The Flinchum File

Thoughtful Economic Analysis and Existential Opinions
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Not Your Father’s . . .

Since Spring, I have advised people that the outbreak of inflation is not “your father’s inflation.” It’s not as bad today as it was in the early 1980s. One reason is that we have additional tools to fight it. Your father only had increasing interest rates to kill inflation – a proven technique but no longer the only cure. Appealing to patriotism didn’t work. (Remember the WIN buttons for Whip Inflation Now!) Today, we also have quantitative tightening, which means the Fed sells bonds out of its own portfolio. The money paid for those bonds reduces the money supply, which is a primary cause of inflation.

Another difference is that the traditional “monetary lag” is shorter today. Traditional economics suggested it takes some time (8-14 months) before the impact of monetary policy becomes visible in the data. Raising interest rates today will not impact the economy tomorrow. For reasons that are still unclear, we think monetary lag may be as short as 4-6 months today, due to the faster speed of transactions. The Fed has been heavily criticized over the last few months for not “pausing” the interest rate increases long enough to see the impact they’re having.

Today’s CPI announcement was good news, with overall inflation dropping from 8.8% to 7.7% — still way too high and far above our goal of only 2% but less than feared. Core CPI has averaged only 5.8% between July and October. We’re enjoying falling energy prices and food prices . . . yes, food prices too. The delay and the cost of the supply chain trouble are finally easing.

If you want a reason to dislike President Biden, it might be fair to blame him for the insanity on our southern border, but it is not fair to blame him for the inflation we’re fighting today. The executive branch caused some inflation but not much. Inflation can be caused by fiscal policy or monetary policy. In this case, the President and Congress realized the pandemic created a “hole in the economy” and they moved rapidly to plug that leak. Since too little would be worse than too much, they would up putting $2.5 trillion into a $1.5 trillion hole, leaving a trillion dollars to foster inflation . . . and it did! That was a fiscal policy mistake.

More importantly, this bout of inflation was mostly caused by the Fed, which kept interest rates too low for too long. That was a monetary policy mistake! They should have started increasing rates last Fall. They also kept “quantitative easing” for too long, which began after the Great Recession of 2009. It means that the Fed is buying bonds in the market and paying out more money, thus increasing the money supply – another monetary mistake.

Bottom Line: Inflation is not as bad as you read in the media. The Fed will undoubtedly raise interest rates again at the December 14th meeting by 50-75 basis points and probably start reducing those increases in January — not reducing the rate, just reducing the increase in rates. When they do, watch for Bulls near Wall Street!