GoldPro UnderGround 07/20/2021
The Bureau of Labor Stats announced that consumer prices increased by a whopping .9% in June. That means since June 2020; prices have increased by 5.4%; that is the most significant annual increase in more than a decade.
Worse yet, most of the increase incurred between January 1 to June 30 of this year. During that time, prices rose by 3.6%. If that pace continues until the end of the year, inflation for 2021 will be 7.2%. Since the goal is to keep inflation under 3%, inflation will be a significant problem.
The Federal Reserve (Fed) and the Biden administration continue to say that inflation is temporary (transitory). They believe that the inflation spike is due to disruptions in the supply chain, and once the economy fully re-opens, inflation will subside.
They are wrong.
Prices for commodities generally fell sharply last month. For example, lumber prices fell by nearly 50% in June. Other commodities like corn and copper also saw price decreases in June. However, with those prices falling, the CPI in June still rose by .9%. That means the June annualized inflation rate exceeds 10%.
For the first time in modern history, the Fed is not out in front of inflation. In the past, even a hint of future inflation would result in the Fed taking action to reduce inflation before it got too high.
For instance, in the fall of 2016, there were some signs that inflation was escalating. The Fed had already begun to reverse the quantitative easing by reducing their bond purchases which slow the rate of growth of the money supply. In addition, the Fed began to raise interest rates from the near-zero level.
In fact, between the end of 2016 and the end of 2018, the Fed raised interest rates eight times. They say that those actions took enough demand out of the economy to avoid high inflation but not enough to slow economic growth.
The Fed should take similar action immediately.
The money supply has increased by nearly 20% in the past 12 months. Economists, except for the few that believe the incorrect Modern Monetary Theory, will say that the rapid growth in the money supply is highly inflationary. The Fed should slow the growth of the money supply by gradually reducing the $120 billion monthly purchase of government bonds.
In addition, the Fed should immediately and gradually raise interest rates, similar to their actions from 2016 to 2018. The longer the Fed waits to act, the more drastic the actions will have to be.
President Biden’s economists will disagree. Despite the data from the last six months, these economists say that the inflation is primarily due to supply chain disruptions in specific markets like new and used cars. If those industries are removed from the CPI calculations, the inflation rate would be much lower.
That is not an accurate conclusion.
Instead, today’s inflation is due to excess demand in the economy that has resulted from the massive increase in the money supply and the massive deficit spending by the federal government. In other words, the rising car prices are not due to supply chain issues but rather from the increase in the number of consumers who want to buy a car.
That number is so significant because the Fed has kept interest rates near zero and because consumers have plenty of cash for the down payment. That cash came from the government handing out free money to all households. A family of four has gotten more than $11,000 in free money in the past year. Most of that has been saved.
There is also inflationary pressure from increased energy costs and increased labor costs. Since Biden continues his war on fossil fuels, which reduces supply, energy prices will continue to rise.
Because, for whatever reason, millions of unemployed workers are not returning to their job, higher wages are needed to attract them back into the labor force. This wage inflation will continue.
Inflation is a nasty and challenging problem to solve. However, the longer the Fed waits, the more drastic action will result in a recession or, worse yet, a stagflation problem like what we saw in the late 1970s.