U.S. inflation is at its peak, and the Fed will try to take back the reins

This may no longer be surprising at this point, and yet it is an extraordinary figure. US inflation has reached levels not seen for 39 years. The December 2021 consumer price index, released on Wednesday, was 7% – the highest since 1982.

The core index of inflation, which neutralizes volatile prices such as fuel and food, also recorded an annual increase of 5.4% – the highest rate of price increases since 1991. In short: whether there was a lively debate between economists in the summer, No, at least not in the sense of ‘passing fast’.

Inflation recorded in December is lower than in November and October, and some argue that henceforth inflation will only fall – along with the epidemic dampening and pressure relief on supply chains. And yet, it will remain at relatively high levels. Only at the end of the current year, according to forecasts, US inflation should fall slightly below 3%. Meanwhile, Americans will continue to feel the price increases: at the gas station, on supermarket shelves, and also in rental prices.

In his Senate testimony this week, Fed Chairman Jerome Powell explained that demand in the U.S. economy was recovering rapidly, while the effects of the corona had not yet passed. The result was that supply did not meet demand. ” Supply for demand, and bottlenecks – and higher-than-normal inflation. ”

Powell has taken time to change his tone about inflation, but now he is sending a blatantly hawkish line: “If we have to raise interest rates more over time, we will do it,” he testified in Congress. He explained that taking control of inflation is essential to ensure the continued recovery from the economic crisis. “To achieve a long recovery, we need to achieve price stability. So in a sense, high inflation is a serious risk to achieve maximum employment” – stability and prices and maximum employment are the official two goals of the Fed.

In other words, Powell is trying to convey that the Fed is “on top of it,” and that the severity of the situation is clear to him. It is estimated that the Fed will raise interest rates three times in the coming year. It’s a change of direction, and an abandonment of the age of zero interest rates – but the truth is that we are not yet talking about skyrocketing interest rates.

Mid-term elections are approaching

Inflation is a serious danger not only to the labor market – which has not yet returned to normal, but also to the White House and Democrats. Some of the inflation is due to wage increases, especially at the bottom of the income scale (in industries like catering, for example). But on average, American workers have seen their wages erode by 2.4% in the past year. A drop in real wages is not a good positive development for any president – and Joe Biden and the Democrats are facing middle-term parliamentary elections this year. They will be exposed to the accusation (and not everyone agrees) that the overly generous aid policy dictated by the White House has also contributed to over-demand and inflation.

Biden has something to do: try to control the plague (as much as possible to control the omicron), and try to solve the problems in the supply chains (some of which are not under his control at all) – and the White House is already trying to do that. But to a considerable extent, the one who will have to deal with inflation is the Fed led by Powell.

There is here, again, movement of the pendulum. After the financial crisis, central banks were the ‘only game in town’. They were the ones who carried most of the burden of stimulating the economy, with governments taking a relatively conservative line. The corona has apparently led to the return of governments, which have poured huge budgets into the economy. But now that inflation is back – which is true, it must be emphasized, especially to the US and less to Israel – the ball is back in the hands of the central banks again. But this time, their task is not to stimulate the economy, but to calm it down a little, gently.

By Editor

Leave a Reply