Inflation: A Major Political Issue

Inflation just doesn’t seem to want to exit center stage.

If anything, inflation became a major political issue Wednesday when the President defended his efforts to have a $3.5 trillion spending bill follow the $1.2 trillion infrastructure bill that passed with bipartisan support in the Senate. The new amount would not push inflation higher, President Joe Biden said. His reasoning: The supplemental spending would go toward areas such as lowering drug prices, thereby reducing the cost of living.

The general public, however, feels differently. University of Michigan’s Consumer Sentiment for early August, released Friday, showed an unexpectedly large and stunning drop in the index to a decade low. While increasing concern over covid’s delta variant was an important factor in the decline in sentiment, consumers also raised their expectation for inflation over the next five years from a 2.8% annual rate in July, to 3.0%. Obviously, survey respondents did not believe that inflation is “transitory,” as Fed Chair Jerome Powell has said often.

The Michigan survey provided support to the results of the latest survey of consumer expectations by the Federal Reserve Bank of New York. The survey showed inflation expectations over the next three years increased from 3.5% per year in June to 3.7% in July. And while consumers’ expectation of their earnings growth over the next year reached a series high of 2.9%, it was still less than the expected inflation over the same period of 4.8%. Simply put, the FRBNY survey suggests that consumers expect to lose real purchasing power over the next 12 months, and continued high inflation over the next three years.

These issues are important to ponder, especially ahead of the 50th anniversary of President Richard Nixon’s decision on August 15, 1971 to unilaterally end the free convertibility of the dollar to gold at $35 per ounce. Fiscal and monetary excesses in the 1960s and early 1970s had resulted in the rest of the world holding massive amounts of paper dollars. There was not enough gold in Fort Knox to meet the feared rush to convert! “The dollar is our currency, but it is your problem,” said Treasury Secretary John Connally as he walked away from the problem.

As the Federal Reserve keeps expanding the central bank’s balance sheet by $120 billion every single month even as near-zero interest rates allow the speculative bubble to get bigger, lessons that the developments of 1971 held for the rest of that decade should be required reading for all voting members of the Federal Open Markets Committee.

Dr. Komal Sri-Kumar

President

Sri-Kumar Global Strategies, Inc.

Santa Monica, California

srikumar@srikumarglobal.com

August 14, 2021

Sri-Kumar Global Strategies, Inc. advises multinational investors and sovereign wealth funds on global risk and opportunities.  Dr. Sri-Kumar is regularly featured on business TV and Radio media, and is a frequent speaker in global financial centers on major topics that affect markets and investments.

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