The Bureau of Labor Statistics just released the monthly change in the Consumer Price Index (CPI) for March. The CPI increased by a whopping 1.2%. That raises the inflation rate for the last 12 months to 8.5%. While many will blame the Russian invasion for the price spike, the reality is that most of the inflation was caused by government policy.
As I have noted in my Newsmax columns at least a dozen times since last year, government policy has caused this inflation and government policy can end it. Since the federal government is unlikely to change most of its policies, inflation will worsen in the coming months.
It is true that the Russian invasion of Ukraine is contributing to the inflation problem. But most of the impact of that invasion has yet to be felt. Energy prices rose significantly last month, which added to the high overall inflation rate. Energy prices stabilized in April, yet the inflation rate for April may be as high as March’s number.
PPI, Wages, Demand Up
But the most significant factor affecting the inflation rate is the excess demand in the economy, which is entirely a result of federal government policy.
For the last two fiscal years, the federal government has spent nearly $6 trillion more than was raised in tax revenue. This created pure excess demand, especially considering that the economy is now producing at a rate that is about 2% higher than pre-pandemic levels. In total, that means disruptions in the supply chain is not the primary cause of this inflation.
While it is true that there are supply chain disruptions in some markets, like the market for imported goods or the market for products using computer chips, overall supply issues are not the problem.
Adding to the excess demand is the shockingly irresponsible monetary policy of the Federal Reserve. In spite of rising inflation, which started very early last year, the Fed continues its expansionary policy. Finally, at the end of last year, the Fed decided to stop the inflationary increase in the money supply by ending its $120 billion per month bond-buying program.
Why the chairman and the governors of the Federal Reserve waited so long is baffling and inconsistent with past action, where the Fed always tried to stay ahead of inflationary pressures. In 2016, for instance, there was a slight hint of inflation. The Fed raised interest rates eight times over the next two years.
They said that their action took enough excess demand out of the economy to keep inflation down, yet not too much to cause a recession.
This time the Fed waited one full year before it decided to raise interest rates. Last month’s rates were raised by a meager 25 basis points or one quarter of 1%. That action is clearly way too little and way too late. In its next meeting, the Fed will have to be much more aggressive. The next rate hike will be at least 50 basis points, but in my opinion, it really should be more.
If inflation increased 1.2% per month for the next 12 months, which admittedly is unlikely, the annual rate would exceed 15%. That would be devasting for the economy in general, but it would clobber people on fixed incomes and lower income people.
Biden Admin Spending to Continue
The Fed will not allow that to happen. Since the Biden administration will not reduce government spending, monetary policy is the only tool available to fight inflation. That means the Fed will get very aggressive by raising rates four or five more times before the end of the year.
That will lead to interest rates at least 3 percentage points higher by this time next year. That would point to inflation running at a rate of ~ 11.5%.
An added danger is that if rates are raised too quickly and too much, a recession will follow on top of this double-digit inflation. The number of economists who are currently predicting a recession will begin by this time next year, is rapidly increasing.
The federal government caused this inflation before Russia’s actions. Russian President Vladimir Putin, with his unprovoked aggression into Ukraine, has made the problem worse.
We are now heading toward higher inflation, especially considering food prices are about to increase significantly.
The Fed must aggressively address this problem immediately.
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