Just call us inflation nation.
U.S. consumer prices went up again, jumping 5% in the month of May versus last year, to registering their highest annual surge in nearly 13 years. The jump follows a 4.2% rise in April. Meanwhile, the core CPR rate, which strips out the volatile food and energy sectors, rose 3.8% for May, registering the largest gain in 29 years. Not since June 1992 have we seen such a massive increase.
Prices for everything are way up — as consumers face rising demand, tight inventory supplies and…the Fed effect.
The Fed Effect
The Fed’s role in the inflation story cannot be overlooked. By continuing to leave rates at record lows, while buying up bonds in an effort to influence the treasury markets, Jerome Powell and company are doing their part to keep the spigot open and the money printed. When combined with extraordinary liberal stimulus fiscal policy out of the White House in the last year, it is clear; there’s plenty of money in the system.
The question now is: do we need it?
We do not.
The economy has begun its recovery process and then some. After all, people have been vaccinated and are returning to their normal lives. And, let’s face it…part of normal life is consumption. Lots of it. One of the things Americans are especially good at–for better and for worse–is CONSUMPTION. Indeed, consumption makes up roughly 70% of our overall economy.
And with the economy open again, Americans are enjoying the good life. Spending money by going out to dinner, going on trips, purchasing clothes and doing all the things they’ve put off for the last year.
As a result, there’s a ton of demand…
The Fed should have factored this into its decision making and had a plan in place to help curb inflation but, alas, in typical Fed fashion, these academics are always ‘a day late, and a dollar short.’ Fed Governors like to bury their heads in the sand, making the most obvious moves at all the wrong times.
Bottomline: there’s a serious tightrope to walk at this moment in time. We need to hope the Fed will not overreact and allow the economy to grow enough while not terrifying the markets with threats of pullbacks. Yet, we also need the Fed to face the reality that low interest rates cannot, nor should they not, be with us forever.
It’s a precarious spot… and like much of our troubles over the past year, self-induced.