Rising Inflation Threatens To Pummel American Economy

Recently released data from the Department of Labor reveals that the Consumer Price Index (CPI) has already increased by 5 percent for the year.

The increased CPI rates denote the largest 12-month increase since August 2008, as August 2008 was marred by a 5.4 percent increase in the CPI. In addition, these numbers are also high than what many forecasters had perviously estimated.

Consequently, fears about skyrocketing inflation have amplified.

According to Rubeela Farooqi, who serves as the Chief U.S. Economist at High Frequency Economics, it is likely for consumer prices to continue increasing, especially due to “reopening,” “supply chain disruptions,” and “base effects.” In addition, higher demand, in particular demand for services, is likely to increase substantially. Alongside with “supply bottlenecks,” a lift to the economy may be provided in the near-term, Farooqi notes.

However, “the pace should stabilize” and become more “moderate,” especially as “reopening effects fade,” as well as when “supply catches up,” Farooqi added.

Various economists have sounded the alarm on excessively high inflation. They have noted that the economy is at higher risk now, especially in terms of overheating, due to the various monetary policies of the Federal Reserve, alongside the enormous federal spending that has pervaded the American economy. Currently, the economy is experiencing a massive glut in demand while the pandemic dissipates.

The Federal Reserve has remarked that it does not have any intention of increasing historically low interest rates until the American economy is at maximum employment, with 2 percent sustained growth. In addition, the Central Bank also expects surpassing the 2 percent figure, though that level of increase is likely to be transitory in nature, with numbers settling down the following year.

Nonetheless, concern remains regarding the Fed’s approach.

For instance, Selin Ilik, who works as a senior account executive at Grayling, noted that in spite of CPI growth, the uptick of inflation in May was “inevitable,” as the CPI hit its lowest point during May 2020 as the pandemic increased in intensity.

As a result, “year-on-year inflation [figures]” were “inevitably going to be big,” Ilik added.

In addition, Sen. Pat Toomey of Pennsylvania also noted that the time has been “long overdue” for the Federal Reserve to start normalizing its monetary policies.

Toomey noted that “the combination of the Fed’s average inflation targeting,” alongside the Centra Bank’s view that inflation is merely “transitory” will essentially “guarantee the Fed will be behind the curve” if inflation persists, Toomey stated.

Toomey also noted that the massive spending proposed by Congress “contributes to the problem,” which is precisely why “it’s time to end it.”

Bill Dudley, who serves as the former president of the Federal Reserve Bank of New York, has also issued warnings this week that the approach of the Central Bank regarding inflation risk management is an approach that risks a major recession.

If the economy continues to overheat, the Federal Reserve may have to abruptly hit the brakes and subsequently increase interest rates, which will lead to high volatility in short-term rates, as well as the higher likelihood of an “economic hard landing,” Dudley added.

Janet Yellen, the Biden administration’s Treasury Secretary, also stated that the nation could witness inflation upwards of 3 percent throughout the remainder of the year. In addition Yellen also remarked that this inflation would be beneficial from a societal and Federal Reserve perspective if the nation does end up with slightly higher interest rates.

However, Yellen later moved away from these remarks and simply stated that she does not see any current “evidence” illustrating “that inflation expectations are getting out of control.”

The American economy has heated up and prices have increased accordingly, but concerns about massive labor shortages remain persistent across the country. Leading economists have noted that the massive expansion in unemployment benefits has discouraged people from returning to the workforce due to the highly generous payouts.

Consequently, the jobs report for May fell short of expectations, which promptly reignited concerns about serious labor shortages. While the economy was expected to add 650,000 jobs, only 559,000 jobs were added. However, the previous month’s report revealed even more disappointing results.