On Tuesday, Nov. 30, during testimony before the U.S. Senate Banking Committee, Jerome Powell, chairman of the Federal Reserve bank, did an about face on monetary policy. Powell appeared to take on a new mantle, that of the nation's chief inflation fighter, casting aside his former dovish stance towards continued easing of monetary stimulus. Investors are asking "what changed?"

 

"We're now looking at an economy that's very strong and inflationary pressures that are high," Powell said. He went on to say that it might be "appropriate to wrap up our purchases a few months earlier."

 

Powell was referring to the planned tapering of the Fed's monthly purchases of fixed income assets. Since March 2020, the Fed has purchased at least $120 billion in Treasury bonds, and mortgage-backed securities as part of an emergency monetary stimulus program to combat the effects of the pandemic on the economy.

 

Last month, the Fed, after months and months of preparing the market for a purchase reduction, finally announced they planned to reduce purchases by $15 billion per month until the purchase program ends sometime next summer. Investors, having taken that on board, were suddenly told this week that the timetable may be accelerated.

 

For weeks, central banks have been struggling with rising prices throughout the global economy. Several nations have already taken steps to rein in inflation by raising interest rates. Here in the U.S., the annual inflation reached its' highest level in 30 years two months ago. As inflation continues to climb and spread throughout the economy, the pressure for the Fed to do something has mounted.

 

Inflation, like almost everything else in this nation, has become a political football. Republicans have used the fear of inflation to scuttle the administration's Build Back Better spending proposal. At the same time, Democrats have argued that pulling back support for the economy until unemployment returns to its pre-pandemic levels would be a mistake. As it stands, the nation has recovered about 75 percent of the jobs lost, but there are still millions of Americans that have yet to return to the labor force.

 

The fly in the employment ointment continues to be the coronavirus. Each new variant of the virus delays further gains in labor force participation. Over the Thanksgiving weekend, for example, another variant called Omicron, presented itself with the first case discovered in California. Depending upon the outcome of this new threat, the risk to inflation could rise as supply chain problems worsen throughout global economies.

 

At this point, however, inflation is increasing its hold on more and more areas of the economy, regardless of the supply chains problems. "I think the risk of higher inflation has increased," Chairman Powell said, adding that he fears inflation will persist "well into next year."

 

Powell's testimony before Congress was his first public appearance since President Biden nominated him for a second term. As I mentioned, inflation has become a political problem, especially for the president. Was it an accident that Powell's stance on inflation altered just a week after his nomination?

 

No one knows what the two men discussed during their meetings, but it doesn't take a rocket scientist to imagine that the issue of inflation came up. Some think that Fed vice chairman, Lael Brainard, lost out for the top spot because she was perceived to be a little less hawkish on inflation.

 

Whether political or not, Jerome Powell's decision to tighten monetary policy in the months ahead, while the coronavirus continues to be a serious issue, heightens the risk to investors in the future. 

 

Consumers are making up for last year's subdued Thanksgiving holiday. Air travel has jumped. Traffic on the roads is expected to be heavy. Grocery stores are crowded, and families are getting back together again all over the country. Hurrah!

 

As most readers know, last year's holiday was a bit of a dud largely because of the pandemic. Fewer people travelled. Instead, many of us decided to play it safe. Across the nation, family members decided to remain home, avoid the possibility of contagion, and postpone celebrating together until this year. That was a smart decision. In the meantime, the coronavirus cases have declined, vaccinations rates have risen, and America has reopened its borders to vaccinated foreign travelers

 

For tourists and other visitors, New York City, Las Vegas, and Disney World top the list of favored holiday destinations during Thanksgiving week, according to Trivago, a leading global accommodation search platform. On the domestic front, Triple A is predicting that 53.4 million people plan to travel during the holiday (myself included). That is up 80 percent from last year. This uptick in travel is likely to cause some chaos on the roads, rails, and airports, but nothing out of the ordinary for one of the most traveled holidays of the year.

 

Inflation and supply chain issues, however, are presenting a variety of obstacles for consumers.  Higher gasoline prices are raising the cost of travel. The average price at the pump is around $3.40 a gallon for this week, which is the highest price in seven years. The supply chain shortages in the semiconductor sector have hurt new vehicle production overall, which has led to a scarcity of rental cars. Car rentals prices (if you can find one) are through the roof.

 

Thanksgiving dinner will also be more expensive, according to the American Farm Bureau Federation.  A dinner for 10 people is pegged at $53.31, which is a 14 percent increase from last year. That sounds awful high, but last year prices were depressed. The average total cost of that same dinner in 2020 was $46.90. That was a $2.01 decrease from 2019, and the lowest price tag for a Turkey Day dinner since 2010.

