The Biden Administration’s and Federal Reserve’s long-standing insistence that the pickup in inflation would be “transitory” was hit by a double whammy. On Tuesday, we learned that the producer price index (PPI) — a precursor of consumer price changes — rose by 8.6% in October compared with a year earlier, matching the September figure and remaining at the highest level in over a decade. This was followed on Wednesday by figures indicating that consumer prices had surged by 6.2%, the fastest pace since late-1990.
President Joe Biden admitted that the inflationary pressures were “worrisome”, and that combating them was a top priority for his government. However, rather than cut stimulus to mitigate price increases, the President insisted that his infrastructure spending plan would, in essence, improve productivity and slow inflation. The problem, as Jeanna Smialek and Jim Tankersley noted in a New York Times article, is timing. Building better roads and bridges will improve productive capacity over the longer term but are likely to push up prices faster in the short-term.
The inflation numbers, and Biden’s reaction, were preceded by Treasury Secretary Janet Yellen being sanguine on the outlook. Interviewed on NPR, Yellen felt confident that price increases would slow close to the 2% target in the second half of 2022 without much effort — no explanation as to how this would be achieved.
The Secretary is among those who believes that not enough stimulus was provided after the 2008 financial crisis, and seems determined to follow a different path this time around now that she holds the reins at Treasury. Yellen’s statement suggested that she marches to a different drummer than the President. Simply put, her being calm in the face of continued price acceleration adds more uncertainty to investors on what future policy measures may turn out to be.
Adding to the overall uncertainty, President Biden has yet to announce whether Jerome Powell will be renominated to another four-term term beginning February 1. In addition to Powell, he interviewed Lael Brainard, another member of the Federal Reserve Board. Powell, who had been considered a shoo-in for renomination, has seen his prospects dim following trading scandals within the central bank on his watch. Either nominee will need to be confirmed by the 50 - 50 Senate.
Brainard, a Democrat on the supposedly independent central bank Board, contributed to the 2016 Hillary Clinton presidential campaign when she was still serving in that capacity. A Bloomberg News story at the beginning of last week that Brainard went to the White House for a job interview led to 2-year Treasury yields plunging on Tuesday. Brainard is favored by the liberal camp within the Democratic party since she is seen as likely to be even more dovish than Powell.
With all these developments going on in the nation’s capital, what was missing was concrete action to control inflation. Biden spoke to CEOs of large retail companies such as Walmart and Target to try to get them to improve product supply and limit price increases. However, such actions, comparable to President Gerald Ford’s issuance of “Whip Inflation Now” buttons in 1974 to mitigate inflation, are likely to fail.
Controlling inflation in a timely manner requires a tighter monetary and fiscal policy, including a move to higher interest rates now rather than wait several months to do so. Jawboning CEOs and selling anti-inflation buttons are nice but they won’t succeed in mitigating inflationary forces!
Dr. Komal Sri-Kumar
President
Sri-Kumar Global Strategies, Inc.
Santa Monica, California
srikumar@srikumarglobal.com
@SriKGlobal
November 13, 2021
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