Commentary
Egg prices are soaring, reaching levels not seen in the past five years. However, overall inflation has been on a downward trend since late January, coinciding with the inauguration, which the Trump administration may take credit for. The relationship between these events is complex.
Inflation, the general increase in prices, is influenced by factors such as output, growth in the money supply, and velocity of spending. Velocity, akin to the infection rate with the flu, measures how quickly money circulates. Higher spending leads to increased velocity and potentially higher inflation, while more saving reduces velocity and inflation.
Velocity plays a significant role in inflation. For instance, if the government injects $10 trillion into the economy but people hoard the money without spending it, prices remain unaffected. Money only impacts prices when it enters circulation.
Expectations of future prices can also influence spending behavior. Anticipating rising prices prompts people to buy now, driving up velocity and inflation. Conversely, if prices are expected to remain stable or rise slowly, people may save more, reducing velocity and inflation.
Speculatively, recent data suggests a possible decline in velocity due to expectations of lower inflation under the Trump administration, creating a self-fulfilling prophecy.
A complicating factor is the relationship between output, money supply, and prices. If production matches money supply growth while velocity remains constant, prices generally remain stable.
Currently, the money supply is increasing while velocity is decreasing. Output is likely rising in real terms. The latest data indicates a 3.8% annualized increase in the money supply, tempered by slowing velocity.
Furthermore, specific factors, like regulatory actions affecting egg prices, can cause price disparities within the overall inflation rate. Eggs, for instance, have surged due to government-mandated poultry slaughtering.
Regarding Trump’s proposed tariffs, while they may raise prices for certain goods, it doesn’t necessarily lead to across-the-board inflation. Media claims of tariffs fueling inflation can be misleading.
The goal in managing inflation is to prevent multiple waves, similar to the 1970s. Recent policy shifts indicate a better position to avert such scenarios.
In terms of economic outlook, there’s been a subdued recession-like state for nearly five years. Despite questionable job numbers, any output growth coupled with lower inflation can boost confidence among consumers and investors, potentially creating a sense of recovery.
If the Trump administration achieves budget balance, it could reduce pressure on the Treasury and Fed for debt financing, redirecting private capital to productive ventures. This, along with potential tax cuts, could set the stage for robust growth leading up to the midterm elections.
However, uncertainties remain, including the impact of a global trade war and potential distractions from the administration’s agenda.
There are increasing indications of another potential pandemic scare, this time related to Bird flu, which could disrupt the Trump administration’s plans.
It is important to hope that the Trump administration does not push the Federal Reserve for lower interest rates. This could lead to a resurgence of inflation and fail to address the deep economic damage of the past five years. The path to true recovery is long and demands discipline and patience. Thankfully, the second term of the Trump administration appears to be more astute and focused, less susceptible to distractions and schemes. One can only hope.
Recently, there have been discussions about the possibility of deflation. While the overall risk for the country is minimal, there may be significant corrections in commercial real estate and potentially housing prices in the DC/Virginia region depending on the outcome of efforts to reform the public sector labor market.
While an increase in the purchasing power of money would be beneficial, it is unlikely to occur in the near future.
Opinions expressed in this article are solely those of the author and do not necessarily represent the views of The Epoch Times.