 

Supply shortages have also cropped up on the grocery shelves. Canned jellied cranberry sauce, produced by Ocean Spray, a cooperative of more than 700 farms, may not be easy to find this year. It seems that there is a can shortage that has forced the cooperative to switch can sizes. The disruption created a scarcity of the Thanksgiving staple just in time for the holiday. Supplies of cold storage frozen turkeys are also at their lowest level ever. Prices for items such as pie crusts, dinner rolls, veggie trays, and fresh cranberries have seen double-digit increases. The good news, however, is that stuffing mix, for some reason, suffered a 19 percent price decline.   

 

Consumer data indicates that shoppers also hit the grocery stores somewhat earlier this year to get ahead of rising prices and worries that there might be product shortages. Shoppers have also been switching to lower price brands and are visiting multiple retailers in search of lower prices. Count me as guilty of all the above.

 

As a side note, I will be visiting with family for the holiday and staying over into the weekend. As a result, I won't be posting my usual Friday market column this week. To all my readers, have a Happy Thanksgiving.

 

The U.S. labor shortage is hitting the public education sector hard. Yes, COVID-19 and its mutations have had a lot to do with the lack of teachers, but the problem predates the pandemic. In just the last two months, 65,000 public education employees left the industry.

 

Across the United States, in October 2021, there were 575,000 fewer state and local education employees than in February 2020, according to the latest employment report of the Bureau of Labor Statistics. The pandemic, in some ways, was simply the straw that broke this camel's back.

 

Stagnant wages, or worse, falling wages, have beset the teaching industry for years. In 2018, for example, the wage gap between teachers and a comparably educated U.S. workforce was roughly 21 percent. Twenty-five years ago, that same wage gap was only 6 percent, but beginning to grow. And while most teachers, like everyone else, have enjoyed yearly wage gains of about 0.7 percent, that is less than half the average annual gains for the rest of the civilian workforce.

 

The pay issue extends beyond the teachers, however. Support staff and school bus drivers have had the same issues. In today's strapped labor market, public education support workers have a choice.  Why continue to file school records, answer phones, or maneuver a bus load of kids when private sector offices and trucking companies are paying far more (with benefits) for that labor?

 

As you might imagine, fear of COVID-19 and continued stress brought on by the pandemic provided the impetus many teachers needed to make the decision to retire, or simply quit. Some hoped that as the pandemic waned, teachers and support staff would return, but that has not been the case. As a result, schools are making do where they can.

 

Some schools are continuing and extending their efforts to provide virtual learning. Others are shortening teaching hours, or in some cases, simply closing for a day or two per week. A school administrator's worst nightmare today is finding substitutes for a teacher on holiday, sick, or who enters quarantine after testing positive for the coronavirus. Those who might be willing to fill in as a teaching substitute are opting instead for different jobs. That is because temporary teaching wages are so low that cooking burgers at fast food restaurants pays more.

 

Unfortunately, the present demand for teachers is far outstripping the supply.  Less and less college and university students are willing to embark on a teaching career. Many would face decades of repaying student loan debts on skimpy salaries with little or no prospects of ever making ends meet.

 

The public school labor shortage is worse, depending upon geographic location, grades, and subject matter. High schools and middle schools have always been harder to staff than elementary schools. STEM areas (science, math, special education and foreign languages) have always been chronically understaffed and have become more so since COVID-19. The Southern, Southwestern, and Western U.S. have historically struggled with teacher shortages. It is also the case when comparing urban and rural schools, versus easier to staff suburban schools.  

 

Those teachers who have maintained their careers and jobs over the last year or two have had to contend with an overwhelming amount of responsibility during the pandemic. Overworked and stressed, many teachers are in burnout mode with few avenues to reduce their immediate symptoms. And while my heart goes out to this beleaguered group of workers, the impact of this shortage has severe ramifications for the future of education in America.

 

As most readers know, the U.S. continues to slip in educational rankings when compared to the developed world. It is most apparent in science and math. However, we are still perceived as having the best all-around educational system in the world. In order to remain at the top, we need good teachers — well-paid, well-educated people — who are proud and fulfilled in their chosen careers. As a first step, raising wages would seem to me to be a no-brainer. 

 

High-income tax states like Massachusetts, New Jersey, California, and New York would appear to be winners if President Biden's "Build Back Better" plan is finally passed by Congress. The Trump-era limit on state and local tax deductions could provide a $200 billion (or more) wind fall for wealthy Americans.

 

As it stands now, congressional Democrats, especially those who represent high tax states, are crafting a change in the SALT deduction cap. Presently American households can only deduct $10,000 of state and local taxes from their federal income taxes. That cap deduction is poised to end by 2026.

 

In a prior column, I explained that in exchange for their votes on Biden's $1.7 trillion plan, high tax state legislatures insisted on lifting the amount of the SALT cap. The House Rules Committee is now working on a change that would raise the $10,000 cap to $72,500 for five years (that would be retroactive to 2021).

