Inflation is over, the administration crows, even as Congress works to pass another massive spending bill — this time, $1.7 trillion.
The consumer price index rose just 0.1% last month, bringing the 12-month rate to 7.1% — still higher than any year since the disco days of 1981. Politicians have downplayed inflation ever since President Biden ignored economist warnings in early 2021 that it would be economic malpractice to throw a $1.9 trillion stimulus bill at a supply-constrained economy. Then we were told that inflation was “transitory,” a relic of corporate price gouging and “Putin’s price hike.”
The Federal Reserve has also downplayed inflation. Two years ago, its Federal Open Market Committee (FOMC) forecast that inflation (using a slightly different measure called the PCE, for Personal Consumption Expenditures) would be 1.8% in 2021. It instead came in at 5.8%. Not learning its lesson, the FOMC projected that inflation in 2022 would fall to 2.6%. It is now set to end the year at 5.6%. So here we are again, with the FOMC projecting inflation rates of 3.1%, 2.5%, and 2.1% over the next three years.
Losing credibility
Repeatedly downplaying the threat of inflation has reduced the credibility of the White House, the Federal Reserve and other forecasters.
Even as the Federal Reserve aggressively plays catch-up on interest rates, one or two positive months mean little to wary consumers — especially when paired with the same old promises that supply chains will open up, government spending will slow, and shifts in demand from goods to services will dampen price pressures.
Consumers have several reasons to worry that inflation may remain sticky. Large Federal Reserve interest rate hikes have not yet broken inflation. As of this past summer, household savings remained $1.7 trillion above the baseline (mostly due to excess government stimulus payments), ready to drive up consumer demand. Supply chains have been slow to open, and Russia’s war in Ukraine can still wreak havoc on energy and food prices.
Most self-defeating of all, President Biden and Congress have that massive year-end spending bill. This is in addition to the student loan payment moratorium (and possible student loan forgiveness), and a plethora of expensive new Biden administration regulations, tariffs and mandates specifically designed to raise consumer prices and federal-government costs.
And of course, the more Washington drives up inflation with spending and regulations, the harder the Federal Reserve will have to slam the economy’s brake pedal with higher interest rates, likely killing jobs and inducing a recession.
R&I~Smit