I’ve been saying it for almost a year now — “this ain’t your father’s inflation.” I was surprised last year when people “freaked-out” over the outbreak of inflation. Of course, I knew that, since the outbreak of inflation during the early 1980’s, we have learned a few things and even had a new tool.
Year-over-year wholesale prices rose only 2.7% last month, close to the Fed’s goal of 2%. While it is too early to declare victory, but it is time to stop freaking-out.
Fed-head Paul Volcker proved that high inflation could cured by a recession. It’s not complicated! The trick is to minimize the recession with a “soft-landing” as opposed to a “hard landing”. I think we’ve already missed the opportunity for a soft-landing, due to the speed of our interest rate increases, and am preparing for a hard-landing. Engineering a soft-landing is as much a political trick as an economic trick, but it doesn’t matter at this point.
The new tool is “quantitative tightening”, which is a fancy way of saying that we’re decreasing the money supply. Remember: the supply of goods & services will absorb whatever money (demand) is available. Increases in money (demand) increase inflationary pressure. Reducing demand (money) reduces inflationary pressure.
If you just want to criticize the Fed, you can complain that they were slow in seeing the inflationary pressure that was building during the pandemic . . . with that tsunami of pandemic-related spending. Of course, unlike inflation, the pandemic was the first “rodeo” anybody has seen since 1917.