It’s become clear that inflation pressure will persist the rest of this year and...
The first — and, for a while, the most dominant — is that inflation is largely COVID-induced and that as we get a handle on the virus, supply chains will heal and rising prices will subside.
Energy prices — particularly for transportation fuels such as gasoline and diesel — have not yet fully worked their way into the Consumer Price Index numbers. No doubt we have seen many immediate effects, but other developments will lag and only show up in the official inflation numbers months later, with gasoline and diesel prices merely among the most obvious.
The other concerning issue deals with the interruption of fertilizer exports from Russia, Ukraine and Belarus. Fertilizer shortages emanating from supply chain interruptions will also take time to work their way through the system, causing prices for food to rise even further. While the U.S. is a significant exporter of wheat, global shortages will mean higher prices for consumers everywhere.
Meanwhile, despite recent harder line jawboning by Chair Jerome Powell, the Federal Reserve has taken only a tepid approach to raising interest rates as a means to quell inflation. It’s not hard to see why. Rapidly raising interest rates in half-point increments could slow the economy enough to cause another recession — something the Fed fears almost as much as inflation.
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