 

The largest beneficiaries, according to the Tax Policy Center, would be households earning at least seven figures. They would receive the lion's share of benefits. As for middle-income U.S. households, the average cut in taxes would only amount to roughly $20 per year, while the higher income earners would be saving $23,000 per year. 

 

A full 25 percent of the tax cuts would flow to the top 0.1 percent of taxpayers. For them, the average savings in taxes would be $145,000. Another 57 percent of the benefits would go to the top 1 percent, who would save roughly $33,100 annually.

 

The Committee for a Responsible Federal Budget, a non-partisan, non-profit economic education organization, believes the tax benefit would cost $300 billion over the next four years with $240 billion of that cost accruing to those who make more than $200,000 a year. That would put the price tag for the SALT cap expansion on par with childcare subsidies, and the clean energy tax credits, making it the third costliest element of the overall Biden plan.

 

The legislation puts Democrats between a rock and a hard place. Clearly, most of the benefits would be going to the bluest-of-the-blue coastal states. The fact that it also benefits the wealthiest Americans flies in the face of the progressive side of the party, who have stomped and won their seats railing against income and wealth inequality.

 

In order to pass the Build Back legislation, Democrats need all hands-on deck. But the group of legislators most impacted by the present SALT tax has made it clear that without a SALT deal there would be no deal on the overall Biden plan. 

 

Over in the U.S Senate, key players are backing a different approach. They want to exempt taxpayers from the SALT cap, who make under a certain income level. That level is still being debated.  Achieving a resolution between the House and the Senate will be necessary before Democrats can hope to send a new version of the budget reconciliation package to the White House.   

 

In the middle of the debate sits the president. The framework of President Biden's plan, released last week, did not include a SALT repeal, or change in the present tax cap. In the past, however, the president has indicated he might be open to eliminating the deduction cap altogether. 

 

My own guess is that the Senate approach, which favors an income-based exemption, would be more palatable to a voter base that would not be interested in giving the wealthy another huge tax break.    

 

Rising prices at the gas pump, combined with soaring shopping bills at the supermarket, are having a noticeable impact on the consumer's pocketbook. But what's worse is that higher prices in oil beget higher prices in food in the future. Here's why.

 

Historical economic studies tell us that energy prices have a significant impact on food prices with 64.17 percent of changes in food prices explained by the movement of oil prices. But that only tells half the story. As energy prices climb, inputs to farm production are also impacted. Fertilizers, for example, account for between 33 percent to 44 percent of operating costs. 

 

The production of fertilizer and its inputs (such as nitrogen, phosphate, and potash) requires substantial amounts of energy, which increase the selling costs to farmers. Fertilizer prices are now the highest in decades. To make matters worse, the prices of fertilizer and its inputs continue to see dramatic increases, rising as much as 18 to 26 percent during the last month alone.

 

Obviously, energy in the form of diesel, gasoline, and electricity is also a direct input cost to the agricultural sector. It is critical to running and maintaining the myriad machinery required to plant, grow, harvest, and transport food products to market.

 

In addition, the explosion of greenhouse growing of vegetables has also been hit hard by higher energy costs. That is no surprise, since this is an extremely energy-intensive area. And as energy prices continue to climb, more farmers have shut down their greenhouses, reducing crop production even further.

 

Higher energy prices have also prompted farmers to switch more of their fields from food production to making biofuels. As more and more acreage are switched to soybeans and corn (key inputs in biofuels), there is less acreage devoted to other crops. That leads to less supply and higher prices for everything from wheat to livestock feed.  

 

The United Nations index of food costs has climbed by a third over the past year. This has led to a decade-high jump in global food prices at a time when the world is contending with its worst hunger crisis in 15 years. As readers may be aware, this energy/food issue is being aided and abetted by worker shortages, supply chain issues, and weather calamities such as flooding and drought. This is particularly bad news for poorer nations that are dependent on imports.

 

It is currently harder to buy food on the international market than in almost every year since 1961, which is when the U.N. record keeping began. The only exception was the period 1974-1975. That is no coincidence, since the OPEC-driven oil price spike of 1973 spawned the rapid inflation that impacted food prices.

 

To give you an idea of how food stuffs are climbing throughout the globe, in September 2021, alone, the U.N. food index rose 1.2 percent. Grains jumped 2 percent, driven by wheat, which has been hit by drought in North America and Russia, the world's largest producers. Sugar, a big Brazilian export, also saw big price gains. These price hikes are boosting import bills for buyers around the world. Competition for additional food supplies is also adding upward pressure to prices as well.

 

Most of us here in the United States are at least able to afford the twin increases in fuel and energy for now. However, there is a time lag between the recent price spikes in the oil and agricultural markets and how long it will take to filter through to grocery stores. In the meantime, keep an eye on the oil price as an indication of where your grocery bill will be going into the weeks and months ahead.