Commentary
The Federal Reserve may have prematurely declared victory over inflation.
Just weeks after their latest round of quantitative easing, prices on many items are already on the rise again.
This process involves Congress spending money, the Treasury labeling it as debt, which the Fed buys with new money and adds to its balance sheet. The Fed then reduces interest rates on bank loans, encouraging more lending and easing that extends to all debt.
Ultimately, this leads to a decrease in the dollar’s value in terms of goods and services, both domestically and internationally.
Despite a strong dollar exchange rate, imports remain cheap, shielding them from domestic inflation. However, domestic inflation remains a significant concern.
Historically, inflation referred to an increase in money and credit, but today it signifies higher prices. The Fed should anticipate external factors that drive up prices when formulating policy.
The Fed’s current easing approach risks sparking a second, potentially more severe wave of inflation.
Official data indicates a 20% domestic dollar devaluation since January 2021, but industry figures suggest rates between 34% and 60% in various sectors.
Excluding food and energy sectors, inflation remains at 4.2%, more than double the target rate.
Truflation offers a real-time inflation rate methodology that surpasses the Bureau of Labor Statistics’ approach.
In recent weeks, inflation trends have shifted from below target to above, with a six-month rate exceeding 3.1%.
This sudden shift aligns with lower interest rates, posing risks of a second wave of inflation.
Shrinkflation is evident in smaller product sizes and increased fees across various industries.
Factors driving current inflation include falling velocity of spending and the imposition of new fees in response to price pressures.
As the economy emerges from crisis, velocity is on the rise, leading to upward pressure on prices. Over the past two years, velocity has been steadily increasing alongside the growth of the money stock. This surge in velocity is expected to result in higher inflation, a trend that has already started in the fall of 2024. Despite the increase in money supply, velocity has yet to normalize, and the continued low rates are likely to further boost the money supply.
There is a looming risk of a repeat of the 1970s inflation, characterized by three waves of inflation from 1971 to 1981. The first wave followed the end of the gold standard and the introduction of fiat currency. The subsequent waves were triggered by attempts to suppress price increases and misguided Fed policies. Unfortunately, history often fails to inform present actions, and the current economic landscape is marked by excessive government spending, reliance on new money creation, and a lack of leadership advocating for fiscal responsibility.
The repercussions are felt by American workers, whose wages and salaries are losing value. Homeownership is increasingly unattainable for the majority, while household debt continues to rise. Savings rates are low, borrowing costs remain high, and real median household income has declined over the past four years. These economic trends point towards a challenging future, with the second wave of inflation expected to hit hard in the coming year.
The prevailing monetary and economic policies are setting the stage for a tumultuous political environment for the next administration. It is imperative for the United States to address its budget imbalances and embrace austerity measures to pave the way for a sustainable economic recovery.
(Note: This content is the author’s opinion and does not necessarily reflect the views of The Epoch Times.) Could you please rephrase that?
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