Inflation at 7.9% — But the Worst Is Yet to Come

Inflation may reach double digits by summer. A recession could follow by year-end.

The Bureau of Labor Statistics just released the Consumer Price Index (CPI) for February. Prices rose by 0.8% for the month which means the annual inflation is 7.9%. That’s the highest number since 1982.

Biden, Fed Blind

Unfortunately, the worst is yet to come as the Biden Administration and the Federal Reserve refuse to act.

The latest inflation numbers do not reflect the increase in energy prices due to the Russian invasion of Ukraine. The run-up in prices from the Russian activity occurred mostly in March. That means next month’s inflation number will worsen.

Since Russia and the Ukraine supply, large amounts of food and fertilizer, the reduction in supply from the war will push food prices higher. While consumers could cut back somewhat on energy consumption by driving less and perhaps lower thermostats in their homes, consumers cannot eat less.­

Contrary to President Biden’s explanations, there is much he can do to offset rising energy prices. In fact, it is Biden’s energy policies that caused the price increase prior to the Russian invasion. Simply reversing his policies would bring down energy prices quickly.

Had Biden not revoked the permit to build the Keystone XL pipeline in January of 2021, there would be more than 800,000 barrels of oil flowing to refineries. That is more than the 580,000 barrels per day that we were buying from Russia.

It would also signal to the oil industry that there is a future, which would encourage more investment to increases the supply further. Biden also canceled all drilling on federal lands and stopped the drilling in ANWR, off the coast of Alaska. Reversing those bans would lead to drilling quickly restarting.

Excess Demand

The high inflation is not caused by supply chain disruptions nor by businesses' price gouging as the President has suggested. Since the economy today is producing about 2% more output than before the pandemic, supply issues are not leading to higher prices.

Admittedly in the market for imported goods or in markets that rely on computer chips, some supply shortages exist, causing some inflation in those markets. But most of the inflation is due to excess demand.

The four reasons why we have this much inflation are1) rising energy prices, 2) rapidly rising wages, 3) huge government spending leading to budget deficits and 4) the shockingly irresponsible monetary policy of the Federal Reserve.

Energy inflation can be reduced by increasing domestic supply. Wage inflation can be reduced by cutting all of the free money the federal government is giving to workers which enables them to stay out of the workforce. Government spending could be reduced, although Biden won’t consider that and is, in fact, desiring to spend even more money. So now it is u to the Federal Reserve to act.

The Fed’s expansionary monetary policy is probably the largest contributor to the excess demand that has caused much of the inflation. The Fed should have started to reduce its expansionary policy a year ago when it was obvious inflation would be a problem.

The CPI, which for the prior four or five years averaged about a .2% monthly gain, was rapidly rising early last year. The CPI increased .3% in January, .4% in February, .6% in March and .8% in April. Instead of seeing the growing inflation problem, the Fed did absolutely nothing.

The Fed continued to support Biden’s excess deficit spending by purchasing $120 billion monthly of government bonds. Finally, last November it decided to begin to scale back. The bond-buying program will finally end this month.

Zero Interest Rates Too Long

More shockingly, the Fed continues to keep interest rates near zero, which causes excess demand in interest-rate sensitive products like cars and houses both of which have been experiencing double-digit inflation.

Next week the Fed will finally raise interest rates. Likely the increase will be only ¼%. That’s way too little and way too late. That means inflation will continue to increase in the coming months. That will lead to more drastic action by the Fed resulting in four or five more interest rate hikes this year.

Then the danger becomes raising rates too high and too fast, which could lead to a recession by year’s end. That will be likely, given that the higher prices will cause consumers to purchase fewer goods and services.

If the current policies continue, we could be in recession by year-end.