Inflation, sentiment and welfare

The Cleveland Fed's CPI Nowcasting model, which estimates inflation before official data is released, currently stands at 4.18%. This data point has been published this week, as Mr Warsh was swore in. It’s is a welcome message from an economy that is running hot in prices, but it’s not hot in salaries or jobs. Take a look at the chart below: you’re looking at the Index of consumer sentiment in the US. The index is constructed on 5 core questions: (1) personal finances today vs a year ago, (2) personal finances expected on 1 year, (3) business conditions expected in 1 year, (4) business conditions in 5 years and (5) current business conditions vs 1 year ago. It was first published in November 1952. Ot currently shows the lowest and weakest level ever. That’s 75 years of data. It includes the oil embargo, the Vietnam war, the hyper inflation of the 80’s, the dot.com crisis, the GFC and Covid-19. But the worst reading ever is the current one. The U.S. consumer is being squeezed, and small businesses too. High inflation and flat salaries growth. And the AI menace threatening to take jobs away. Sam Almant said it recently: “advances in AI may require changes to the social contract”. The whole point of using Macro variables (GDP, inflation, etc) to govern a country is to have KPIs tied to social welfare. If AI produces 10% annual GDP growth but people don’t benefit directly from it, what’s the point? And furthermore, how does that end according to history?

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