Inflation dominated the 1970s.
We’re well into a new decade, and inflation is once again a headline. It affects consumers; investors; everyone.
Data Source: St. Louis Federal Reserve March 2024
Despite an unemployment rate that is stuck below 4%, despite strong job creation, despite a series of new stock market highs this year, consumer sentiment is in the dumps.
Why? Much has to do with high prices.
Inflation slowed more than most forecasters expected in 2023, and that’s great news, but progress has come to a grinding halt in the new year. Or worse, it’s re-accelerating.
Hope springs eternal
The Fed seemed intent on cutting rates this year, probably with the first cut in June. Fed officials were reasonably confident that progress would continue.
That’s why they lowered their guard and started talking about an easier monetary policy, which, in turn, helped juice stock prices.
The CPI is no longer in a disinflationary trend. Instead, price hikes have accelerated in 2024, as evidenced by the graphic above.
Just as Powell retired ‘transitory’ in late 2021, he’s no longer blaming the calendar for price re-acceleration this year.
However, he believes the Fed’s current stance is sufficient to return the economy to price stability–eventually. Let’s hope he’s right. We don’t need a repeat of the 1970s.
Fly in the ointment
But, what if a 5.25-5.50% fed funds rate isn’t all that restrictive? Job growth is strong, wages are rising, and government spending is off the charts.
Boosting aggregate demand in the economy via federal spending (and no tax hikes) is a great way to pump up GDP and job growth, but it also creates a tailwind for inflation.
In some respects, we’re all paying for higher spending via inflation, which acts like a hidden tax.
