Recently, Jerome Powell, Chair of the Federal Reserve suggested that the Fed might soon take serious measures to reduce the economy’s growth. Inflation has been described until recent times as temporary. However, this story needs to change.
In 2022, prices will most likely increase. For July, August and September, the all-item consumer price indicator (CPI), was more than 5 percentage points higher year-over-year. The increase for October was 6.2 percent—the largest jump since 1990. According to the Fed, 2 percent inflation is its target. It is evident that there is an enormous gap between this and the reality.
CPI is still higher than producer price index. This indicator shows that consumer prices are rising faster than ever before. This index has a 9.6 percent annual increase in September and October from the CPI, the biggest since it was created in 2010.
It isn’t a U.S. phenomenon. However, U.S. inflation is more than inflation in G-20 countries and the eurozone. Therefore the dollar should continue to be weaker against these currencies. This makes exports stronger, and imports less.
Reports often mention rising prices of key items like energy, rent and used cars. An analysis of prices in the July personal consume expenditures index (PCEI), the Fed’s favorite inflation measurement rod, revealed that 84% were on the rise. The September PCEI was up 4.4 percent on a year-over-year basis, having risen from 4 percent in June—the largest monthly increase since October 1990.
Inflation rates are reflected in the interest rates that borrowers have to pay. This is especially true for long-term debt. Lenders want to return at least half their purchasing power. Lenders who believe that inflation will increase at 4 percent will see interest rates rise. Higher interest rates will lead to higher interest costs for all types of debt, public or private. Mortgage rates will increase, construction costs will go up, businesses won’t make large investment in equipment and plants as a result.
Now consider the public debt—especially the federal debt, which ballooned as a result of large budget deficits in recent years. The federal government spent $6.6 trillion and raised $3.4 trillion revenue in 2020. In 2008, the interest cost for national debt stood at $253 billion. This is equivalent to 325 billion dollars in 2021. It stayed around this level until 2015. The debt doubled over those years due to low interest rates and inflation.
However, that was only yesterday. The Congressional Budget Office (CBO), citing rising inflation (possibly with even more coming), estimates that public debt will cost $413 billion by 2021. This is in current dollars. It is clear that any interest earned cannot be used for government services or benefits.
CBO predicts even more in the future. The CBO predicts that in 2026 the interest rate for 10-year Treasury bonds will reach 2.6 per cent and that federal debt interest costs will rise to $524billion. Projections of 2.8% and $829billion are given for 2030. All figures in current dollars.
We are now talking about actual money. 829 billion is a lot of money. In 2020, $814 billion was spent on military spending. $769 billion went to Medicare. $914 billion was used for all discretionary nondefense spending. The back-of-the envelope calculations suggest that certain spending categories may have to go.
Let’s get down to the root of the matter. The United States is experiencing an inflationary surge caused fundamentally by the injection into the economy of trillions of dollars—stimulus and other spending—without an accompanying rise in production of goods and services that might be purchased with the new dollars. The combination of increasing demand and troubled supplies is what causes it.
These forces will continue to be there until stimulus dollars are absorbed into the economy and federal government ceases printing money. It’s difficult for many people and beneficial only to a small number. People who aren’t paid inflation-adjusted wages must make cuts and manage their money.
As the process continues, our government—the source of inflation in the first place—will face hard choices when paying for past and future deficits and rising debt. That is, they claim, when the rubber will be on the road.