High U.S. inflation runs rampant, the Fed responds to the lack of evidence

Maintaining price stability is one of the Fed's core goals, but the level of inflation in the United States for the past year has clearly contradicted it.

As of March this year, the U.S. consumer price index (CPI) has exceeded 4% for 12 consecutive months, far above the average target of 2%. The latest data released by the U.S. Bureau of Labor Statistics last Wednesday (May 11) also showed that, In April, the CPI rose 8.3% year-on-year. Although it was slightly lower than the 8.5% in March, it was still at the highest level in the past 40 years, indicating that the overall price pressure is great.

It is foreseeable that the Federal Reserve, which has raised interest rates twice this year, should accelerate the fight against inflation and stabilize prices in the future.

The question now is: Can the bureau avoid a recession and achieve a "soft landing" while curbing inflation?

Inflation Helps 'Republican Revolution'?

In the past year, the U.S. economy has recovered beautifully, with strong consumption, and the annual gross domestic product (GDP) increased by 5.4%, the best performance since 1984.

But at the same time, inflation in the United States has also begun to rise, everything has become more expensive, and the life of the grassroots people has increased, and the complaints are full of complaints.

In the face of high inflation, the Biden administration has taken a number of countermeasures, including improving the efficiency of port operations to improve congestion, releasing national crude oil reserves, calling on Congress to pass the "Bi-Party Innovation Act" as soon as possible, and encouraging semiconductor companies to set up factories in the United States. In order to solve the shortage of chips, crack down on companies taking the opportunity to drive up prices, and consider canceling additional tariffs on China.

Biden said on Tuesday (May 10) that fighting inflation is the current domestic priority and will make every effort to reduce the cost of living for American families.

Data released by the U.S. Department of Labor last week showed that the U.S. consumer price index (CPI) rose 0.3% month-on-month in April and 8.3% year-on-year.

(Xinhua News Agency)

For now, however, these measures have had little effect.

According to the latest data from the U.S. Bureau of Labor Statistics, food prices rose 0.9% in April from a month earlier and 9.4% year-on-year, the 17th straight month of increases.

The Meat, Poultry, Fish and Egg index rose 14.3% from a year earlier, the biggest gain since 1979.

In addition, housing rents, which have a higher weight in the CPI basket, also rose rapidly.

In terms of energy, although energy commodity prices fell 5.4% month-on-month in April, according to the American Automobile Association (AAA), gasoline prices have reached a new high since May, reaching $4.4 per gallon, which means that energy prices may rebound in May.

When inflation continues to be high, the Democratic Party's election in the November midterm elections is bound to be affected.

A poll conducted by the Washington Post and the ABC at the end of last month showed that inflation is becoming an important issue in this year's election, with more than 90% of respondents expressing concern, among which four Four out of four respondents were dissatisfied.

Only 31% of the Democrats and Republicans believe that the Democratic and Republican parties can handle inflation better, and 50% of the Republicans.

Democrats now narrowly control both the House and Senate; as the election approaches, Republicans appear to be seeing hope in hot inflation data.

On the same day that the Bureau of Labor Statistics released the data in April, Senate Minority Leader Mitch McConnel said bluntly that Democrats will suffer from the perfect storm of the moment, because this is a government completely controlled by Democrats. ; On the contrary, the situation of the Republican Party is very good, even "better than 1994" - when the Republican Party regained 8 Senate seats and 54 House seats from the Democratic Party, it was the first time since 1952 that it took full control of Congress. Republican Revolution".

Is the Fed missing the best time to raise interest rates?

It is undeniable that the inflation surge in the United States this time is not unrelated to the large-scale fiscal stimulus of the Biden administration. However, the Fed's response is widely believed to be a failure, and stable prices are the legal goal of the latter.

Looking back at the beginning of last year, the Biden administration, which had just taken office, launched a bailout plan, and many economists have issued an inflation warning.

Former U.S. Treasury Secretary Larry Summers warned in February last year that the $1.9 trillion stimulus package, approaching the size of the abnormal (World War II) era, could "raise inflationary pressures from an unseen level".

At that time, the U.S. CPI was still below 2%. In March of the same year, Congress passed the bailout plan, and U.S. inflation also rose.

Federal Reserve Chairman Jerome Powell said cutting inflation to his 2 percent target would bring some "pain."

(Associated Press)

After the CPI exceeded 4% for several consecutive months, the Fed initially insisted that inflation was only "transitory"; it was not until November last year that the Fed changed its tune and said that "inflation pressures persisted longer than expected", but still did not take action. Still buying at least $105 billion a month in Treasuries and mortgage-backed securities (MBS).

In March of this year, the US CPI has exceeded 4% for 12 consecutive months. The Federal Reserve finally officially announced an interest rate hike, but it was only a symbolic 0.25%, which means that the real interest rate may still be negative.

The Fed's misjudgment of rising inflation has naturally attracted a lot of criticism, and it has been questioned that it has missed the best window for interest rate hikes.

If we remember, in December last year, the bureau still expected to raise interest rates by only 0.75% this year, and now it has been greatly adjusted to the expected rate hike of 2.5%.

Some economists, including Summers, even believe that 2.5% has been unable to curb the current inflation, and the Fed should take more aggressive measures to catch up and increase it to 5 to 6% during the year.

At the same time, Fed Chairman Jerome Powell has become more determined.

After being confirmed by the Senate last week, he said that the Fed has the tools and determination to reduce inflation to 2%; as the impact of rising interest rates appears in the future, short-term economic shocks and pain may be inevitable, but if prices continue to accelerate , the results will only get worse.

Whether "soft landing" depends on uncontrollable factors

The challenge for the Fed now, though, is that the factor that can be controlled by raising rates is demand, but it's not just overheating demand that's causing inflation to soar...

According to a report released by the US Retailer Data Survey recently, in the first week of May, the out-of-stock rate of infant formula milk powder nationwide was as high as 43%.

(Xinhua News Agency)

For details, please read the 317th issue of "Hong Kong 01" e-Weekly Newsletter (May 16, 2022) "