Larry Kudlow: Inflation has become part of the whole economy
First off, today Jay Powell put more hair on his chest and boosted his manhood against inflation with the tough talk at the CATO Institute in Washington, DC
He said: ‘We must carry on until the job is done’, and added that ‘history strongly warns against a premature relaxation of politics’.
In fact, the Fed’s most senior spokesman, Wall Street Journal reporter Nick Timiraos, announced on the front page this morning that the Fed would raise its target rate by 75 basis points, taking it from 3 to 3.25% from its current 2.25-2.50%. .
It’s absolutely true that some forward-looking inflation indicators such as lower M2 growth, falling commodity prices, a very strong king dollar and the addition of falling oil to this list, all suggest that the worst of inflation may be over, but (and this is a big but) as Art Laffer told us two nights ago, there is a huge volume of excess money still circulating in the banking system and the economy.
MORTGAGE RATES REACH THE HIGHEST LEVEL SINCE 2008
Plus, all of those federal grant programs (think student loans, food stamps, housing assistance, child allowance) have a inflationary effect. The income effect puts more money on the demand side into their hands and the lack of labor demands generates disincentives to re-enter the labor force and produce.
Therefore more demand coupled with less supply equates to higher prices or inflation will remain sticky for some time as it has embedded itself throughout the economy not only in prices but also in wages .
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For example, the Cleveland Fed’s Inflation Tracker projects that year-over-year developments CPI for the next two months will remain around 8.2%. Remember that the Fed’s target is 2%. Moreover, even if the Fed’s target rate reaches 4% or slightly higher by the end of the year, it will still be a negative rate which is almost always consistent with higher, not lower, inflation.
To compound our economic woes, the Atlanta Fed’s GDP tracker just downgraded its third-quarter estimate from 2.6% to 1.4%. It’s a bad sign. We seem mired in an inflationary crisis. Two years ago, President Biden inherited a non-inflationary boom. Shows you how damaging big government socialism can be.
This article is adapted from Larry Kudlow’s opening commentary on the September 8, 2022 edition of “Kudlow”.