Inflation has risen at the fastest annual rate in almost 40 years
On Friday, the Labor Department revealed that the Consumer Price Index (CPI) has climbed 6.8% in the past 12 months. This represents the fastest annual rate in almost 40 years. Inflation of this magnitude erodes paychecks and undermines the real value of savings accounts. To fight inflation, a growing number of economists are calling for a withdrawal of fiscal and monetary stimulus.
The latest University of Michigan consumer confidence survey found consumer confidence to be at its lowest in 10 years. 76% of those polled said inflation was the most serious problem facing the country.
Greg Ip wrote in the Wall Street Journal: “During his first term, Jerome Powell became arguably the most accommodating chairman in modern Federal Reserve history, prioritizing full employment at a time when l inflation seemed to be off. In his second term, he may have to do the opposite: prioritize inflation at the risk of sacrificing jobs. The doves favor keeping unemployment low rather than inflation, thus supporting low interest rates and an expansionary monetary policy.
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Katy Bostjancic, chief US financial economist at Oxford Economics, told Bloomberg Television: “It’s a very difficult place for them. Inflation is going to stay hot and sticky throughout the first quarter. “
Bloomberg reported that average costs across almost all of the categories that make up the CPI have increased – gasoline, shelter, food and vehicles.
• Gasoline climbed 6.1%.
• The national median rent has increased 11.4% since the start of the year.
• Food in the home is up 6.4% from a year ago.
The data points to a perfect storm of disrupted supply chains, a recovering economy, robust consumer demand, and labor constraints that, overall, have driven prices up. The lack of semiconductor chips and the disruption of the supply chain have limited supply. Therefore, companies can raise prices and workers can demand higher wages. The United States has more job openings today than ever in history, and unemployment remains low at 4.2%.
In the early stages of inflation, the public can be fooled by what economists call “the money illusion.” The money illusion highlights that people tend to view their wealth in nominal dollars, ignoring their loss of purchasing power.
There is now, however, a distinct change in sentiment. In recent months, the rise in prices has angered the American public. To quote Abraham Lincoln, “You can’t fool everyone all the time.”
AW Phillips developed an economic theory called the Phillips Curve. Phillips observed that inflation is linked to economic growth. If we maintain a very high growth rate, our inflation rate will also increase.
The pandemic and the inflation that followed widened our wealth gap. While wages have increased significantly in recent months, they have not risen as fast as consumer prices. Hourly inflation-adjusted earnings fell 1.9% from a year earlier. In contrast, people with assets did well. According to Freddie Mac, home prices rose 14% in 2021. The S&P 500 has risen 27% since the start of 2021. Net worth (assets minus liabilities) hit a record high of $ 144.7 trillion.
The federal government and the Federal Reserve must recognize that inflation is undermining their stimulus packages. If we maintain 7% inflation for 10 years, our purchasing power decreases by 50% over the same period. Ever higher prices are catastrophic for people living on a fixed income.
William McChesney Martin, who was Chairman of the Federal Reserve from 1951 to 1970, said the Federal Reserve’s job was to “pull out the bowl of punch when the party begins”. Historically, rising interest rates when the economy is percolating has been the cure for inflation. In the early 1980s, with America experiencing double-digit inflation, then Federal Reserve Chairman Paul Volcker raised overnight interest rates to over 20% to fight against stagflation.
Sarasota resident Ernest “Doc” Werlin spent 35 years in the fixed income industry as a corporate bond trader and seller, including time as a trading partner at MorganStanley. corporate bonds. Send your suggestions and comments to [email protected]