The last time US inflation was this high Ronald Reagan was president and Argentina was about to invade the Falkland Islands. US consumer prices rose by an annual 6.8% last month, the fastest pace since March 1982. Petrol prices surged by 58.1% in the year to November. Strip out the effect of volatile food and energy prices and “core” inflation hit 4.9% year-on-year, its highest reading since 1991.
Inflation? What inflation?
Markets were unperturbed, says Randall Forsyth in Barron’s. The pricing of US treasury inflation-protected bonds implies that inflation will come back down over the next year or two. For now, investors still have confidence in the ability of central bankers to get price rises back under control. The big worry for the US Federal Reserve is that expectations of rising prices become “entrenched”, says The Economist. The average US consumer thinks prices will rise at an annual pace of 4.2% over the next three years, according to the Federal Reserve Bank of New York. If they demand higher wages, then these expectations will become a self-fulfilling prophecy.
“In an ideal world” the Fed would be planning to raise record-low interest rates now; instead, it is still adding new liquidity to the market by buying bonds with printed money every month. The Fed should move to “taper” those purchases quickly.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
The Fed risks being caught “behind the inflation curve”, says Mohamed El-Erian on Project Syndicate. For months its officials have mischaracterised this year’s surge as “transitory”. It was defensible to blame pandemic distortions when prices first took off this spring, but by the summer it was clear that supply-chain problems and labour shortages were here to stay. Policymakers instead buried their heads in the sand. The later the Fed acts on inflation, “the greater the likelihood that it will have to hit the policy brakes hard, causing market turmoil and unnecessary economic pain”.
Powell is trapped
In the 1980s the Fed only got a handle on inflation by administering “brutal shock treatment”, pushing interest rates above 20%, says Larry Elliott in The Guardian. Under the guidance of Paul Volcker, “the inflation hawks’ hawk”, the Fed presided over “business failures and mass job losses”. The “Volcker shock” accelerated the decline of manufacturing and unleashed a crippling debt crisis in Latin America. Such is the price to be paid when a central bank needs to regain lost inflation credibility. A repeat of that strategy today looks nigh-on impossible. The US economy has become so “financialised” that “Volcker redux” would cause a “monumental financial crisis”. Fed chair Jerome Powell is “trapped… Wall Street has the whip hand these days, not the Federal Reserve”.
“Central bank governors are like wild beasts,” says Ron William in the Halkin Letter. “Given too much freedom, they dominate their territory… Carefully managed in a secure enclosure… they lose the will to live and stare blankly into the far distance.” In 2018, Jerome Powell started his Fed term as a monetary hawk, but now he has been well and truly domesticated.
-
Dividend heroes: the investment trusts that have increased their dividends for 20+ yearsInvestment trusts can be a good option for income-focused investors – but which trusts have consistently increased their dividends over the past 20 years?
-
Six reasons not to top up your state pensionA deadline to buy National Insurance credits and top up your state pension is fast approaching. Here’s why it may not be worth it for some people
-
Do we need central banks, or is it time to privatise money?Analysis Free banking is one alternative to central banks, but would switching to a radical new system be worth the risk?
-
Will turmoil in the Middle East trigger inflation?The risk of an escalating Middle East crisis continues to rise. Markets appear to be dismissing the prospect. Here's how investors can protect themselves.
-
Inflation is tamed at last – when will interest rates fall?UK inflation may have hit the Bank of England target but it's unlikely to stay that way for long. What does that mean for interest rates?
-
US inflation rises to 3.7% as energy prices surge - will the Fed hike rates?US consumer price index rose in August but markets do not expect a rate hike this month
-
Would a food price cap actually work?Analysis The government is discussing plans to cap the prices of essentials. But could this intervention do more harm than good?
-
UK inflation jumps to 10.4% in FebruaryNews The rate of inflation increased in February following two months of falls, increasing pressure on households and the Bank of England ahead of its interest rate meeting tomorrow.
-
When will UK inflation fall back to the BoE’s target?Advice Inflation has started to slow, but it could remain high for some time as underlying pressures build
-
UK inflation slows to 10.5%News Figures from the Office for National Statistics showed the decrease was largely due to falling fuel prices
