Workers’ wages are failing even more to keep pace with price increases, not just in relative terms to the inflation rate but in actual nominal value:

Wage gains for American workers are beginning to slow, threatening one of the few positive trends for the economy since the pandemic. But that could be good news for the nation’s labor force. …

Average wages this year are up more than 5 percent from a year ago, the fastest pace since Ronald Reagan’s presidency. But that has caused concern at the Fed that the trend might accelerate and feed back into price increases, which have already been eating away at those impressive gains. The steady decrease in the speed at which wages are rising could allay those fears.

In a memo to reporters, White House National Economic Council Director Brian Deese and Council of Economic Advisers Chair Cecilia Rouse noted that average hourly earnings grew at a 4.2 percent annualized rate in the three months ending in June, down from 4.8 percent the previous quarter and 6.1 percent in the last quarter of 2021.

The picture for wages when adjusted for inflation “is terrible right now,” said Jason Furman, former chief economist for President Barack Obama and a professor at Harvard University. That’s because people are getting raises much more slowly than prices are rising.

But the slowdown in wage increases “might mean the Fed needs to raise less aggressively, so it can do a better job of preserving jobs,” Furman said.

Are we to breathe a sigh of relief because workers have fallen even further behind on inflation? Washington Post economic analyst Heather Long yesterday pointed out that workers have lost 3.6% of their buying power over the past year thanks to inflation, countering the larger gains that Politico and the White House note in this report:

Workers are experiencing the biggest decline in years in inflation-adjusted pay.

Wages are up 5.1% in past year. Inflation is up 9.1%.

The Labor Department calculates that workers had a -3.6% inflation-adjusted decline in pay in the past year (that's seasonally adjusted). pic.twitter.com/yM0cd7sHbn

— Heather Long (@byHeatherLong) July 13, 2022

If wage growth is slowing down, we’re avoiding a wage-price spiral — but workers are losing even more buying power every month than before.

Not only does that sound a bit like tossing workers under the bus, it actually makes the inflation problem even more acute for the Fed and for the White House — politically, anyway. Workers, by which we can mean voters, are not going to endure that corrosion of buying power over the long haul. It’s bad enough that the 2008 bailout and the Fed’s easy money since then has mainly benefited Wall Street rather than Main Street; Main Street isn’t going to like holding the bag for those policies one single bit.

That’s the issue that now faces Jerome Powell. He’s given some recent indications that the Fed needs to consider a broader inflation metric than just core CPI, which excludes food and energy — the two ways consumers experience inflation the most. The Fed will need to act quickly and more sharply to make sure consumers don’t lose confidence in the economy, and that means they need to stop the erosion of buying power as soon as possible.

Get ready for Powell’s big foot, in other words, and don’t assume that accelerated erosion of that buying power will delay it.