By now you’ve seen the news that June inflation hit an annualized rate of 9.1%. And you know that’s bad — not just bad, epically bad, the highest in 41 years. What you may not know is that right now a small army of economists are trying to figure out how best to react. Should they talk about whom to blame or worry about whom to warn?
I say, why choose? Let’s warn about the people who are to blame.
Start with the Federal Reserve. They had one job — ONE JOB! They were supposed to keep inflation from ever getting started. Wednesday’s numbers are yet more evidence of how miserably they failed. And it’s not like they weren’t warned about the consequences of needlessly expansive monetary policy, they just thought they knew better.
INFLATION SURGES 9.1% IN JUNE, ACCELERATING MORE THAN EXPECTED TO NEW 40-YEAR HIGH
This is not controversial. The Fed knows it messed up. Chairman Jerome Powell has, to his credit, been saying as much for some time now.
More importantly, Powell has been issuing warnings. Interest rates are going up, almost certainly by another 0.75% at the next meeting with several more rate hikes at least through 2023. Chairman Powell knows that makes a recession in the next 12 months even more likely. But he also knows that evading responsibility and not taking aggressive action now will make things even worse in the long run. Listen to his warning.
There’s another thing Powell said; something that merits more attention and for which Powell deserves more credit. He’s said in the press conference after the last Fed meeting that the Fed won’t be paying much attention to “core inflation,” the inflation rate after stripping out the effects of things like energy and food prices, which can bounce around by a lot .
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The politicians, of course, will be yammering on about how the core inflation numbers show that this month’s dreadful news is just a quirky, one-off thing. Sure, they’ll say, $ 5 gas was terrible but now that those prices are coming down (by a bit) good times are sure to come.
This is nonsense. The core inflation numbers are down by a fraction over May but they’re still awful. In any case, who cares. We have to eat and put gas in the car. That Powell gets that is a good thing. But it also means the Fed will not flinch from doing their job.
Which brings us to the other end of this Axis of Incompetence, the politicians.
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This is not all the Fed’s fault. Beginning in 2021 the usual herd of politicians were promoting yet more “emergency” relief spending. And beginning in 2021 a number of responsible economists — and, to be fair, a few responsible politicians — were telling them that spending wasn’t necessary and would likely lead to inflation.
Never mind. There’s no safe way to get between a politician promising free money and a camera. Today’s numbers show the consequences of that folly.
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But should there be a warning that goes with the blame? I’m afraid so. The Fed is promising to do something that will be hard and likely painful. They’ve got to do it, but you need to be warned about what’s to come.
Most politicians don’t have a clue about what to do but they need to show us they care and some of them will try to convince you they have a plan. You need to be warned about that too.
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You can ignore the rhetoric but you can’t ignore the chaos some of these anti-inflation tactics will create. Despite the mountain of evidence indicating they don’t work, some politicians are proposing price controls.
Some politicians want us to restructure whole industries, breaking up successful companies to in the name of “competition.”
Some politicians are even advocating that in the middle of the most serious inflation in two generations — an inflation that was partly caused by spending money — we need to spend more money.
There you have it. Wednesday’s inflation numbers terrible news. It’s OK to be angry. It’s OK to be worried. In fact, be angry and worried about the same people.
Michael L. Davis is a clinical professor of economics at the Cox School of Business at Southern Methodist University.