Personal Consumption Expenditure for July 2021 shows increased inflation is still in play.

The Personal Consumption Expenditure (PCE) inflation index shows an increase of 0.4% in July 2021. Since December 2020 this index is shown inflation of between 0.3% and 0.6% each month.

This indicates that inflation is continuing. Good news is that inflation is not accelerating. Bad news is an annualized inflation rate of about 6% is continuing.

The PCE is the inflation index preferred by the US Federal Reserve. An intriguing aspect of the PCE is the numbers are routinely revised. This means prior month’s numbers will shift, sometimes by substantial amounts.

Update: The year over year change in PCE is 3.6%. CNBC reports on 8/28/31 Key inflation gauge rises 3.6% from a year ago to tie biggest jump since the early 1990s. To be specific that matches the increase in May 1991 and is second only to the 4.2% increase in January 1991. Current policies of the White House and Congress have given us the highest inflation in 30 years. Not yet Carter era bad, but there is time to achieve Carter level performance.

The CNBC article also says some of the Fed members are starting to see the immediate inflation just might be more than just a temporary adjustment to the economic shutdown. President of the Atlanta Fed acknowledge such possibility when he said on-air that he is hearing from a many of his business contacts that they expect inflation go to beyond the immediate-term.

Very slow but steady improvement in unemployment as of early August 2021.

New claims for unemployment are down about 60,000 per week since my last post 10 weeks ago. For the week ending 8/21/21 new claims were 353K compared to 412K the week of 6/12/21.

The number of insured unemployed has dropped more substantially, from 3.53M the week ending 6/12/21 to 2.9M the week ending 8/14/21. That is a drop of 672K over nine weeks. For contrast the number of insured unemployed was averaging 1.7M in January and February 2020.

Those numbers reveal a slow improvement although the number of people losing their jobs each week is still running double the average in January and February 2020.

Purpose of these posts on economic statistics is to help all of us keep current on what is going on in the overall economy.

What I’m drawing from the data is the economy is improving one little bit at a time. Seems to me the recovery is slowing.

Revised number of weekly new claims in state programs over recent months shows following trend:

  • 406K – 5/22/21
  • 412K – 6/12/21
  • 368K – 7/10/21
  • 349K – 8/14/21

Following graphs show the devastation from the economic shutdown.

New claims

New claims for unemployment by week since the start of 2020:

Consumer Price Index again showing strong inflation in July 2021.

The Consumer Price Index, or CPI, shows 0.5% price increases in July with a core increase of 0.3%. While that is the lowest increase since February 2021, half a percent in one month works out to about 6% in a year.

Graph at top of this post shows the monthly change in the primary index along with the core change which excludes food and energy. Graph also shows an average of the preceding 12 months.

The average was running around 0.1% a month for most of 2020 after the shock of the pandemic. You can see the rising monthly increase quite visibly, starting in January 2021. Watch the green line increase from around 0.1% up to currently 0.4%.

The trailing 12 month average is also grim. It shows:

Expectations growing that we will see rising interest rates and sustained inflation.

Image courtesy of Adobe Stock.

It isn’t just the current numbers that are hinting that inflation is back. Changes in CPI and PCE are unsettling.

There is also a clear statement from the Fed they will nudge interest rates up earlier than they previous announced. Also indications from two big banks that we will see rising interest rates.

6/17/21 – Dailywire – Federal Reserve Delivers Bad News About Expectations For Inflation, Raising Interest Rates: Report – Previously the Federal Reserve indicated interest rates would not have to be increased until sometime in 2024.

New claims for unemployment are flat and ongoing claims are slowly decreasing as of middle of June 2021.

New claims for unemployment are flat compared to three weeks ago. Ongoing claims for unemployment at the state and federal level are declining, slow though the decline may be.

Number of weekly new claims for unemployment was 406,000 three weeks ago and 412,000 the most recent week. The increase in the most recent week offset the decline in the previous two weeks.

Most recent data shows ongoing claims at the state level dropped from 3,602,000 three weeks ago to 3,518,000 in the most recent week, for a net decrease of 84,000. There was an increase two weeks ago, large drop last week, and essentially no change this week.

The number of new claims is still double the average from before the pandemic.

Purpose of these posts on economic statistics is to help all of us keep current on what is going on in the overall economy.

Revised number of weekly new claims in state programs over the last four months to show the trend:

  • 728K – 3/27/221
  • 590K – 4/24/21
  • 406K – 5/22/21
  • 412K – 6/12/21

Following graphs show the devastation from the economic shutdown.

