A nudge on interest rates from the Federal Reserve. A gradual winding down of quantitative easing. No more stimulus cheques flying out of the White House window. And rising energy prices dropping out of the annualised headline rate. This was meant to be the month when the spurt of inflation in the United States turned out – as president Joe Biden and his officials insisted it would – to be mostly transitory. We were told that it would die down over the course of this year.
But, whoops, if that was the plan, it has already gone badly off the rails. Today’s inflation figure for the US was genuinely shocking. The headline rate has jumped once again, with the consumer price index hitting seven per cent, up from the 6.8 per cent recorded last month, and the steepest rate since way back in June 1982. Perhaps more significantly, the ‘core’ inflation rate, which strips out volatile items such as food or energy, also jumped by more than expected, rising to 5.5 per cent, from 4.9 per cent a month earlier. Even once rises in energy and food prices fall out of the index, the US is still going to be grappling with a high, persistent and rising inflation rate. There is nothing transitory about it anymore.
This should not come as a surprise. President Biden and his team took an economy that was already being run ‘hot’ by Donald Trump – hardly anyone’s idea of a fiscal conservative, either in business or public office – and arrogantly assumed they could run it even hotter. They started a huge stimulus programme, showering the country with free money, and spending on new social programmes on an unprecedented scale. Even worse, while Trump at least combined fiscal recklessness with supply side reforms such as corporate tax cuts and deregulation, Biden has combined his programmes with promises of higher taxes and more rules for business. Lots of printed money hits an economy less able to produce anything? You hardly need to be Milton Friedman to work out that prices are going to rise sharply.
For Biden and the US economy, there is now no easy way back. The Fed has plotted out a path to higher interest rates and it is winding up QE. But there is no sign of the White House making cuts to spending. We have a lot of economic history to tell us that inflation can only be brought under control with punishing real interest rates (think ten per cent to 12 per cent for the Fed rate with prices rising at seven per cent) and tight control of public spending. It is seldom easy, nor is it much fun for whatever politicians have to put it into action. In reality, Joe Biden is the first president to lose control of the economy since Jimmy Carter in the 1970s. And no one needs reminding of his fate.