National Review Online
Thursday, July 14, 2022
June’s CPI report was
worse than expected. Prices were 9.1 percent higher than the year
before, when most projections were in the high 8s. The CPI increased by 1.3
percent in the last month alone, the highest monthly rate this year. The report
notes, yet again, that inflation is broad-based, as Americans have no doubt noticed.
President Biden called the report “out-of-date” while
noting the inflation reading was “unacceptably high.” He said that the report
does not reflect falling gasoline prices over the past few weeks. Well, of
course it doesn’t, since the report is for prices in June.
He also said that core inflation “came down for the third
month in a row.” That’s a misleading use of year-on-year numbers. Core
inflation (which excludes food and energy) rose 0.7 percent last month after
increasing by 0.6 percent in each of the two months prior. That works out to an
average annualized core inflation rate of 7.6 percent over the past three
months. Core inflation is holding steady at a disastrously high level.
When the current bout of inflation began, Democrats waved
it away by pointing to volatility in energy prices and saying core inflation
was doing fine. Now, they’re pointing to energy prices to distract from core
inflation.
Biden was, however, wise to conclude his statement by
saying, “I will continue to give the Federal Reserve the room it needs to help
it combat inflation.” He has consistently held that line, breaking a long
tradition of presidents of both parties harassing the Federal Reserve to help
their political fortunes. The task of bringing inflation back under control is
indeed mostly on the Federal Reserve.
The Fed can’t do much about energy prices, but it can do
more to tighten monetary policy. The total spending level in the U.S., unlike
in Europe, remains above its pre-pandemic trend. Combined with the high core
inflation, the trajectory of spending indicates that our inflation has a
significant demand-side component that goes beyond supply constraints and
energy prices. The FOMC should at least repeat a 75-basis-point interest-rate
increase at its next meeting at the end of the month. If it’s going to
surprise, it should do so on the upside. The Bank of Canada raised its key
interest rate by 100 basis points today. It would not be out of line
for the Fed to do the same.
And getting the inflation rate to inch downward is an
insufficient goal. The Fed’s target is 2 percent inflation. It has led many
people to believe that it wants to hit that rate on average, which means that
it should be aiming for below 2 percent to compensate for the excessive
inflation of the last 15 months. And the longer inflation persists at a high
level, the more expectations of high inflation become entrenched throughout the
economy.
Fed governors know all of this, and the minutes from the last FOMC meeting indicate they
retain a commitment to the 2 percent target. But if fighting inflation produces
a recession, they could get distracted. They should keep their resolve. A short
recession is preferable to the likely alternative: stagflation followed by a
worse recession.
And Congress must not make things worse by passing any
major spending bills. News from Capitol Hill indicates that some form of
Build Back Better is being discussed again. Even supposedly paid-for spending
should be opposed, both because the federal government has enough budget
obligations already and because Democrats’ maximalist strategy on budget
gimmicks, as demonstrated all of last year, means their pay-fors can’t be
trusted. U.S. bondholders must be reassured that the federal government intends
to pay them back in real terms, not inflated currency, and that means a
long-term commitment to basic fiscal responsibility.
Even if headline inflation comes down next month due to a
decline in gasoline prices, the fundamental task before the Federal Reserve
will remain the same. And politicians — especially Senator Joe Manchin — must
avoid adding to the fire by approving more spending. The No. 1 mission for
domestic policy right now is getting inflation back under control, and so far
it remains unfulfilled.
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