New claims

New claims for unemployment by week since the start of 2020:

Accelerating inflation rate continues in May 2021.

Changes in the Consumer Price Index have been making a splash in the news lately. Increases over the last three months have been unusually high.

The headline consumer price indicator increased 0.6% in May after 0.8% in April and 0.6% in March. That is a big run of inflation for three months.

The core measure, which excludes energy and food costs, has been on a roughly parallel track with 0.7 increase in May following a 0.9% in April and 0.3% in March.

Graph at the top of this page shows the change in the primary inflation indicator, and the core index along with a 12 month average of the monthly change.

You can see a large drop in prices during the pandemic followed by spikes over the next several months. Price changes returned to normal range in the September 2020 through February 2021 timeframe.

What is behind those numbers? Let’s check out the Wall Street Journal’s narrative:

America is Land of the Free, Because of the Brave. My ‘thank you’ to those who made it so.

Heavy bomber crewman, U.S. Army Air Force, World War 2. Photo from Legacy Flight Museum in Rexford, Idaho by James Ulvog.

Our freedom is under rapidly increasing assault by many politicians who think they are kings and queens appointed by divine right instead of having merely won a few more percentage points of the vote than their opponent in the last election.  In the last year public health officials at the federal, state, and county levels who lack self-awareness of how often they beclown themselves have joined in the efforts to shred our liberty.

As a result of these attacks, it is ever more important that on this Memorial Day we remember those who shed all their blood so that we may be free.

A ‘thank you’ from me is so trivial, yet that is all I have.

I will demonstrate my appreciation for freedom purchased by others by exercising freedom.

Yesterday I exercised my freedom of religion. Tomorrow I will exercise my economic freedom, also called pursuit of happiness, by running my business the way I choose.

I have posted variations of the following ideas several times before.  I will continue to make these points routinely.

To everyone on active duty today, I often accept a ‘thank you’ on your behalf.

Union Infantry private, U.S. Civil War, 1961-1865. Photo from Legacy Flight Museum in Rexford, Idaho by James Ulvog.

While touring the U.S.S. Midway Museum in San Diego early this month, I wore a “U.S. Air Force” ball cap with various stuff pinned to it, such as the rank I wore, a missile badge (“pocket rocket” for those who know), SAC logo, and a rectangular piece of metal that declares “Combat Crew.”

During the course of walking around, I got lots of glances and several comments of “thank you for your service.”

Also got some joshing comments from the retired Navy guys about them ‘allowing’ me on their ship. Since we were all on the same team back in the day, the kidding was pure fun.

I was on active duty for only four years and that was decades ago. I never got within 3,000 miles of hostile action. (Of course if the flag had gone up, I would have been radioactive dust at 20,000 feet altitude about 40 minutes later.)

As a result, I was uneasy for a long time when someone said “Thanks for your service.”

It took me a few years to get to get comfortable with those comments.

I now graciously and proudly accept those expressions of appreciation from my fellow Americans, but not because of what I did so long ago. 

Monitoring inflation through the Personal Consumption Expenditure (PCE) price index.

Another way to keep track of inflation trends is by watching the price index for the Personal Consumption Expenditure.

Please journey along with me as I continue my education.

In the news yesterday was the April increase which showed a 3.1% year-over-year increase compared to an expectation of a 2.9% increase. For one article discussing the news, check out the following:

I have started to track this data, gathering information back to the start of 2020. The month by month change in the headline index and the core index (which excludes food and energy costs) can be seen in the graph at the top of this post.

Before look at the year-over-year change, we need to look at the nature of the index. There are two main indices used to monitor inflation. The first is the Consumer Price Index (CPI) which everyone knows about. The other is the Personal Consumption Expenditures (PCE).

What’s the difference? Great question.

New claims for unemployment decreasing at end of in May 2021. Ongoing claims are flat.

Since my last post on 4/30/20, a month ago, there has finally been visible progress in the number of people losing their job.

Since 4/24/21 the number of new claims for unemployment has dropped from 590,000 to 406,000 in the week ending 5/22/21. Graph above shows improvement. Average had been running around 800,000 from early October 2020 until late in February 2021.

The number of new claims is still double the average from before the pandemic. As recently as February it was four times, so that is progress. From quadruple for oh so many months to merely double is good. Not great for all those people losing their job now, but at overall level it is progress.

Purpose of these posts on economic statistics is to help all of us sort out what is going on in the overall economy.

Revised number of new claims in state programs over the last four months:

  • 754K – 2/27/21
  • 728K – 3/27/221
  • 590K – 4/24/21
  • 406K – 5/22/21

Following graphs show the ongoing human cost of the economic shutdown.

