Inflation has come down from the highs registered last summer, but most recent data is showing that it's becoming "stickier" at uncomfortably high levels. For example, PPI released yesterday came in at the highest reading since last June.
This is prompting various analysts to revise upwards their terminal Fed Funds target rate, now expected to peak at 5.25-5.50% from 4.50-4.75% currently. That's 0.25% higher than previously expected.
At the risk of my becoming repetitively boring, that's not enough. Until and unless the Fed truly bites the bullet and starts to drain liquidity in earnest, ie to sharply reduce the size of its own balance sheet, inflation won't come down rapidly. Why? Because inflation is a monetary phenomenon, more money = more inflation.
Looking at monthly changes in the Fed's assets, we see the pumping of huge amounts of cash into the system, as much as $590 billion per week, during the COVID era (see chart below-red circle). By comparison, the draining of this flood is extremely timid, at around $ 20-25 billion/week (yellow highlight).
Once again, then: if the Fed really wants to fight inflation it better look at its own house first and start selling bonds from its portfolio.
Unfortunately draining liquidity at $590 billion per week will never happen unless we want the collapse of the USG. Stagflation is the more likely scenario.ReplyDelete
By H. I didn’t mean to imply that the Fed should drain as much as $590 billion per week. Indeed, that would be outright “criminal”. But around $50/week would be perfect, IMHO.Delete
2023 COLA for social security and government employees is 8.7%. NY governor wants to tie wages to inflation. They seem inflationary, or at least don't help to restrain current inflation or inflation expectation.ReplyDelete
Indeed, COLA "bakes in" inflation. Unfortunately, however, it may be justified in this case. Inflation right now is impacting mostly the absolute necessities: energy and food. And that's where price increases are significantly above average CPI inflation. For example, food prices are jumping over 10% at the moment. Energy is at 8.4% but as recently as a few months ago it was at 30-40%.Delete
We may not like COLA as economic theoreticians, but regular middle and lower income people absolutely need them to get by.