Op-ed views and opinions expressed are solely those of the author.
The Bureau of Labor Statistics just released the Consumer Price Index for April. The CPI increased by .4% bringing the twelve-month inflation number down slightly to 4.9%. While moderation with inflation is welcomed, there are hints that inflation may be accelerating. That means the Fed will likely raise interest rates again when they meet in mid-June.
Somewhat disturbing to note is that the annual core inflation rate, which excludes food and energy, continued to be 5.5%. While food prices have fallen in the last few months, energy prices are rising. If food prices stabilize and energy prices continue to rise, the CPI will increase in the coming months.
Prior to the Fed’s next meeting, the CPI for May, as well as employment data, will be released. If the labor market remains tight and the CPI rises, the Fed will have to raise the Federal Funds rate by another 25 to 50 basis points. That will bring the rate close to 6%, which is the level that is needed to permanently reduce inflation.
Energy prices are somewhat mixed. For the most part, those prices have fallen steadily since the peak last summer. Overall energy prices are now 5% less than a year ago.
Oil and gasoline prices, in particular, have decreased. Oil prices have fallen more than 20% since April 2022, while gasoline prices have fallen by 12%. That downward trend appears to be reversing. Last month energy prices rose by .6% after decreasing 3.5% in March.
The May CPI number is likely to be higher than the .4% recorded in April. OPEC has announced production cuts starting May 1 and the summer driving season will increase domestic demand for gasoline likely leading to higher gas prices.
It is evident that the US continues to have an inflation problem. The Fed has said the inflation rate must be reduced to under 3%. To accomplish that more excess demand must be taken out of the economy.
The Biden Administration’s Fiscal Policy is making the Fed’s job more difficult. Even though the economy was growing at more than 6% in 2021, the Biden Administration spent $3 trillion more than was received in tax revenue. This followed a similar $3 trillion deficit in 2020. That’s pure excess demand.
Then in 2022 and again in 2023, Biden’s deficit averaged more than $1.5 trillion annually. That means in the last four fiscal years, the Federal Government has spent $9 trillion more than it received in tax revenue. That is pure excess demand. That is pure inflation.
That means the Fed had to get very aggressive with interest rates. From early 2022 to today the Fed has raised interest rates ten times. The federal funds rate went from near zero to just over 5%. That is still not high enough to take enough demand out of the economy to offset the increase in demand caused by the huge government spending deficits.
That also explains why the House of Representatives will only allow an increase in the debt ceiling if the federal government will hold the line on increases in government spending. The House wants to limit government spending increases to 1% annually.
That seems like a reasonable solution, but the Biden Administration claims that the 1% increase will actually result in a decrease to many social spending programs, which is why the President will not go along with the proposal passed by the House.
Taking all of this into context, to reduce inflation further, more demand must be taken out of the economy. The Fed can do that by continuing to raise interest rates. On the Fiscal side, the Federal Government must agree to very small increases in spending, even increases that will be less than the inflation rate, meaning it is not a real increase.
Inflation is a very serious problem and must be reduced as soon as possible. The Public Debt is a very serious problem that must not be allowed to grow rapidly. All of this means, government spending must be reduced, and interest rates must increase further.
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