New claims

New claims for unemployment by week since the start of 2020:

Major revision to Quality Control Standards on the horizon.

Let’s dial up the quality of our A&A work. Image courtesy of Adobe Stock.

The AICPA’s Auditing Standards Board is proposing a massive overhaul of the Quality Control Standards.

Who will this affect? All CPA firms who provide any audit, review, compilation, preparation, or attestation engagements. In other words, anyone with any accounting & auditing work.

As a mere starting point, the new standards will be relabelled as Quality Management Standards.  Instead of QC system, we will now have a QM system.

As a reminder, QC or QM standards apply regardless of whether you go through a system review or engagement review during your tri-annual peer review. The QC/QM system is tested in a system review but you still must have a formal QC/QM system even if you only do comps and reviews.

This post will provide a quick mention of what I see as the three biggest changes followed by a lengthy summary.

Major changes

A massive change that will impact small firms is that the annual inspection (which is currently required and will continue to be required) may not be performed by anyone who worked on the engagement.

For one person firms, this will require us to get someone outside the firm to perform the annual inspection. Two or three partner firms where the partners do essentially all of the work will also have to get someone from outside to do the inspection.

Two of the other changes of note: new risk assessment process and annual evaluation of quality management system.

The risk assessment process will require establishing quality objectives, identifying risks to achieving those quality objectives, and implement responses to address the quality risks.

After a one year delay to allow running the new QM system for a while the new requirement of an annual assessment of the QM system will kick in.

Proposed effective dates

The first Statements on Quality Management Standards, referred to as SQMS #1, is proposed to require the new quality management system be designed and implemented by December 15, 2023. The first annual evaluation of the system of quality management is proposed to be required within one year following December 15, 2023.

Rephrasing the effective date, the new QM system has to be in place before the end of 2023 (by 12/15/23 to be exact). That is about 2½ years from now. The first annual evaluation will be required one year after that, by the end of 2024 (specific deadline 12/15/24).

Summary of exposure drafts

How can a football team’s position for scoring the game winning points illustrate the differences between an audit, review, compilation, and preparation?

Image courtesy of Adobe Stock.

(Cross-posted from my other blog, Nonprofit Update, not because CPAs need this information, but because it might be helpful for your clients. You might also be able to use this illustration as a tool to explain different service levels to your clients.)

Let’s think about a football team and how they are positioned for scoring the winning points in the last few seconds of a tied game. They could be 4th-and-goal or perhaps not yet to a position for a field goal attempt.

Let’s use that illustration to explain the services provided by your outside accountant.

A CPA can provide four levels of services if you’re looking for financial statements.

You can hire a CPA firm to provide:

  • audit,
  • review,
  • compilation, or
  • preparation service.

What is winning the game?

We all know what that is in football.

In our accounting illustration a winning score would be perfect financial statements. Every number is correct. Not just close-enough, but exactly correct. Every disclosure complies with every single requirement.  The presentation and classification are picture perfect.

That probably never happens in real life, so let’s simplify it by saying that there is nothing even close to materially incorrect in any number, presentation, or disclosure. The financial statements are as close to perfect as is humanly possible.

That is what a win looks like.

Audit

Let’s say there is under a minute left in a tied game. Our favorite football team has just completed a successful drive and is sitting on the 1 yard line on fourth down. There’s only one play left in 30 seconds and the game is over.

Likelihood of getting a touchdown and winning the game is pretty good. Right about now the odds look incredible.

Background on the inflation environment.

Image courtesy of Adobe Stock.

Previous post suggested It’s time to start monitoring inflation. The dramatic increase in inflation rate in March and April 2021 suggests we need to be watching the inflation numbers more closely.

Not only does this help us generally understand what is going on around us, but specifically it helps us understand and interpret our clients’ financial results as we provide audit and review services.

A few articles I have found helpful in the recent weeks providing context on the inflation environment:

5/5/21 – Wall Street JournalEverything Screams Inflation – Columnist senses a possible shifting point from the low inflation we have seen for a very long time, going back to a sustained period of high inflation.

He cites five general trends which point towards years of high inflation:

It’s time to start monitoring inflation.

As CPAs, we pay attention to economic trends because those have big impact on our client’s operations.  Understanding what is happening in terms of interest rates, growth or shrinkage in the GDP, unemployment trends, and real estate prices also helps us interpret financial statements during and audit or review.

It is time to start monitoring inflation rates.

Graph at the top of this post shows worrying information about inflation.